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cvTokens
Stable currency without trust
With supply-limited stores of value like gold and Bitcoin, inevitable changes in demand result in a corresponding change of market value. But for many business uses, a more stable market valuation is preferred in a medium of exchange and a unit of account.
Many options exist to use Bitcoin technology for the issuance of pegged or otherwise stabilised currencies. However, few of them replicate the elegance and security of Bitcoin. In practice, most of these systems amount to trusting a real-world or pseudonymous entity. This is unacceptable.
cvTokens are Bitcoin-based currencies that address this problem in three steps:
First, by collateralising BTC to "back" each respective type of cvToken. In reality, of course, currencies are backed primarily by their respective markets. However, the existence of tamper-proof algorithmic backing in an accepted store of value offers the market for a cvToken the confidence it needs to maintain a consistent valuation. A cvToken can be redeemed for its market value in BTC at any time and without the intervention of any agent, effectively separating the roles of speculation and market participation.
Second, by incentivising backers of cvTokens to uphold their BTC valuation even during a dip in market value of the underlying BTC collateral. In the worst case, cvTokens will "collapse into bitcoins" with the backer incurring a nontrivial expense compared to their original investment as users of the cvToken walk away with their collateral. However, losses can be fully prevented by holding value in an equivalent basket of goods to the valuation of the cvToken, and during prolonged upswings in BTC valuation a backer may issue additional cvTokens against their existing collateral. With a flourishing and successful cvToken, backers also have the opportunity to collateralise excess market demand. Since the backer is implicitly assuming the role of BTC speculator, this allows for increased profits in the event of rising BTC market value.
Thirdly and most importantly, multiple backers compete in a free market to collateralise a given cvToken under a model of "lowest risk wins." The backer or backers who most effectively collateralise their positions by combined use of BTC and other holdings reap the greatest share of any speculative profits, while backers who fail to cash out a single token for its BTC market value end up becoming "organ donors" for the cvToken currency they backed.
This combination of features allows the construction and issuance of currencies with stable market valuations while retaining the trust-minimising and cryptographically secure approach of Bitcoin itself. cvTokens require no additional trust beyond that which all Bitcoin users must place in the general Bitcoin market. cvTokens could be implemented with minimal modifications to existing Bitcoin infrastructure, depending on the performance characteristics to be optimised for. cvTokens will be most effective if offered in valuations against which the Bitcoin tends to rise monotonically, such as fiat equivalents and baskets of market goods (as opposed to more fluctuation-prone commodities such as gold, oil, etc. where the odds of a "collapse into bitcoins" are much higher for a cvToken).
Implementation details for the cvToken system will be explained in a forthcoming whitepaper.
Comments welcome.
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