In a recent article on Kickstarter coins the idea was presented that companies could issue their own coins and back them by goods and services (credit). This idea isn’t exactly new but until recently it has not had a mainstream audience. The idea seems to have been positively received so now I want to offer a twist to that idea.
A collateral backed asset/coin is a token of credit backed by the goods and services of the issuer which relies on collateral to offer a money back guarantee prior to the expiration date. The guarantee is paid using the collateral held in escrow.
So for instance if you’re issuing a token called wood coins with the promise that you’ll redeem these wood coins for wood cutting boards, how would the purchasers of these wood coins be able to trust that you will redeem? If there is collateral then even if you are a scammer, are late, or have some lame excuse, they can just send their wood coins back to you/the issuer and receive their money back from the collateral escrow fund. This removes the risk from the purchaser of the wood coins, they don't have to trust the issuer but only have to check to see that the issuer has enough in collateral to give them their money back within a certain period.
Remember Butterfly labs?It is like a pre-order. The problem with doing a pre-order without collateral is that prior to delivery there is no way for the people who hold the tokens or coins to get their money back.
By offering collateral an issuer can guarantee that whoever sends them the coins before the "redeem by date" will get their money back. So if this were Butterfly Labs and you purchased BFLASIC coins those coins/tokens would represent the next generation ASIC to be released by Butterfly Labs. The problem is people who purchased pre-orders might realize that they can’t make a return on their investment so now they want their money back.
If there is collateral then they can get their money back. Collateral acts as a buffer which provides a money back guarantee to whomever holds the coin/token and this collateral backs the coin in a similar way that gold used to back the dollar. If at any time you want your money back you would get it back.
Once Butterfly labs starts to ship their product you don’t get your money back. At that point you can send them your token and they’ll send the product to the address you give them. In this example the token effectively allows for decentralized pre-ordering.
But the difference is that these tokens can also function as currencies and be traded for other tokens. So you could trade a Butterflylabs token for some other type of tokens or you can sell the Butterflylabs token for Bitcoins to random people who want to buy the token because these tokens can be used for speculation and trade. So that would mean you could trade BFLASIC coins for wood coins.
Trust given based on the amount of risk taken by the issuerIn order for the collateral backed coins/tokens protocol to work the issuer would have to put enough in collateral to pay everyone back. The question is how much collateral should that be?
What I mean is the issuer can put double or triple in collateral until people trust them. This is so that people know the issuer has more than enough money to give them all their money back held in escrow. This could work 1:1 also, but of if the user has a choice as to which company to trust which company would they prefer? What if issuers could be rated and ranked based upon how much collateral they put into the pool as a measure of trustworthiness?
2:1 or greater leverage can be used as a measure in how much confidence the issuer has in being able to meet their own goals. According to my hypothesis the issuer willing to risk their own money is expressing confidence in their ability to deliver exactly what is stated in the contract (on the agreed upon schedule, quantity and quality).
To enforce the terms if the issuer does use more than 1:1 leverage then the customers will be able to charge the issuer late fees if the issuer fails to deliver on time (think Butterfly labs). This means if the issuer does not deliver the product prior to the redeem by date in the contract then the customers now have the right to punish the issuer by charging against what is held in collateral. This would mean the issuer has every incentive not only to be honest but also to deliver on time and in high quality otherwise the customers could vote to punish the issuer.
I'm looking for a way to use collateral to discourage scams, fraud, late redeems/deliveries, and the whole Butterfly labs sort of affair. My hypothesis is that the more risk an issuer is taking with their own money the more incentive they have to be honest with their customer because if they don't the customer might ask for their money back. If the collateral is twice that, then not only could customers ask for their money back but they could punish the issuer for being late on delivery by charging late fees. This could be voted on by the owners of the tokens if and only if the redeem by date has passed. (To prevent collusion the customers would not be able to get more than their money back, the late fees could be destroyed).
Please vote and give feedback.
Would you find this feature useful as a business, a speculator, or a customer?
For reference
http://techcrunch.com/2014/02/15/kickstarter-coins-2/
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