A standard of deferred payment for the Bitcoin economy.
A monetary system where the price of money is set directly by the market would be less disposed to asset pricing bubbles and monetary inflation. Many see Bitcoin as the basis for this monetary system, but Bitcoin's fixed supply makes BTC a poor standard of deferred payment, as its future purchasing power is inherently uncertain. In this paper, we argue that bitcoin's long-term value in real terms is an algorithmic function of its required real rate of return, which will eventually converge to the global real rate of interest. An estimate for this rate of return could therefore be used to define a new unit of BTC, which reflects a consistent amount of value in real terms. We call this unit of account the "util." We propose a purely peer-to-peer mechanism to continuously estimate Bitcoin's expected real rate of return. The mechanism consists of two convertible assets, Tighten and Ease. Users convert between them according to a constant sum-of-squares invariant, and the relative quantity determines the estimated rate. By pricing Tighten and Ease optimally, the market sets the interest rate in the economy such that the number of "utils" per BTC expands and contracts with long-term demand, making it suitable for transactions where payment is due in the future.
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