MasterCoin: New Protocol Layer Starting From “The Exodus Address”

[dacoinminster]

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.

MasterCoin won't cause problems if it doesn't work, because it will never get big enough to cause problems.

If it does explode, then yes, it is likely to cause more "growing pains". If it causes plutonium-going-critical level of problems, then either bitcoin wasn't truly scalable, or bitcoin will recover. I don't think most people would just give up on bitcoin because of growing pains though, even extreme growing pains, as long as there are technical solutions to deal with them.

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[dacoinminster]

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

The motive would be because you want to own GoldCoins, and you believe the escrow fund is still healthy enough to maintain their values. Maybe that will be too risky for some people. For me, 50% does seem dangerously low, but not necessarily destined to crash. I think I'd be just fine with 75% though.

Hopefully I'll have a lot better idea of what level is safe once we create a few unsustainable ones "just to watch them die".

[d'aniel]

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.

[dacoinminster]

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.

All GoldCoins are backed by the same escrow fund, to the same degree. GoldCoins are fungible, and there wouldn't be one that was more funded than another.

[bytemaster]

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

The motive would be because you want to own GoldCoins, and you believe the escrow fund is still healthy enough to maintain their values. Maybe that will be too risky for some people. For me, 50% does seem dangerously low, but not necessarily destined to crash. I think I'd be just fine with 75% though.

Hopefully I'll have a lot better idea of what level is safe once we create a few unsustainable ones "just to watch them die".

*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?

[bytemaster]

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

[d'aniel]

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.

All GoldCoins are backed by the same escrow fund, to the same degree. GoldCoins are fungible, and there wouldn't be one that was more funded than another.

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

[dacoinminster]

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

The motive would be because you want to own GoldCoins, and you believe the escrow fund is still healthy enough to maintain their values. Maybe that will be too risky for some people. For me, 50% does seem dangerously low, but not necessarily destined to crash. I think I'd be just fine with 75% though.

Hopefully I'll have a lot better idea of what level is safe once we create a few unsustainable ones "just to watch them die".

*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?

If you believed the escrow fund was healthy enough to sustain GoldCoin values for the time you would hold GoldCoins, and you were interested in owning something which tracked the value of gold, then this would totally make sense.

Again, I really don't know if 50% is enough or not.

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

GoldCoin volatility is absorbed by arbitrage traders at first, and ultimately by the escrow fund. The cost of volatility is borne by people who buy or sell GoldCoins at prices which are off-target. The premium they pay for their off-target transactions goes straight into the escrow fund, making it stronger.

[dacoinminster]

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

I must be losing my mind after so many posts with bytemaster. This is another post which makes no sense to me. Maybe I just need to be done for the day . . .

[bytemaster]

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

The motive would be because you want to own GoldCoins, and you believe the escrow fund is still healthy enough to maintain their values. Maybe that will be too risky for some people. For me, 50% does seem dangerously low, but not necessarily destined to crash. I think I'd be just fine with 75% though.

Hopefully I'll have a lot better idea of what level is safe once we create a few unsustainable ones "just to watch them die".

*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?

If you believed the escrow fund was healthy enough to sustain GoldCoin values for the time you would hold GoldCoins, and you were interested in owning something which tracked the value of gold, then this would totally make sense.

Again, I really don't know if 50% is enough or not.

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

GoldCoin volatility is absorbed by arbitrage traders at first, and ultimately by the escrow fund. The cost of volatility is borne by people who buy or sell GoldCoins at prices which are off-target. The premium they pay for their off-target transactions goes straight into the escrow fund, making it stronger.

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.  

[bytemaster]

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

I must be losing my mind after so many posts with bytemaster. This is another post which makes no sense to me. Maybe I just need to be done for the day . . .

Don't worry... his post made no sense to me either.

[dacoinminster]

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.  

Your argument about GC going volatile when the escrow fund falls below 100% (say 95%) would only be true if 95% of GC holders abandoned the currency, which doesn't seem likely to me. Now, a 25% funded escrow fund is in a much more dangerous place. It's much easier to imagine 25% of GC holders abandoning the currency.

However, an unhealthy fund can eventually become healthy by continuing to buy GC low and sell GC high! If MasterCoins don't crater, a modestly unhealthy escrow fund still stands a decent chance of getting back to 100% funded

[bytemaster]

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.  

Your argument about GC going volatile when the escrow fund falls below 100% (say 95%) would only be true if 95% of GC holders abandoned the currency, which doesn't seem likely to me. Now, a 25% funded escrow fund is in a much more dangerous place. It's much easier to imagine 25% of GC holders abandoning the currency.

There is no reason to abandon GoldCoin priced at 50% with 50% backing (assuming you don't debase current holders to prop up the price)...  those who hold it need to sell at some point which means they must find a buyer and they will not find any new buyers willing to pay the old price for something only 50% backed.     So even assuming no one 'abandons it' the price will always equal   EscrowFund / # GC  when the value is below 100%

[d'aniel]

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

I must be losing my mind after so many posts with bytemaster. This is another post which makes no sense to me. Maybe I just need to be done for the day . . .

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.

[dacoinminster]

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

I must be losing my mind after so many posts with bytemaster. This is another post which makes no sense to me. Maybe I just need to be done for the day . . .

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.

Now THAT is an interesting point. An escrow fund could continue to operate successfully in a closed system, but given another competing GoldCoin launched by someone else, people might flock to the new one which would start at 100% backing.

Of course, over-funded escrow funds would work just fine, but it may be that under-funded ones will immediately face competition.

Very interesting. I'll need to think about this.

[mindtomatter]

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

I must be losing my mind after so many posts with bytemaster. This is another post which makes no sense to me. Maybe I just need to be done for the day . . .

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.

Is there a reason to not require 100% backing?

[dacoinminster]

Is there a reason to not require 100% backing?

That would be the colored coins project, which requires trusting the issuer to have gold stored in a vault somewhere.

A system which holds something else in escrow (like MasterCoins) has built-in potential for going insolvent, as we have been discussing, but does not require trust of an issuer.

[bytemaster]

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

I must be losing my mind after so many posts with bytemaster. This is another post which makes no sense to me. Maybe I just need to be done for the day . . .

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.

Now THAT is an interesting point. An escrow fund could continue to operate successfully in a closed system, but given another competing GoldCoin launched by someone else, people might flock to the new one which would start at 100% backing.

Of course, over-funded escrow funds would work just fine, but it may be that under-funded ones will immediately face competition.

Very interesting. I'll need to think about this.

Thanks d'aniel this explains the mechanism that will drive the under-backed GC toward the value of its backing in a very clear manner instead of my intuitive understanding of what the market forces would do.   We have dacoinminster now...

[d'aniel]

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

I must be losing my mind after so many posts with bytemaster. This is another post which makes no sense to me. Maybe I just need to be done for the day . . .

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.

Now THAT is an interesting point. An escrow fund could continue to operate successfully in a closed system, but given another competing GoldCoin launched by someone else, people might flock to the new one which would start at 100% backing.

Of course, over-funded escrow funds would work just fine, but it may be that under-funded ones will immediately face competition.

Very interesting. I'll need to think about this.

This also provides a profitable avenue for attack: short sell a bunch of insolvent OldCoins, and use a portion of the proceeds from this sale to issue your own solvent NewCoins at a discount.  Wait until OldCoin's escrow fund is overrun and OldCoins become worthless, and your short sale is automatically covered for free.

[bytemaster]

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

I must be losing my mind after so many posts with bytemaster. This is another post which makes no sense to me. Maybe I just need to be done for the day . . .

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.

Now THAT is an interesting point. An escrow fund could continue to operate successfully in a closed system, but given another competing GoldCoin launched by someone else, people might flock to the new one which would start at 100% backing.

Of course, over-funded escrow funds would work just fine, but it may be that under-funded ones will immediately face competition.

Very interesting. I'll need to think about this.

This also provides a profitable avenue for attack: short sell a bunch of insolvent OldCoins, and use a portion of the proceeds from this sale to issue your own solvent NewCoins at a discount.  Wait until OldCoin's escrow fund is overrun and OldCoins become worthless, and your short sale is automatically covered for free.

I didn't think MasterCoin supported short sales...