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Author Topic: A Practical Use for Pegged Cryptocoins  (Read 881 times)
XertroV (OP)
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Max Kaye


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March 27, 2013, 10:45:31 PM
 #1

I've been thinking recently about the potential applications for pegged cryptocoins. The setup would be something like this:

  • A Transparent Not-for-profit creates a new cryptocurrency and premines [1] a great deal of coins, hundreds of thousands or millions of units.
  • They maintain control over the cryptocurrency.
  • They exchange 1 AUD (australian dollar) for 1 AussieCoin (or whatever it's called). There may be a small fee (0.5% or something, to support the organisation).
  • They maintain a 1:1 reserve of distributed AussieCoins to AUD held. This allows the currency to remain pegged and can guarantee their 'value'. [2]

We now have a cryptocurrency that can easily work as Bitcoin does, but is intrinsically linked to the Australian Dollar. [3]

Why is this important? Once we're in Cryptocurrency-land, issues we have now do not apply. We can easily exchange one cryptocurrency for another with little issues of trust and fraud. (As transactions on both chains are irreversible). The most crude (safe) implementation would be using a 3rd party to hold coins from both chains in escrow. Once they are confirmed, the two parties can exchange. If there is any issue, the escrow party has the final say on the trade.

This potentially opens up an easier supply chain for changing Fiat into Bitcoin or other cryptocoins. Furthermore, it means we have an introductory step for new users. New users may be unwilling to trust Bitcoin (a currency sans government backing and whatnot) - but it will be easier for them to trust electronic fiat in their 'native' currency.

Furthermore, with the recent FinCEN report, if a USCoin exists it may be easier and safer for a company / not-for-profit to comply with regulatory laws (since once we enter cryptoland, we leave all jurisdictions).

However, before these ideas become viable, we'll need both the exchange infrastructure and the right legal environment - which might mean needing more regulation. After all, when you try and shut something like this down, it will sprout another head; we just need the motivation.



[1] They could premine, or, for simplicity, they could simply make the first block rewards massive, and latter rewards 0. Or they could create a way to 'mint' currency on demand. The trust required for such a setup requires a transparent not-for-profit IMO.

[2] This is why they need control over the currency, how much is up for discussion.

[3] There may be issues if the free-market exchange rate differs from the pegged rate (i.e. 1:1). This is possible if there are issues with supply, or for money laundering purposes (buying off the grid and selling back to the not-for-profit).
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March 28, 2013, 10:43:05 AM
 #2

I've actually thought about this a while ago. My idea involved the foundation/trust placing it into a bank account and earning ~3% interest a year. The value of each coin will grow. After this coin has caught on, there would be a 2 weeks warning and then no more coins will be issued (you can still exchange coins out).

Problems:

Regulatory - this currency is tied to fiat. Would you need money transmitter licenses? It's pretty much a bearer instrument
Trust - how would you trust the non-for-profit to not take your coins? Don't expect any help from the justice department if the non-profit runs away, like we've seen before.
Why - most of bitcoin's success is because it is decentralized, and a fixed monetary base.
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March 28, 2013, 11:17:27 AM
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The problem with using a fixed max number of coins cryptocurrency as a stand-in for fiat is that the limited number of coins can lead to the coin trying so hard to become worth more than the fiat you hoped to peg it to that you simply cannot afford anymore to keep dumping your coins to drive the price down... At some point you run out of coins, if you are fool enough to persist in trying to keep the price low enough to be equal to the fiat unit you originally tried to peg it to.

Take a look for example at http://galaxies.mygamesonline.org/digitalisassets.html

The Canucks tried to make their Canadian Digital Notes (CDN) be worth only one CAnadian Dollar (CAD) each.

The Brits tried to make their United Kingdom Britcoins (UKB) be worth only one Great Britain Pound (GBP) each.

The Martians just wanted their coins to be valuable, and did not care about keeping CDN and UKB artificially low in price merely so that they would stay at par with CAD and GBP. Thus the Martians bought up any CDN and UKB they perceived as cheap, ending up owning significant numbers of both.

The Brits and Canucks were losing when they sold off their coins cheap to try to keep their price down; in the end they gave up trying to suppress the value of their coins, and parity with fiat is now an ancient archaelogical relic. And the Martians are rich, their coin worth the most.

The perplexing thing about all of this is not the inability to suppress coin values to try to keep them on par with fiat but, rather, the question of how the heck BiTCoin managed to get so heavily suppressed in value for so long that not only the Martian BotCoin but also various others caught up with, and even surpassed, BiTCoin in value.

-MarkM-

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May 23, 2013, 03:02:44 AM
 #4

See my post https://bitcointalk.org/index.php?topic=213760

Taking some tips from Open Transactions in terms of how it would actually work underneath, the coins could be premined and pooled, and those managed by a number of nodes. They become part of the system.

People buy and sell them with the pool at a fixed rate calculated by algorithm based on a number of currencies and their relative exchange rates (if this is mathematically possible). Pegging to one currency exposes you to that currency, so pegging to the USD means they just became the de facto central bank (well, sort of, because they couldn't print coins only adjust the exchange rate indirectly by printing dollars).

Because the rate is fixed, there is no Forex market for buying and selling. The pools would need to be associated with banking entities (or individuals) who make the exchange for a minimal fee.

The coin holds its value by definition, and would live or die by the architecture underlying it.

It would move value somewhat with exchange rates, but that's acceptable.

An obvious issue is the fiat side - there has to be a matching seller for each buyer or another way to get/receive/store fiat which will have been input and output in a number of currencies, but that's what Open Transactions + BitMessage may help solve. The difference is that the currency can be held (unlike OT as far as I know; correct me if I'm wrong and isn't subject to any centralisation or market itself (Ripples).

It wouldn't work as a commodity, and there are clear uses for a crytpocommodity, but Bitcoin seems to me to be something that could function better as a digital commodity that digital cash (at least as things stand).
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