It is more attractive because they get to double their gains as MC appreciates against GC.    Say 1 Oz of Gold is worth 100 MC.   Suppose Alice has 100 MC she could create 1 GC by selling it for 100 MC.   You now have an escrow fund with 200 MC (100 from buyer, 100 from seller) that is owned by Alice and 1 GC owned by Bob.    Alice is not allowed to spend the Escrow fund until she buys back the 1 GC.

If GC goes down 50% (MC doubles in value) then Alice can buy back 1 GC for 50 MC and walk away with 150 MC, a profit of 50 MC.  These 50 MC are also worth 2x as much.

As long as the network forces Alice to cover her position before 1 GC is worth 150 MC then Bob has nothing to fear and can be 100% certain the GC will always be worth 1 Gold Coin. 

Say, why don't you allow the creator to sell GC provided they put as much value into the sale as they receive from the sale and then hold by the creator's funds and the buyer's funds in escrow.  The creator can get their funds back when then repurchase the GC and thus destroy it.   The creator profits if GC goes down relative to MC and can repurchase for less.

Right, but no one shorts BTC because no one lends BTC (at least not in quantity).

Is there a reason to not require 100% backing?

I'll elaborate:  Your response was that your system prevents fully solvent competitors from stepping in and wiping out a currency that has just become insolvent, by the mechanism I described.  Namely, where the simple existence of the better positioned competition forces the market price of the currency below its target, and thus forces perpetual buying by the escrow fund until it's emptied.  My point is that there will always be competition from outside your constrained system that you must take into account, and as soon as the backing of a currency in your system drops below 100%, then it's automatically at a competitive disadvantage with any freshly created one in an outside system.

If I own gold coins back by 50% escrow... my risk is the same as owning MC  because there is no reason for GC to be worth more than 50% escrow because to make such a bet is the same as betting the MC will double in value.   Thus, no profit for buying GC when I can just own MC until GC has 150% backing at which point I can see owning GC.  

I suggest you rethink the market dynamics on how you will make a profit for the fund because it is not possible for you to increase the backing of the fund except by appreciation of MC vs GC.  

Saying that traders would take the losses is like claiming that BTC traders absorb the cost of volatility.   I have already shown that GC will be just as volatile as MC when escrow is less than 100%.     You have not shown me how GC escrow fund grows back toward 100% absent any change in the value of MC.  

These constraints are artificial.  The market is much bigger than your system.

*why* do I want to own gold coins except for immediate payment to someone else?    In the short term volatility of BTC doesn't matter and thus short-term ownership of GC doesn't count.     Why would I want to hold them long-term when they have 100% or less backing?

Who eats the losses from the volatility and how are they compensated for their risk?

If the total value of the backing drops below the total nominal value of the issued currency, then why anyone would ever bother to buy this one over a freshly created copy?  The latter always begins its life with full backing, and thus has a relative advantage over the former.  It seems to me that once this threshold is breached, the old currency will have to sell at a discount to compete with the new one, thus depleting the escrow fund until it's wiped out completely.  Notice that the old currency remains technically insolvent no matter how much buying the escrow fund does, and it can never eliminate the advantage that the new currency has over it.  Its demise is a certainty at this point.

So what profit motive do you have to buy GC at 50% backing over just owning MC?

Sometimes when I read crazy ideas like these, I have to wonder if we're either on the precipice of something horrible - like two halves of plutonium banging together and going critical, or something great, like the birth of the internet. The main issue here is the risk taken in doing so. If your baby 'breaks' bitcoin (For whatever duration - either temporarily or permanently), will the usual sentiment I see from software engineers the world over - usually along the lines of "Well, if 'X' couldn't handle it, then 'X' is stupid and deserved to die." - going to be enough to placate the angry mob of now-bereft bitcoiners?

Of course, the flip side is supposed to be "well, if we didn't do new things no progress would be made" -- but I've yet to see anyone say "Lets test this idea out responsibly just in case we totally fuck something up." It's all SHOVE it into the live production network and see what chaos it causes - "Oopsie!, we're just trying new and crazy ideas guys, so sorry for screwing over the rest of the community."

There has to be a better way than working on the jet engine while at 30,000 feet in the air - just saying.

In effect, your system is different because it is pre-mined and you get paid to develop it.  Got it.    There exist some unspecified problems with the short/long model that I am willing to PAY YOU to identify and yet you opt to say nothing.    Obviously if there are problems then I want to know them so that they can be addressed.

It's impossible to reach parity with an asset simply by reinvesting the money from people who buy it. Do you dispute this?

If so where does the initial money come from? Why would anyone buy one considering there's nothing backing their purchase?

A more important question is this:

What value are you proposing MasterCoin has over BitShares?  

Lets compare by features:
  - better hashing algorithm ( eliminate miner centralization )
  - higher through put, lower overhead message block chain
  - dividends
  - options
  - short positions
  - better decentralization
  - trust free

If you all want to create the best product, I would highly suggest that you help to develop BitShares.  It is open source, has no pre-mining, and thus equal opportunity for everyone involved.    We could certainly use some additional development and support of people who at the very least see the value of creating GoldCoin/BitGold.  

So far you have yet to produce a single argument against BitShares other than Not Invented Here.

Or you could use the BitShares approach and the owners of BitUSD have almost 100% guarantee that BitUSD will always be worth more than face value USD.   Those that accept the risk of volatility profit immensely.

This isn't a question of risk for you, it is a matter of profit.

You have two choices:   Own  100 MC  worth 1 Oz Gold      *or*     Own  2 GC  backed by 100 MC  (50% backing) and priced accordingly.

Lets assume the value of MC goes up by 10x

Case 1:  You have enough MC to buy  10 oz of Gold.
Case 2:  Your GC may have enough premium to be worth 2.3 oz of Gold.

Lets assume the value of MC goes down by to 1/10th its previous value.

Case 1:  You have enough MC to buy 0.1 oz of Gold
Case 2:  You own 2 GC with 5% backing and can trade them for 0.1 oz of Gold.


So what profit motive to you have to buy GC at 50% backing over just owning MC?

You are missing something....

So now that we have identified the mechanics of your system... you need to certify the following:

a) the escrow fund never acts to debase the backing by taking any action that would adjust the  Gold / Fund ratio below say 150%
b) this means the price of GoldCoin will initially track the value of MC with any downside adjustment in price, but will not track it to the upside because those gains are being captured to fund your margin.
c) this means that no one in the right mind would buy a one-way ticket to fund the system initially.
d) this means that the long-term holders have their gain capped at the difference in value between a 100% backed IOU and a 150% backed IOU.  

Who does the system transfer value from to cover the volatility losses?  What did they receive in exchange for accepting that risk?  

From what I can tell, there is no reason to buy GoldCoin until after the margin is above 150% and every reason to sell it as soon as its value approaches 100% backing because there is no profit in holding it any more (only risk).

This is just assuming that the price of your assets will go up forever. There's never going to be enough currency in the escrow to achieve parity unless there's a large investment in the escrow from outside. Even if you did that, you'd slowly bleed money until parity was lost. When the escrow runs out of money and parity is lost, the whole thing collapses.

The cheapest below target is going to be at or below  Fund / Owed...  which will thus represent the same risk profile as owning MC directly without any of the gains.

Price would move for its own sake, not because of your actions.  Price is driven by supply/demand for Gold IOU backed by 100+X% margin and the only thing your fund would be doing is maintaining the margin or decreasing it to some minimal level, say 150%.  

You still have the initial condition to address.   Everyone initially agrees to buy GoldCoin and 'self insure' everyone else against temporary losses due to volatility with a baked in assumption that MC will go up relative to Gold.    Everyone also recognizes that this insurance only works as long as everyone continues to hold a balance and not withdraw their funds and who ever holds on the longest when the price goes down takes the largest loss.  

In theory, as long as the fund never debased the escrow ratio and MC was intrinsically deflationary and growing in market demand then anyone who could 'hold on until the price recovery' would get their money back.   However, they could have held MC itself and had a better investment because they wouldn't be magnifying their losses by propping up (insuring someone else) and they would have an opportunity to profit from the gains in MC.  

Effectively this system transfers losses from short-term volatility to those who are holding for long-term gains in MC value.  Those who are LONG MC would be better off holding MC than holding their value in GC which has almost 0 upside potential (only the premium from increased margin) and more than 100% of the long-term downside potential.  

You must follow the money and always identify who is profiting and who is taking the loss and make sure that the profit == loss and thus a value transfer occurs.   Then ask yourself if the parties signed up for that particular transfer and what compensation did they receive for the risk they took?