Re: Wei Dei's "b-money" protocol

[Wei Dai <weidai@eskimo.com>]

On Sun, Dec 06, 1998 at 12:08:04AM +0000, Adam Back wrote:
> (2) Borrowing resources -- a student with access to a campus full of
> workstations can obtain quite a bit of free CPU time.

If a problem can be solved on a network of computers for free, then by
definition broadcasting the solution to that problem won't create any
money. B-money mints will need to solve problems that can't be
parallelized well on low-bandwidth networks in order to prove that they're
not using free idle time of network computers. I'm not sure if such a
problem class exists, however. I think this problem will probably become
less serious in the future as people discover more productive uses of idle
computer time.

> (7) If such a system took off there seems to be an overhead equivalent
> to the value of b-money in circulation which over time has essentially
> been burnt off in disipated heat, and useless hardware.  But probably
> the cost is still much lower than the enormous costs involved in
> maintaining a force monopoly to enforce traceable transactions.

I now tend to think that the government monopoly of force is a net
benefit. If you look at countries where the government doesn't have a
monopoly of force (like Russia) things look pretty bleak.

Anyway, back on topic. The resource waste in creating b-money can be
reduced if we assume that b-money will be created gradually as the b-money
economy expands rather than all at once at the beginning. If we build a
deflation factor into b-money, b-money will be worth more over time and
therefore not as much b-money will be needed to support the operation of
the economy. This can be accomplished by specifying that the standard
basket used to define the creation of b-money grow at a fixed rate over
time. But of course deflation also has costs since it makes comparing
prices across time more difficult. 

I think b-money will at most be a niche currency/contract enforcement
mechanism, serving those who don't want to or can't use government
sponsored ones. However if it did become mainstream I think there are some
interesting macroeconomic questions here. Will prices really be stable as
they're designed to be? Will there be business cycles? What is the optimum
inflation/deflation rate?