In a previous post I discussed the problem with bitcoin's constant-quantity of money. Wei Dai has commented that he views bitcoin as probably problematic for probably similar reasons. But even an asset-backed currency such as Gold or b-money has a problem.
Hard core money, an objective asset that retains its value is great when doing transactions with potential enemies. It should have an important place in transactions across disparate legal systems such as countries. You want to walk away without future obligation (a threat). "Cash on the barrel head" has its place with potential enemies not mutually adhering to a higher law or assurance of mutual benefit after the transaction (that higher law and mutual benefit are often the same thing). But money does not have to be meant only to objectively optimize isolated transactions without regard to a wider society. It can be more intelligent than that, finding optimal solutions to the prisoner's dilemma on a grander scale, beyond the immediate participants in a transaction.
The problem (or lack of "optimality") occurs in systems where you are not the only one who is important to you. It's not ridiculous or anti-evolution-theory to assume you will sacrifice a part of your profit for the benefit of others, especially if it is a small cost to you and a great benefit to others. If you count your success as dependent on society's success and not just your bank balance, there's more to consider. This is why a constant-value coin is not ideal. By making the value of the asset vary with something other than a stable asset, pro-social law (aka system-wide intelligence) can be implemented.
The fundamental problem with a constant-quantity coin like Bitcoin or gold is that it is an anti-social money. It seeks for the holder to maintain value without regard to the condition of society. Society can go to hell and Gold (at least) will still have value.
That's a-social. Past transactions that result in a person holding an asset should be post-invalidated if the sum of those transactions resulted in disaster for all. Every transaction should carry a concern for all, present and future. That is a characteristic of a system that displays cooperative intelligence. There should always be a feedback measurement from the future of the entire community of people you (should) care about back to your current wealth. This feedback is a scientific measurement as if the past was an experiment. It enforces decisions on how to make future measurements, seeking an optimal outcome. Defining an optimal outcome should be the first step. (this is not easy, see footnote 1). Deciding how to measure it is the second step. Deciding how to use the measurement in order to adjust your actions in order to maximum the outcome is the core intelligence (see footnote 2), once you've realized the important of steps 1 and 2. Technology has advanced so rapidly, we never formalized a consensus goal for 1 well enough for defining a number 2. As Einstein said, the defining characteristic of our age is an excess of means without knowing what we want. It used to be we just wanted money so that we could have food, sex, and children, or to have enough pride via money and/or social relative to our peers that we felt justified in having children.
Side note, Nick Szabo has pointed out that keyboard credit from modern banking allows speculators to change the price of commodities as much as supply and demand. In what I describe here, that would need to be prevented.
This is why a coin that adjusts to keep commodity prices constant is more intelligent. Laws against monopolies and pollution can regulate transactions to prevent the anti-social nature of maximizing profit per transaction. That's not the benefit of a commodity coin. A commodity-coin has a different kind of system-wide intelligence. If commodities are in excess to demand, the prices will try to fall. So a currency following a basket of commodities will "print" more of itself to keep commodity prices stable. In a growing economy, the excess money could replace taxes, so it would merely fund government, or it could fund the building of more infrastructure to make it's workers healthier, happier, and/or more competitive with other countries. That would demonstrate intelligence that is good for the system's future. A less intelligent outcome (defined as bad for the future strength of the system) is to print the money to buy off voters or to bailout corrupt, inefficient, useless banks with QE.
Printing more money when commodity prices falls prevents the type of destructive deflation that occurred in the Great Depression. Instead of printing more money, they burned food in the fields. They stopped producing real assets like commodities on purpose instead of producing paper money.
If commodities get scarce, the money supply would contract along with them, raising its value. This promotes savings and working. Theoretically the savings and working would be directed towards more commodity production to return the system to health.
In the first case, an economic boom is allowed because the availability of commodities indicated it could afford it. In the second case a bust is prevented by making everyone work harder.
In the first case, savers are penalized. It should be this way because their capital is no longer needed to invest in producing more commodities. It needs to be spent, and if they are not spending it, then "the people" will spend it on the street, reaping the rewards of past savings. Commodities are the measure because they are the fundamental inputs to everything else that require the largest investments.
In the second case, everyone is biased towards being more of a saver.
footnote 1) Should we have a higher median happiness, or a higher median happiness times number of people? Should we restrict it to people? Or should we have a preference for machines? They're infinitely more efficient (see past posts of my measurements of their ability to acquire energy, move matter, create strong structures, and to think about how to do it). They'll be the only ones capable of repelling an alien invasion and to engage in the most successful invasions themselves.
footnote 2) Intelligence requires feedback from observation to modify the algorithm. Engineering control theory writes it as a differential equation and block diagrams "consciousness" as the subtraction from where you are from where you want to be, and takes action on the difference (the error signal). I am not sure if there's any A.I. that is not a variation of this. If it is not making an observation (science) to increase intelligence, is it an adaptable intelligence? In past posts I've mentioned how the simplest form of this feedback is also an element (like a NAND or XOR gatee) that can be used to implement a complete Turing machine. A house thermostat is an example. There is also a reduction in entropy in intelligence, taking a lot of observation to classify observation into a much smaller set of action. The error-signal-of-consciousness may need a reduction (classification) of the observed world. I believe Schrodinger discussed this in "What is Life?"
next Diff = avg past N Diff * TargetInterval / Avg past N solve times.
The shorter the window average, the more protection against attacks, but there is more variation in solve times. This is unavoidable. There is a law written in stone: if difficulty is allowed to go down, you can have good protection or good solve times with a low standard deviation, but you can't have both. You have to choose how many blocks you want to "give away" by choosing the max time for say 10% of the block solves. Low block window averaging is higher protecting but wider swings in solve times. You could use N=5 for great protection if it is OK to have time to solve > 5x your target for 5% of the blocks. Once manipulators come in, you need to be prepared for 5x target 10% of the time. But such a short averaging window requires an accurate timestamp on blocks instead of miner generated times. Without that I would copy what Zcash is doing (N=17 window average with a median instead of mean for the solve times), except be sure not to use the 8% up and 16% down limits they are using, which I hope and suspect they drop before release. There is something weird with their method of getting the median that works better than the way I get the median, so us eit, which I guess comes from Digishield v3. But if you get an accurate timestamp, use the mean.
And low N averages have accidental spikes in difficulty and solve times. Miners can choose to come in immediately after those which makes the next difficulty and solve time spike even higher. so they can put it into oscillation for profit. But this might be a problem for all windows of even larger N.
The biggest protection against attacks might be to discover the methods and encourage and enable everyone to use them. That tends to block the profits of cheaters by actually leveling out the swings, helpig the constant-on miners. For example, in time warp attack is less and less useful if you initiate it and 10 people come in to take it away, splitting the profit. So maybe you shoulld give the code to enable everyone to do it. It might then become useless to everyone. Of you try to pick a bottom, but then someone comes in earlier so your bottom does not occur, and so on, until there is no bottom.
The only way I have found to get perfect protection against attackers (and fairness) and to have a perfect release schedule is to never let the difficulty drop but follow a slow steady rise, use a valid timestamp on solved blocks, and pay miners inversely proportional (Tim Olson's idea) to their solve time relative to the average time that is expected for the current difficulty setting. If a miner solves fast, he gets paid proportionally less. If he solves slow, he gets paid more. The coin release schedule stays as perfect as your clock, and there's zero profit from manipulations. The problem with a clock is that it is a third party. But it is not a problem if you're already using a subtle 3rd party going under the name of "trusted peers" who will set to a universal time clock. (The trusted timestamp also prevents timewarp attacks. ETH uses one.)
This has very important stable, real value implications. For example, miners are paid PER BLOCK for the amount of electricity needed, getting closer to the ideal of value=joules, not merely based on the average electricity expense per block expected. This requires abandoning the idea that blocks must be solved within a certain time frame. If the coin can survive post-mining on fees, then it should survive solve delays in the exact same manner to prove it can survive on fees ahead of time. But it may not result in substantial delays as everything is done so well.
This probably changes too much in bitcoin's core, and there are likely good reasons Satoshi did not do it. But it's best by starting with a known ideal and work backwards. In this case it means every time you let difficulty fall, you are harming constant-on miners relative to other types of miners.