Of Dynamic Pegs and Digital Politics

by coinewzealand

A digital currency pegged to a fiat one sounds simple, but in practice can be very complex. For example, the Bitcoin and proof-of-work style communities are very decentralized and prone to volatility compared with other commodities. One of the issues with this is the 51% attack, when a single actor has control of 51% of the processing power of a network. As such, pegs would have to be agreed upon by all actors, something the decentralized network makes unlikely.

Proof-of-stake currencies (such as Peercoin), however, offer alternatives based on “stakeholders” of the currency itself. Interestingly, there is also proof-of-activity, a somewhat hybridized approach of the two. A 51% attack there is difficult and perhaps self destructive, and costlier than the proof-of-work concept. As far as a peg goes, the issue comes with finding people to uphold this, even when selling to each other (also highly unlikely).

The dynamic proof-of-stake structure proposed here offers some advantages. For one, we have a reserve account that represents a fixed portion of all currency of in circulation, updated on a regular basis. If something happens to one address corresponding to the reserve, the reserve simply shifts down the list. Our goal is that the reserve cannot be touched, save by software. If addresses become inactive, they are removed. If new addresses are added, they are accounted for each time the reserve updates.

The Kiwicoin project was built entirely around the idea of an exchange that automatically pegs itself at a particular rate to a fiat currency. A government could print more money to devalue it (and indeed, much devaluation has been going on), but an “inflation gage” program could estimate and try accounting for this. For our basic income initiative, the size of the payout could be adjusted in this case.

Beyond basic income, we are adding another reason to purchase our digital currency. Holders of said currency would be able to hold stake in directly democratic elections, including submitting ideas or proposals. Those elections would determine how to best spend (or save) a fixed portion of the reserves that are converted to cash each month.

The system is essentially an alternative legislature and financial model independent of party politics, arguably a type of consensus based model instead of a representative one. If it can be done for one fiat currency, it can easily be done for others.

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