Elasticoin: low-volatility cryptocurrency with proofs of sequential work

elasticoin-icbc.pdf (151.1 KB)

I want to solicit some discussion on Elasticoin, which I’m going to present as a short paper at IEEE ICBC 2019, which is a rather weird cryptocurrency issuance scheme I’m using in my blockchain project Themelio.

The goal of Elasticoin is to have a cryptocurrency that has much lower price volatility than coins like Bitcoin, Ethereum, etc, while having an entirely endogenous and trustless algorithm that’s resilient to external economic shocks (so no pegs to USD, no price oracles).

The general idea is ridiculously simple: we fix the real cost of minting a coin. If creating 1 coin costs you $1, obviously the price of the coin is capped at $1. Naively you might think this leads to a coin that fluctuates in price just as much as Bitcoin does, except capped at $1, but that’s not actually true. Most of the volatility in cryptocurrency prices is based on speculation on the slight chance the price is going to the moon — since traditional cryptocurrencies have fixed supplies, “mainstream adoption” means mooning prices. Thus, every piece of news, or every random investor panic, is going to cause massive price swings due to “chance of Bitcoin worth >$1M in 2030” changing several times in different directions.

The hard problem is fixing the cost without oracles. The naive solution would be to basically use PoW without adjusting the difficulty; this is not going to work because sudden technological advances will cause massive hyperinflation.

Instead, we make it so that one day of sequential computation on the fastest processor available right now mints you a coin. This can be done trustlessly by leveraging proofs-of-sequential-work that essentially prove that you computed an iterated Argon2 hash a zillion times. Completing a protocol-given sequential puzzle gives you a fixed reward, while difficulties and rewards adjust so that the fastest solver the blockchain has seen solves the puzzle in exactly 24 hours. We also penalize solvers that are slower than the fastest solver, making using GPUs or ASICs where each core is slower but ops per watt are lower, or “free” spare compute cycles on web servers, uneconomical. The exact algorithm is pretty simple and can be seen in the attached paper (read: I’m too lazy to retype a bunch of LaTeX formulas)

(Note that Themelio is a PoS blockchain, so rewards from the Elasticoin minting have nothing to do with incentivizing consensus. Think of the coin as an ERC20 minted by a smart contract verifying people’s puzzles)

This is a rather weird metric to use, but empirically the cost of “up-to-date” sequential processing time is actually pretty stable. The price of renting single cores hasn’t really changed ever since processors were fully mass-produced. Physically you also don’t see massive improvements in sequential processing speed in the future, and it’s likely to be really hard to make ASICs dedicated to sequentially computing Argon2 that are much cheaper and faster than CPUs.

What we get is a coin that’s basically pointless to HODL in hopes of it mooning, because it’s guaranteed that it won’t. The trading market would look a lot more like trading fiat currency pairs, and a lot less like the Bitcoin market. Coin prices won’t be completely stable (gluts from demand declines will still cause price declines, price shocks in electricity and silicon will affect the coin), but they will almost certainly be much more money-like than Bitcoin. I think that for users wanting a good medium of exchange or gas-paying token, this is a big positive, and could attract the “right” kind of attention and adoption that doesn’t correlate strongly with price bubbles.

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Interesting first attempt at what I’ve been calling an “arbitrage oracle.”

Unless I’m mistaken, your design has two stable equilibria: one at $0 and one at $1 (normalized wlog).

  1. If the price of a stablecoin goes above $1, more is issued—in this case by more minters joining in a decentralized manner. This prevents a price of $infinity being an equilibrium.
  2. In the case a stablecoin goes below $1, then some coins need to be burned/re-bought. This prevents a price of $0 being an equilibrium.

Your algorithm covers case 1 but not case 2, so your stablecoin will have two equilibria. Unfortunately, the equilibrium at $1 is less stable than the one at $0, so the coin will end up being truly stable at a price of zero.

I shouldn’t have declined being a reviewer for this conference when asked back in December, if I knew I was going to be reviewing submissions anyways!

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Haha…

To reply to your comment, Elasticoin explicitly doesn’t want to be a “stablecoin” in the sense of holding a peg to a target price with an equilibrium mechanism. If the cost of minting is $1, you can easily imagine the coin bouncing back and forth between $0.2 and $0.3. The threat of minting at $1 is enough to cut off speculation about “how many millions is the coin gonna be worth in a century”. Note that $1 in this case is a slowly varying, not-obvious number that depends on things like the price of electricity, so we wouldn’t expect any sort of Schelling-point that “fakes” a peg until a panic happens.

With stablecoins, you implicitly promise a fixed price at $1, and its entire value proposition is based on holding the peg, so you do need a very stable and unique equilibrium. Otherwise, a minor deviation can totally destroy the coin as everybody panic-sells. My goal is a lot more modest — it’s a true cryptocurrency used for payments and gas payments, but one that you are pretty much guaranteed to lose money by HODLing, and can be used as a reasonable unit of account.

I do concede that over a long period of time the coin might inflate quite a bit more than US dollars. The USD/coin exchange rate might look like that of a currency of a third-world country. But even those currencies are much less volatile than Bitcoin, and in an efficient market inflation can easily be hedged by holding bonds/stocks issued by DAOs anyway — money is neutral in the long run. Despite Bitcoin etc, I don’t think “no inflation ever” is a necessary condition for a successful cryptocurrency, just “no arbitrary inflation by a sovereign issuer for its own benefit”.

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You’re on an intriguing direction. Eager to see how this works going forward!

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Very interesting. However, I wonder how you are going to create demand for it in the first place. A large part of the value proposition of all current cryptocurrencies and tokens comes from the promise of being worth millions down the line. If there is no chance whatsoever that is going to be the case, then why should I invest anything now into a volatile asset?

So you are going to have a hell of a chicken and egg problem here, you basically need to create a demand for this token without having an economy based on it.

What was the demand for a cryptocurrency in the first place? I would argue that aside from the Economic Majority, a la BTC, it came down to something different. A hedge against the turmoil of the period? A safe store for assets? Perhaps this entire space is simply a demand for stability that now wrests with the powers that be.

We have a grave chicken and egg problem, but we are going to get past it. Demand is on understanding the utility needs of holders, and so proposes a model more toward Intertemporal Consumption.

I stated privately about the prospect of some quasi-enlightened class of cryptocurrency holders around 2011. Many went on to help build this network. A new set of money, fungible in exchange, demands then the funding and furtherance of that core mission. These are no static concepts.

Thanks for sharing your ideas here! It’s definitely an interesting concept to adjust PoW complexity based on the speed of sequential work rather than prove of total work.
About price stability, I think it’s not going to work. The stability proposition is basically based on the assumption that cost of mining is influencing the price minted coin.
I might be wrong but looks like the price is fundamentally determined only by demand/supply equilibrium. In other words, the cost of producing the goods/services don’t directly influence the price. What does is the amount of these goods/services available on the market and the demand for these goods/services.
In case of minting coins if the number of coins going to be “produces” is predetermined,

the only factor which is going to influence the price is the current demand. Since demand is driven by people who are exchanging money for these coins for some sort of utility, unless utility is connected with production cost - the main proposition is wrong.

In Themelio, there are actually two tokens, named the mel and vol (abbreviated TMEL and TVOL; I might change the names to something catchier).

TMEL is the main currency, used for all transaction fees and other in-protocol fees, and intended to be used in an economy. It’s minted through the Elasticoin algorithm and won’t have a really volatile price.

TVOL are “shares” in Themelio; they have a fixed supply of 1 million TVOL and are the only token usable for staking in PoS. TVOL essentially is a share of the transaction fees generated by TMEL users, and will have a volatile price driven by speculation on the discounted future revenues from fees.

So people wanting to invest/speculate in something that might “moon” will buy TVOL, and people participating in the Themelio ecosystem would use TMEL. I think that TVOL has enough draw as an investment asset to garner interest in Themelio without an economy existing yet.

The reward is not literally fixed, but rather adjusted downwards as processors become faster such that one day of sequential processing mints you a coin.

Any coin’s price is driven by demand and supply; Elasticoin’s difference is to make supply respond to changes in price (supply elasticity, hence the name). In Bitcoin etc no matter what the market conditions are, BTC is minted at a fixed rate. With Elasticoin, minters will mint coins when coin price is above the cost of one day of sequential computation, and stop minting coins when it’s not. This should reduce volatility.

The scheme also ends up giving a ceiling to speculation about future coin value, which should reduce swings due to panics/hypes about possible future adoption.