Idea: "Proof of Confidence" - PoS variant with locked coins for value stability


#1

In the last weeks I have thought a bit about value stability and have read some proposals which target a better “value stability” for cryptocoins, like Encoin and GEN. Now, here’s my own idea for this issue: “Proof of Confidence”. It would be far easier to implement than the other proposals, as it’s a very light variation of the “Proof of Stake” concept.

Actual cryptocoins are very volatile in price. I think the problem are the “boom-bust-cycles”: There are rally phases when many people buy coins and hoard them looking for fast profits. But when the rally ends, often there is a massive panic sell which drives the price down by 30 or more percent. (Some may think this is not a problem, but for a currency for everyday-use it is). PPC recently experienced this after the 0.0043 BTC all-time-high.

How can these boom-bust-cycles be avoided? My proposal would be that Proof-of-Stake income can only be earned by users who lock the coins for a certain time, e.g. 60 or 120 days. The lock should be impossible to be undone, so if there is a crash and you have locked the coins you can’t panic sell them. So it requires confidence in value stability.

This mechanism could prevent massive selling panics if many users make use of the “PoC” feature and lock their coins. Obviously there must be a strong incentive to lock the coins for the mechanism to be effective. So I am thinking of a dynamic PoS-“interest” rate based on difficulty which would be calculated considering the following parameters:

[ul][li]The time the coins are locked (more time -> higher interest rate, as a reward for more confidence)[/li]
[li]The total amount of locked coins (the fewer coins are locked, the higher is the “interest rate”. So if there are few coins locked there is more incentive and less 51%-PoS-attack risk)[/li]
[li]The PoW difficulty change (diff ascending - higher interest rate, diff descending - lower interest rate). This would increase the money supply a bit in boom phases and reduce supply pressure in bear markets.[/li][/ul]

In practice, for the user, this would work similarly to a time deposit.

I know this probably could only be implemented in an PPC fork, not in PPC itself. But my opinion is that we are in the initial phase of cryptocoins history and should experiment a lot. And value stability would be really a big thing, I think.

It would be cool to hear what you think about this proposal. Is it feasible? Would there be methods to “cheat” and pump-and-dump? Would 51%-attack be easier? Perhaps it was proposed by another person? If you have ideas for improving this concept, be welcome!

(Sorry for my bad English :D)


#2

Ok, asume we have a panic buy, and I have locked all my coins. How can I stabilize the price then?


#3

If price is increasing sharply because of panic buys, PoW mining profits and difficulty would also increase, so the “PoS interest rate” and the money supply would increase too. So this should stabilize the price mid-term.

But you are right panic buys can introduce short-term volatility with this concept. Will think a bit about it.

The “locking” is meant to prevent large panic sells, as a sharp downtrend is very hard to reverse by a stability mechanism. A slow downtrend can be stabilized by increasing and destroying transaction fees, for example, and an uptrend by increasing money supply.


#4

Increasing price -> increasing miner activity -> increasing difficulty -> dropping PoW mining profits

A holder who tends to panic sell will never lock his coins. Because this person do not believe in the coin. He better should sell them.


#5

Yes, if we use the PPC model which is designed for energy-efficiency. But the mechamism which would stabilize the price would work with PoS minting and be independent from the PoW mechanism. PoS minting supply growth rate must outperform the shrinking PoW supply growth in this case.

A holder who tends to panic sell will never lock his coins. Because this person do not believe in the coin. He better should sell them.
If the incentive is high enough (high PoS interest rate) even a potential panic-seller could see potential profits in locking his coins. Perhaps some users would never lock them, but then they would never get "PoS interest". And the less people lock their coins, the higher is the interest rate, so this should reach an equilibrium at some point.

#6

Yes, if we use the PPC model which is designed for energy-efficiency. But the mechamism which would stabilize the price would work with PoS minting and be independent from the PoW mechanism. PoS minting supply growth rate must outperform the shrinking PoW supply growth in this case.[/quote]
I think I do not understand you. Against what other asset do you want to stabilize?

[quote=“d5000, post:5, topic:516”]

A holder who tends to panic sell will never lock his coins. Because this person do not believe in the coin. He better should sell them.

If the incentive is high enough (high PoS interest rate) even a potential panic-seller could see potential profits in locking his coins. Perhaps some users would never lock them, but then they would never get “PoS interest”. And the less people lock their coins, the higher is the interest rate, so this should reach an equilibrium at some point.[/quote]
If the incentive gets too high, I would become a panic seller. Can’t you see that you describe the fiat system?

#7

I also thought a little bit about the PoS money supply. I see a problem if this coin really gets used massively. Then we had little PoS generated coins, and a lot of destroyed fees.

If technically possible, the interest could rise the more, the less PoS minters are active.

[tt]100% active minters -> 1% interest a year
50% active minters -> 2% interest a year
20% active minters -> 5% interest a year
10% active minters -> 10% interest a year
…[/tt]

The only possible way this perhaps could be applied would be to distribute destroyed coinage to active minters.


#8

[quote=“whifmoi, post:7, topic:516”]I also thought a little bit about the PoS money supply. I see a problem if this coin really gets used massively. Then we had little PoS generated coins, and a lot of destroyed fees.

If technically possible, the interest could rise the more, the less PoS minters are active.

[tt]100% active minters -> 1% interest a year
50% active minters -> 2% interest a year
20% active minters -> 5% interest a year
10% active minters -> 10% interest a year
…[/tt]

The only possible way this perhaps could be applied would be to distribute destroyed coinage to active minters.[/quote]
This idea is better than I thought first. Let the destroyed coinage of the processed transactions go to the PoS minter, who minted the block. This is a little bit like a lottery, because a PoS minter with a small pocket could mint a block for a large transaction, this getting large coinage incentive. For a large PoS minter this makes not much difference. This could lead to a much wider adoption of this coin.

Can any professional tell me, if this is technically possible?


Incentivizing mining by reclaiming coin age
#9

Yes, if we use the PPC model which is designed for energy-efficiency. But the mechamism which would stabilize the price would work with PoS minting and be independent from the PoW mechanism. PoS minting supply growth rate must outperform the shrinking PoW supply growth in this case.[/quote]
I think I do not understand you. Against what other asset do you want to stabilize?[/quote]

Basically, I want a coin with a growing supply when demand is higher and a decreasing supply if demand dwindles. So it would be fairly stable against (stable) fiat currencies.

If the incentive gets too high, I would become a panic seller. Can't you see that you describe the fiat system?

You are right, the system has some things in common with the fiat system. But why would you panic sell if the interest gets too high? My guesses: Because of the higher 51%-attack risk or because you think many people could sell if few coins are locked?

I also thought a little bit about the PoS money supply. I see a problem if this coin really gets used massively. Then we had little PoS generated coins, and a lot of destroyed fees.

If technically possible, the interest could rise the more, the less PoS minters are active.

100% active minters -> 1% interest a year
50% active minters -> 2% interest a year
20% active minters -> 5% interest a year
10% active minters -> 10% interest a year


Exactly, that’s the idea. There could be an “interest factor” which changes according to the PoS difficulty: Low percentage of minters -> Low PoS difficulty -> high PoS “interest factor”. I don’t think that should be too hard to implement, as the PoS difficulty already exists (I think).
The only possible way this perhaps could be applied would be to distribute destroyed coinage to active minters.
This idea is better than I thought first. Let the destroyed coinage of the processed transactions go to the PoS minter, who minted the block. This is a little bit like a lottery, because a PoS minter with a small pocket could mint a block for a large transaction, this getting large coinage incentive. For a large PoS minter this makes not much difference. This could lead to a much wider adoption of this coin.
Here I don't understand you, I fear. Can you explain why this would be necessary?

Thanks for your feedback and opinions!


#10

Here I don’t understand you, I fear. Can you explain why this would be necessary?[/quote]
My explanation was about a possible technical implementation.

The idea to relate it to the PoS difficulty may also work. I see an advantage if someone (perhaps an attacker) collects coinage. The lower the PoS difficulty, the higher the incentive. But we have to pay attention, that the inflation must stay reasonably low in total.


#11

People will just sell the private keys or wallet of the locked funds. The transaction is not as easy to do as going through the blockchain – one may have to use escrow or a special trading platform that provides clearing service – but it can be done.


#12

I don’t think that would be a problem. The “locked coins market” would be much less liquid than the main exchange market, so the prices to achieve there for locked coins would be significantly lower, more so in a bear market. So the incentive to sell locked coins there would be low - my guess is that most people would simply hold and hope that the earned interest compensates for the price losses.


#13

Here I don’t understand you, I fear. Can you explain why this would be necessary?[/quote]
My explanation was about a possible technical implementation.

The idea to relate it to the PoS difficulty may also work. I see an advantage if someone (perhaps an attacker) collects coinage. The lower the PoS difficulty, the higher the incentive. But we have to pay attention, that the inflation must stay reasonably low in total.[/quote]

Now I got it :slight_smile: Your proposal sounds really interesting. It would be interesting to compare the two methods, which one would be more secure against attacks? As the “coinage-to-minters” proposal is somewhat more randomly and it would be more difficult to plan an attack, it could be an advantage against the method to tie interest to difficulty.


#14

You already answered you compare against fiat currencies. But is this a valuable asset? Not for me, hence every price dump makes me happy.

The drop in one asset is the gain of another asset. Volatility between valuable assets changes nothing for the asset holder, only the trade itself changes your wealth. See my lesson here:


#15

Well, I know the “stability problem” is not trivial, as there are multiple ways of measuring stability as you correctly point out. For a final altcoin design, I would propose, for now, a combination of two concepts:

  1. a stability mechanism, that roughly pegs the money supply to the electricity cost needed to mine it (PoW)
  2. the proposed “Proof of Confidence” system, which should act as an incentive to avoid “cyclic trading” (buy and hoard when price is going up - sell when price is going down) as I described in the original post.

The “stability mechanism” I am thinking of would peg the money supply to PoW difficulty change (not to difficulty itself, but the percentual change in a range of time), as PoW difficulty changes are related to price changes. If PoW difficulty goes up -> money supply would go up too, and if PoW difficulty goes down -> money supply would decrease.

The “currency” or “asset” to measure “stability” would be the PoW mining cost. For now, this cost would probably be measured in a fiat currency like USD, EUR or CNY, but in the future it can be a cryptocurrency or even a basket of goods. But the value would closely follow the cost of hardware and electricity required to mine it (Because of this, I don’t think a pure PoS system would be possible for this design).

The hard problem would be the “technological factor”: In Bitcoin and in PPC too, we see now that as a result of the ASIC developments, the difficulty has risen way faster than the price. I think in an early design of the coin this factor should be adjusted periodically by the developer team.

If this problem is resolved, there are many ways to regulate supply. I’m actually thinking to apply a “difficulty factor” to PoS interest rate. So “PoS interest rate” would be determined by two factors:

  • the percentage of users who mint actively, as we discussed here in this thread;
  • the PoW difficulty: if difficulty goes up -> interest rate goes up too; and if difficulty goes down, interest rate goes down too, but never goes so low that there is no incentive to lock coins anymore.

There is a chance, however, that in short-term bear markets the incentive to lock the coins would be affected because of the lower interest rate and the system would not work as good as expected. So there are alternatives like a dynamic transaction costs, that rise if difficulty goes down (and are destroyed like in PPC to actively decrease the money supply) or even a dynamic demurrage rate like in Freicoin. For this part, I don’t have the “perfect concept” for now.

But this is another issue, here in this thread I wanted to discuss first the feasiblity of the “locked PoS” (“Proof of Confidence”) system only.

I liked your posts about contrarian trading. If the currency is designed to be stable with regulated supply and this system works, contrarian trading (buying when price is low compared to other assets and selling if it’s high) would be the main mechanism for traders to make profit, as if price goes up, mid-term it would fall again because of the adjusted money supply and if it goes down, it would go up mid-term. Contrarian traders would stabilize the price (measured in fiat or other commodities) even more.


#16

I gotta say, the two thoughts that screamed in my head while reading this was that this would mimic either CDs or Treasury Bonds.

This would be a very interesting approach to PoS. Unsure about the implementation though (any possible security risks?).


#17

Yes, something like CD’s (I don’t know the exact English words for finance products, but should be the same what in Spanish we call “plazo fijo”) I had in mind.

For security: The essential problem would be to give good incentives for people to lock the coins and so participate with PoS minting, so 51%-attacks can be avoided. For now, I see no other security risks other than those that are present in actual Proof of Stake.

Technically, we already have a “locking mechanism” in Peercoin: the “maturing” of the stake coins after a PoS block has been found. This mechanism could be modified for this PoS variant: Users would have to made a special transaction to lock the coins and then after 30 coin-days they could receive PoS rewards.


#18

[quote=“whifmoi, post:8, topic:516”]This idea is better than I thought first. Let the destroyed coinage of the processed transactions go to the PoS minter, who minted the block. This is a little bit like a lottery, because a PoS minter with a small pocket could mint a block for a large transaction, this getting large coinage incentive. For a large PoS minter this makes not much difference. This could lead to a much wider adoption of this coin.

Can any professional tell me, if this is technically possible?[/quote]

I just wanted to call this out because it has a very interesting concept behind it. I’d have to think about the ramifications of this, and if it could be corrupted or gamed by someone with the technical know-how, but there’s something righteously egalitarian about this that appeals to me.

Now, back to your on-going discussion :slight_smile:


#19

[quote=“whifmoi, post:8, topic:516”][quote=“whifmoi, post:7, topic:516”]I also thought a little bit about the PoS money supply. I see a problem if this coin really gets used massively. Then we had little PoS generated coins, and a lot of destroyed fees.

If technically possible, the interest could rise the more, the less PoS minters are active.

[tt]100% active minters -> 1% interest a year
50% active minters -> 2% interest a year
20% active minters -> 5% interest a year
10% active minters -> 10% interest a year
…[/tt]

The only possible way this perhaps could be applied would be to distribute destroyed coinage to active minters.[/quote]
This idea is better than I thought first. Let the destroyed coinage of the processed transactions go to the PoS minter, who minted the block. This is a little bit like a lottery, because a PoS minter with a small pocket could mint a block for a large transaction, this getting large coinage incentive. For a large PoS minter this makes not much difference. This could lead to a much wider adoption of this coin.

Can any professional tell me, if this is technically possible?[/quote]

I like this idea- it creates a randomized distribution of reward blocks and further incentivizes people to hold long term.


#20

[quote=“whifmoi, post:8, topic:516”][quote=“whifmoi, post:7, topic:516”]I also thought a little bit about the PoS money supply. I see a problem if this coin really gets used massively. Then we had little PoS generated coins, and a lot of destroyed fees.

If technically possible, the interest could rise the more, the less PoS minters are active.

[tt]100% active minters -> 1% interest a year
50% active minters -> 2% interest a year
20% active minters -> 5% interest a year
10% active minters -> 10% interest a year
…[/tt]

The only possible way this perhaps could be applied would be to distribute destroyed coinage to active minters.[/quote]
This idea is better than I thought first. Let the destroyed coinage of the processed transactions go to the PoS minter, who minted the block. This is a little bit like a lottery, because a PoS minter with a small pocket could mint a block for a large transaction, this getting large coinage incentive. For a large PoS minter this makes not much difference. This could lead to a much wider adoption of this coin.

Can any professional tell me, if this is technically possible?[/quote]

I’ve been thinking about this concept and how it could integrate with a similar fixed fee system…
Could transaction fees simply have an inverse relationship to the coin age? So coins with less age have a higher fee and coins with max maturity have zero? For example:

1 month -> 10% fee
2 months -> 5% fee
3 months -> 2% fee
6 months -> 1% fee
1 year -> 0% fee

The transaction fees could then be randomly distributed to the POS miner that processes the transaction. This could incentivize POS miners and help promote holding long term.