Gold as the only form of money that has endured thousands years of test of human history, is now being tested by bitcoin-lead blockchain technology. Instead of asking will gold be replaced by bitcoin in the future, in this article, we ask the question, can gold piggyback onto the train of crypto currencies.
Digital Gold Certificates
Pretty all forms of paper money were started from being backed by gold or silver. No paper money that went off the commodity standard ended up well in the long run. Paper money were just a form of gold or silver certificates.
In the digital age, even the usage of paper can be eliminated by issuing digital gold certificates. But how do digital certificates provide 3 important qualities of a sound money system:
- Fungible, that is, one unit or piece must be perceived as equivalent to any other.
- Redeemable, that is, one should be able to exchange one’s certificate with equivalent amount of gold
- Balanced supply, that is, should everyone decides to redeem all certificates a time, there should not be a shortage of gold; vice versa, should more people want to buy the certificate, they should not have to pay an unreasonable premium over the spot physical gold price.
Here I introduce a wild idea to solve this problem: a community driven central bank, Community Bank of the Earth(CBOE for short, tongue-in-cheek alert), with the help of blockchain based digital assets technology and check of the crowd.
Blockchain based digital assets
Bitcoin revolution brings us the blockchain technology, which is essentially a public ledger of all transactions that occurred in the system, a public excel sheet you may think as. Bitcoin units are very well divisible, a satoshi is the smallest amount within bitcoin representing 0.00000001 bitcoin. Some amount of bitcoin are no different than other same amount of bitcoin, which makes it fungible1)There is concern though, it is possible to trace the owner of the bitcoin which could make it not fungible by having black-lists enforced by government. Read more at http://www.coindesk.com/bitcoin-fungibility-essential/ and https://en.bitcoin.it/wiki/Anonymity.
But bitcoin blockchain provides more than ability of transferring of bitcoins, it supports also a script language2)https://en.bitcoin.it/wiki/Script where one can encode “smart contracts”. The specific types of “smart contracts” that are supported by bitcoin blockchain are asset registration and contract execution. For example we could issue one gold certificate, and create a sell order of that gold certificate on bitcoin blockchain, with the condition that only if certain amount of bitcoin is received the ownership of gold certificate is not transferred. These are called colored coins, the name comes from the idea that digital assets are the coloring of bitcoin. And colu is one implementation of the colored coins standard:
Using colu, CBOE could issue so called locked assets. A locked asset has a fixed amount set at the moment of issuance, and an unique asset id that no one else can “counterfeit” the same asset guaranteed by bitcoin blockchain. In case of our CBOE you may consider it one series of digital gold certificates. To issue more digital gold certificates later, CBOE needs to issue more digital gold certificates assets of different series. From here on, let’s call these digital gold certificates, Auro, tongue-in-cheek alert again, Au is chemical symbol of gold.
Auro is fungible, because not only each asset unit looks the same to each other which is a feature of colored coins, more importantly they are completely anonymous. Anonymity is important because without it, people could be coerced (by government) to refuse accepting others’ digital assets if they may be linked with crimes and blacked listed.
Auro is free from counterfeiting, which helps it to have a balanced supply. As mentioned above, a locked asset is guaranteed by bitcoin blockchain from being counterfeited.
Auro shall be publicly audited, which also helps it to have a balanced supply. Each series of Auro should have a public record, and public clients should only recognize Auro series that are included in the public records. Even if private key of Auro issuer is leaked, Auro series issued by leaked private keys will not have a public record and will not be recognized as valid Auro.
Community Driven Central Bank
While blockchain provides a sound technological foundation for CBOE, it needs to guarantee Auro redeemable and its balanced supply.
One way to look at this problem is that, blockchain technology solves the issues of balanced supply, trustful transactions and authenticity of digital assets by using a rigid algorithm, having a public ledger and validating computing works using distributed computers; when dealing with physical assets like gold, we could instead use an “analog” version of blockchain, which is to have a open community with transparent process, records and distributed power structure.
Here are the major actors of this system:
Committee of Rules
It is a group of people that defines the rules of the system, their interest is to maintain the balance and sustainability of the system. The rules handle cases include:
- How often Auro should be issued?
- How to handle Auro allowance request from Gold Dealers?
- How to handle dispute from Auro Users with regards potential fraud committed by certain Gold Dealers?
It is a computer program which codes the rules defined by the committee of rules. It takes input from the community people, and makes decision of how much Auro to be issued in next series and to whom those Auro will be sent to based on the rules.
It is a computer program which issues new Auro series under the command of the community court.
It keeps a public ledger of each series of the Auro, each ledger entry consists of:
- Which ruling of community court is this series linked to?
- To which gold dealers and how much respectively is Auro sent to?
Because of the usage of this public ledger and all Auro are sent to gold dealers immediately upon creation, we do not need to worry about the private key being used to issue the assets. Hence we do not have a security risk of leaking that private key.
Gold dealers engages in activities of either selling physical gold or storing gold in safe. It is to their benefits to have digital gold certificates in their assets of balance sheet, which is liquid and easily transferable. At the same time, it is their obligation to have same amount of gold in their liabilities of balance sheet, which are ready to be delivered to Auro Users, hence to make Auro redeemable.
For gold dealers, in order to enjoy this benefits while not breach the trust from the community, they have to request Auro allowance through the community court, and the rules may require them to present their cases and proofs under public scrutiny.
Upon receiving Auro, gold dealers then can sell Auro to the market for other currencies, or redeem Auro from users for physical gold.
Auro users can exchange Auro for other currencies in open markets and redeem Auro with physical gold from gold dealers.
They could also fire cases through community court against gold dealers, if they believe that they are committing some sort of fraud related to their claims of gold deliver-ability.
This is how everything looks like:
Please feel free to comment about your thoughts and feedback.
And if you are interested in making this idea real, please send email to rothbardiangoldprice.
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|1.||↑||There is concern though, it is possible to trace the owner of the bitcoin which could make it not fungible by having black-lists enforced by government. Read more at http://www.coindesk.com/bitcoin-fungibility-essential/ and https://en.bitcoin.it/wiki/Anonymity|