Not wanting to be pedantic, but let's stop naming these currency issuers "escrows", shall we? They're not escrows. They're much closer to the concept of
currency boards than that of an
escrow.
Call it what you like - i guess i have a problem with the box on the left in this picture.
I just think the solution needs to be something other than big dumb buckets of money programmed to blindly buy and sell at predictable points. To me this is the achilles heal of the entire project (besides the UTXO issue, which i suspect will be resolved in time) and i'd rather see it sidelined whilst alternative models for trade are considered.
I dont understand. Someone please explain how the 'formulaec escrow funds will fail?'
Not trying to be a troll, just new to all this.
Explain it to me like im a kid
please
A couple of reasons below why I don't think the "escrow" solution is viable (some of these are variations of points orig posted by others).
1. Price variance. Instruments designed to offer exposure to the price movement of an underlying asset (e.g. "Goldcoin") can never offer true 1:1 exposure, since the differences in market environment conditions between the underlying and the tracker instrument will always create different risk profiles, and therefore different valuations once risk is priced in. Buying a "Goldcoin" with mastercoins for example introduces several layers of risk on top of buying "Gold", such as the risk bitcoin itself may implode, that the mastercoin protocol may be discovered to have technical vulnerabilities or may be ruled illegal. As a result of these continually fluctuating conditions, price correlation with underlying assets will vary as risk premiums are priced locally. An "escrow" which steps in to prop up a market which has dipped due to a change in environmental conditions is distorting the market, not correcting it. As a result the fund would continue to push prices up beyond "fair value" toward it's programmed target, with sellers happy to continue selling as the fund perpetually depletes itself.
2. Depletion. Once any escrow becomes depleted, the underlying value of the instrument backed by the fund is reduced (the total potential value which could be injected into the market is reduced, and if nothing else the risk that the escrow will become fully depleted has increased). Not only does this create a a vicious circle with increased risk causing reduced valuations and feeding into scenario 1 above, but at this point, anyone duplicating the instrument feed can offer the chance for investors to jump ship and enter a new version of the same instrument (one with a new and healthy escrow). This in turn amplifies the downward pressure, and escrow-depletion of the original instrument.
3. Manipulation. A trader aware of the escrow logic could conceivably game it for profit. Let's say a trader is bullish and holds the highest open bid on the market, now say there happens to be a thin volume on the sell side and a buy of 5 MSC would push the asset price up 300 basis points and beyond the escrow trigger threshold. Knowledge that doing this would trigger the escrow to sell into the bidwall might be worth far more than the 5 MSC outlay (and if he's really savvy he'll have also reduced his bid to a sliver above the next highest offer). In this way people will be looking for opportunities to trigger escrow events to their advantage when certain market conditions exist.
