[118333] in Cypherpunks
Re: A question about b-money... (fwd)
daemon@ATHENA.MIT.EDU (Anonymous)
Sat Sep 25 02:58:57 1999
Date: Sat, 25 Sep 1999 08:40:45 +0200 (CEST)
Message-Id: <199909250640.IAA26552@mail.replay.com>
From: Anonymous <nobody@replay.com>
To: cypherpunks@cyberpass.net
Reply-To: Anonymous <nobody@replay.com>
http://www.eskimo.com/~weidai/bmoney.txt:
> 1. The creation of money. Anyone can create money by broadcasting the
> solution to a previously unsolved computational problem. The only
> conditions are that it must be easy to determine how much computing effort
> it took to solve the problem and the solution must otherwise have no
> value, either practical or intellectual. The number of monetary units
> created is equal to the cost of the computing effort in terms of a
> standard basket of commodities. For example if a problem takes 100 hours
> to solve on the computer that solves it most economically, and it takes 3
> standard baskets to purchase 100 hours of computing time on that computer
> on the open market, then upon the broadcast of the solution to that
> problem everyone credits the broadcaster's account by 3 units.
This does not work the way people have been assuming. Consider a
more detailed analysis of the example above.
Let us indicate b-money prices using $BM. Suppose computing cycles cost
$BM 0.01 per hour. Now 100 hours of computing cycles cost $BM 1.00.
Suppose, following the example above, the standard basket of commodities
costs $BM 0.33. Then if you burn 100 hours of computing cycles you get
credited with "3 units".
Here is the mistake people are making. It doesn't mean you get credited
with value equal to 3 standard baskets, which would be 3 x $BM 0.33 or
$BM 1.00; rather, it means you get 3 units of b-money, i.e. three b-money
"dollars" or $BM 3.00.
In this situation it is profitable to burn cycles to create b-money.
For each 100 hours you earn $BM 3.00, but it costs you only $BM 1.00
(100 hours times $BM 0.01 per hour).
What happens is that initially it is profitable to burn cycles like this
and generate b-money. This will cause an increase in the b-money supply.
However as the b-money supply grows, inflation happens, just as we have
seen with government currencies when they increase the money supply.
This causes prices to rise.
Eventually prices rise so that computing cycles cost not $BM 0.01 per
hour, but $BM 0.03 per hour. Correspondingly, the basket of commodities
will increase from $BM 0.33 to $BM 1.00.
Now if we burn 100 hours of computing cycles, it costs us $BM 3.00
(100 hours x $BM 0.03 per hour). This is still 3 standard baskets'
worth of cycles, so we would get credited with $BM 3.00. Our costs now
equal our gains and the cycle burning is no longer profitable.
With b-money, the money supply increases initially until it reaches the
point of equilbrium. That happens when the price of a standard basket
of commodities reaches $BM 1.00. At that point the money supply becomes
stable.
Over the long term, there will still be a slow increase in the b-money
supply. Over time, improvements in productivity and technology cause
the price of the basket of commodities to fall below $BM 1.00. As this
happens, it becomes (slightly) profitable to generate more b-money.
This will go on until the money supply is increased enough to stabilize
the commodity price at the $BM 1.00 level.
B-money is therefore highly resistant to inflation, and contains
mechanisms to automatically adjust the size of the money supply to
produce very stable prices over the long term. It would be superior in
this regard to virtually any other proposed form of money.
