Proof of Work.

Here is some new grist for the controlled money-creation problem, you know, the one where you want money to be balanced between its scarcity (having value) and its utility (facilitating transactions in a economy.)  If money is too scarce, it deflates and becomes more valuable, however, with lower velocity (used in fewer transactions) restricting commerce.  BitCoin people like to talk about the time-preference of money when they hand-wave about their imagined future of BitCoin deflation-based riches. If money is too common, it inflates and becomes less valuable and velocity increases  (used in more and more transactions) because it takes more money to represent the same value.

I’ve been thinking about the the “proof of work” issue with BitCoin and how it could be translated into “real world” money-creation with ξ. Right now, BitCoin clients (until they fix the problem) must download over 200,000 blocks of transactions before they can even begin to think about creating addresses for payments.   If an actual banker told you that it would take 6 hours to create your account, you’d look at them as if they were asking you to saw off your left-testicle and eat it, if it was the “only” time you needed to do it. You have to be able to initiate yourself in the system instantly. There are other services out there of course that will proxy-create you a BitCoin wallet so this isn’t quite as big a problem as I make it out to be, and everyone beams with logic that “You could just do that!” whenever I bring it up.  So, why not provide a similar service for ξ-creation?

Enter the Attestation Bureau

Clearly, there needs to be a trusted intermediary to certify the “proof of work.” In BitCoin, this is limited by the algorithms composing its computational lottery. In agorism, it is said that conflicts between two parties are to be resolved with insurance, arbitration or protection services. There may be a fourth mechanism here that the market can provide centering around attesting work transacted in units of time (ξ) between two parties.

The seller of labor performs the work for a given amount of ξ, the buyer demonstrates they have enough ξ to purchase it, and the attester certifies that the work was done and paid for. If this creates money, it only does so because the buyer had enough credit to create it.  This is also where things can get hinky. A corrupt attester could attest all kinds of things, creating money in the market in excess of the value created via the work, thus decreasing the value of everyone’s ξ within the system. If there is no one to attest between the buyer and seller, then they can only swap between each other: the seller performs ξ3 of work so the buyer provides an IOU of ξ3 that would have to be worked out in their future.

Detecting Fraud

An Attester who manages transactions for a small town of 50,000 people should only be able to instantly generate about ξ540,000 in transactions [That comes from the calculation ln(50000) × 50000] between all individuals (An unusual event if all individuals participated 100% in only that Attester’s service all at the same time) before the only savings creates new money in the books. By this measurement you can look at an attester’s books and analyze the creation of money and detect fraud easily: they have to provide a unique identity to each party and should be able to demonstrate the flows of new money through their books. Pick any number of random entities on the books and contact them. Are they real people? Do they know who attests for them? Are they happy with their attester? And so on.

LiteCoin: A fairer BitCoin.

It’s still energy-into-money, but this crypto-currency lends itself to more thinking about proof-of-work. The proof-of-work (PoW) here with LiteCoin is based on sCrypt, which cannot be easily accelerated with farms of video-card GPUs.  You can still make farms upon farms of ordinary CPU-based computers, but at least the difficulty is low enough that there will be more liquidity to the currency.

I’ll have more thoughts later on proof-of-work and alternative currencies.