Remove the 'magic' of your algorithm for a second and instead lets pretend I create a bank, the ByteMasterBank BMB.
I tell people that I will issue a BMB IOU for $100 USD if you deposit 1 BTC into my bank and that I will always be willing to redeem that $100 USD IOU at face value, but you will have to accept $100 worth of BTC in place of actual USD when you redeem your IOU. Assuming price stability I will always be able to meet my obligations. If the price of BTC goes up then I can make a killing because my IOUs are denominated in USD.
So the price of USD goes up and I now have enough BTC in my fund to buy back all outstanding USD loans 2x over. Great! I can now print up additional USD loans and start buying things with them all while maintaining over 100% reserves!
The next week the price of USD goes up and all of a sudden I am insolvent, I only have the ability to buy back 50% of the outstanding USD loans. As long as no one catches on I can play the game of a fractional reserve bank and still honor withdraws (redemptions at face value). How ever, once 50% of my depositors have withdrawn their money that game is over and everyone else loses everything because I am unable to pay.
Unlike traditional banks, I don't earn any interest on my loans and must cover all losses from depositor funds. I also don't have the ability to hide the true state of my balance sheet nor do I have any ability to raise any additional capital on my own. Everyone that continues to bank with me knows they are playing a game of musical chairs and they will only continue to trust it as long as everyone else does. It will not last long, especially for a crypto-currency not backed by the full faith and credit of a big bank.
The problem you have is that you need the system to be workable on day one when MC is worth almost nothing and has no reputation. The first 'panic' or 'market correction' it faces would entirely collapse all of MC because everyone with GoldCoin would lose and once that is revealed all other currencies (not backed by a public issuer violating bearer bonds laws) would also make a rush to safety.
This is why in my opinion Mastercoin escrows should be backed by the actual goods and services of the issuer and not by BTC. A substitute for the actual goods and services of the issuer should be the national currencies because most human beings toil (sacrifice their time) for national currencies. So the value in the time spent toiling is actually locked up in the national currencies and this is why it's a better idea to buy Mastercoins with national currencies than with BTC.
As illustrated by the ByteMasterBank example, if that bank is backed entirely by BTC and BTC is volatile then that volatility in value will transfer over to Mastercoin. Mastercoin can only be as stable as whatever is giving it value so if its getting most of it's value from BTC and BTC is in a bubble then when that bubble bursts you can expect it to be felt in the diminishing value of Mastercoins which suddenly wont be worth as much in comparison to the currencies which truly are stable and which truly provide value (the national currencies).
The Zerg is also correct in that we need to have trust in the system to a certain extent. It's not completely trustless.
You have a deep seated assumption based upon circular logic... that assumption is that the price will maintain parity naturally without respect to the backing and that the fund would be able to profit on this natural market correction. However, if this were a natural market response the fund would be unnecessary. Every action taken by the fund will be at a loss.
Bitcoin succeeds based on circular logic. It is a meme. A self-fulfilling prophecy.
This is Satoshi's real genius, not the technical solution to the double-spend problem.
From the early days - the main reason to buy bitcoins is because it will appreciate in value because other people will buy bitcoins. You can't get more circular than this.
Bitcoin is the proof that "circular logic" by itself is not just cause to disqualify a financial scheme.
MasterCoins's funds use circular logic, but that doesn't make them flawed.
No. the main reason to buy bitcoins is because it will appreciate in value because other people will buy bitcoins to use them because they have extremely desirable properties as a currency.
Look, let's say we have 2 coins XxxCoin and YyyCoin. X starts with 100 backing MasterCoins, Y starts with 1000 backing MasterCoins. Why would XxxCoin track the price of Silver and YyyCoin track the price of gold?
It'll only happen if the person (that you must trust) behind the escrow, issues and redeems xxx or yyy coins such that its supply vs demand creates a price that tracks gold and silver respectively. First off, this requires you trust the escrow admin. So its not a trustless coin. Secondly, the escrow is gonna get drained or be so "full" it becomes more valuable than the commodity ... even just random walk math shows that eventually this will happen. Deliberate speculator manipulation, profiting on the information asymmetry where they know how the other party (the escrow) will behave will make it happen sooner.
Ultimately we have to know for sure that the issuers will redeem their coupons, gift cards, currencies or vouchers for goods and services. The escrow works best when backed by trusted issuers who can guarantee that the value held within the Mastercoin is stable because the most stable way to create value is by goods and services, not by BTC, not by the USD, but the goods and services which actually bring value to any economy.
So there will have to be trusted issuers. This means the legitimate corporation has to be able to interface with Mastercoin. For instance Nintendo should be able to interface with Mastercoin and release Nintendo credits which we can trust 100% are coming from the digital signature of the Nintendo corporation and which we can trust legally to redeem. If it is set up like that then Mastercoin value will be stable and backed directly by the goods and services of every trusted issuer. The untrusted issuers will still exist and anyone who wants to interact with them will be taking their chances.
In order for the Mastercoin system to obtain the value of the goods and services of the issuer of Goldcoins the issuer of Goldcoins must legally be required to redeem their currency. This could happen like this, I give the issuer of Gold coins some Mastercoins and they give me some physical Gold coins worth the same value. Now the value of Mastercoins will remain stable as long as the value of Gold is stable. The demand for Goldcoins will increase the amount of Mastercoins in the escrow. If there is a sell off then people will want to send their Goldcoins back. Perhaps this could be accomplished with an expiration date where they could sell back the Goldcoins in exchange for their Mastercoins back.
Here is the problem though, if the Goldcoins are entirely virtual then those virtual Goldcoins can be destroyed. Physical Goldcoins would have to be created or the virtual Goldcoins would have no value at all and those physical Goldcoins cannot be destroyed, only sent back to the issuer and only by a certain date. As long as no value is created or destroyed and only transferred, and as long as the user has a preference for dealing with trusted issuers, there should be stability in the system if the initial value comes from national currencies.
If the initial value comes from BTC when BTC are $200 for instance and then we see a correction then a lot of people might start selling Mastercoins for USD to get out because they'll know that speculative value is behind the BTC buying the majority of Mastercoin and that this speculative value can collapse. If the Mastercoin holders sell for USD in the first place then the price of BTC doesn't matter, it doesn't matter if BTC is in a bubble, they'll get the exact amount in Mastercoin back in USD that they put in and as utility in Mastercoin increases more people will be putting USD into it and due to escrow they wont be taking it out of it as quickly as they'll be putting it in.
That is the only real problem I could find with the Mastercoin protocol It's weakness to speculation comes from the fact that everyone is thinking about what it's price is in BTC and BTC is weak to speculation. Mastercoin can be more stable than BTC for many reasons if and only if there are enough trusted issuers because the stability comes from them.
No. the main reason to buy bitcoins is because it will appreciate in value because other people will buy bitcoins to use them because they have extremely desirable properties as a currency.
Look, let's say we have 2 coins XxxCoin and YyyCoin. X starts with 100 backing MasterCoins, Y starts with 1000 backing MasterCoins. Why would XxxCoin track the price of Silver and YyyCoin track the price of gold?
It'll only happen if the person (that you must trust) behind the escrow, issues and redeems xxx or yyy coins such that its supply vs demand creates a price that tracks gold and silver respectively. First off, this requires you trust the escrow admin. So its not a trustless coin. Secondly, the escrow is gonna get drained or be so "full" it becomes more valuable than the commodity ... even just random walk math shows that eventually this will happen. Deliberate speculator manipulation, profiting on the information asymmetry where they know how the other party (the escrow) will behave will make it happen sooner.
Sorry - just noticed that I haven't replied to this.
There is no escrow admin - it's all handled by the protocol. Speculators can reduce the escrow fund's trading profits, but cannot eliminate them entirely.
I think maybe I'll stop debating whether the escrow fund can work, and just point out that even if people are doubtful about the escrow-backed currencies, MasterCoins can be absurdly valuable without that feature. Distributed betting is going to be big. Thanks to your suggestion, the spec will also support user-issued coins without escrow backing (working like colored coins).
This is an interesting way around it. It would allow Mastercoin to try the escrow feature while also offering an alternative if the escrow feature fails. I don't think the escrow feature has to fail, I just think it matters how it's implemented.
If you sell for higher than market price there's no reason anyone would buy from you. By definition a "market price" implies that this is a well functioning market which requires there to be plenty of buyers and sellers (not just you). If others are selling the same asset as you but for 1% lower there's no reason anyone would ever buy from the escrow.
By the way where are you proposing this escrow even comes from? So far you've just proposed that money sent to the "exodus address" go directly to funding you, your wife, and your kids.
Ah. There's the spiral_mind I know and love!
The escrow fund buys the cheapest coins below target. If somebody has offered them for sale below the target price, the escrow fund can buy them at that price. If they didn't want to sell at that price, they shouldn't have offered them for sale. The escrow fund merely buys and sells what is out there.
The escrow fund is created the moment the first person buys a new pegged currency. 100% of their money goes into the escrow fund.
The cheapest below target is going to be at or below Fund / Owed... which will thus represent the same risk profile as owning MC directly without any of the gains.
The risk exposure to a total collapse of MasterCoin is the same for both. If MasterCoin only drops a small amount, the risk profile for a GoldCoin holder is still based on the price of gold, not MasterCoin.
This would be correct but why would I trust the data stream for Gold Coin if no gold is created? It's a derivative of gold, it's virtual gold, but it's not real gold. This allows for the GoldCoin holder to basically own the risk profile for gold without owning any physical gold. Why would they want to do that when they can just keep their Mastercoins?
If they buy real gold bars then it makes sense but then they cannot store it unless in a bank? But if its redeemable within a certain time period they can trade it to someone else who wants physical gold making it more valuable. So the real value is in that it's redeemable for real gold just as the US dollar once was when backed by the gold standard. If it's merely virtual and the issuer wont give me my gold bars if I ask for them then I don't understand where the value comes from. If I had Gold Coins I might be able to trade them if the issuer will redeem them for 6 months, giving me 6 months to spend/swap them. But they would have to create a real Gold Coin in their vault and store it so that it can be mailed to whomever owns the virtual coins at the time of redemption.
Finally my understanding on the escrow is that it load balances the virtual representations of the actual physical gold. If there are physical gold coins sitting in a vault those real gold coins do not get destroyed, only the virtual gold coins, coupons, or representations of those physical gold coins would get destroyed when sent back to the issuer to result in adjusting the price allowing it to track to the price of the real gold sitting in the vault.
