Criticism of Mastercoin USD (Warning: Self-moderated, No Austrian econ!)

[cunicula]

Moved to

https://bitcointalk.org/index.php?topic=283666.msg3035340#msg3035340

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[1715394487]

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[thezerg]

this is a good summary of the criticism, but quite long.  Let me try a very succinct description.

The escrow fund sells a promise for X but keeps the money in Y.  It is therefore exactly like going "short" on a stock -- the short seller sells a promise to supply the stock (X) but instead holds USD (Y).  The dangers of shorting are well understood...

Its that simple.

Any system that adds a charge (like a mutual fund "load") to buying/selling can use that profit to create > 100% backing.  But it will still be vulnerable to large price swings and is therefore only useful for short term activity.  But the charge discourages short-term activity.  And for short term use, why not just use the backing crypto-currency directly?

Any system that uses dividends is either adding a charge (as above, just paid over time), OR moving value between the owners of the raw crypto-currency and the pool of crypto-X owners.  So owners of the crypto-currency are implicitly shorting crypto-Gold, crypto-Silver, etc against the crypto-Gold, crypto-Silver long.  This value transfer could be done (as in BitShares I think) by an uneven mining award -- essentially the coins created by inflation are applied unevenly.  But the end result is that inflation is causing an individual coin to be worth less.


I sincerely hope that the people creating these systems allow independently-minted currencies backed by a cryptographically signed documents (identifying the real-life owner for example).  This will at least allow "trust" based currencies, tracking commodities, or even stocks, bonds and mortgages.

And let me finish by also saying that these systems (BitShares and Mastercoins) seem to have a LOT of other great features.  I do not think they will live and die on these tracking currencies.  However, I wish BitShares would use some of Mastercoin's "embedded in bitcoin" technology to create atomic transactions between the Bitcoin blockchain.  And I hope Mastercoin moves the majority of its transactions to its own blockchain.  I think that if Mastercoin is successful, its transaction load will raise Bitcoin transaction fees which will in turn discourage Mastercoin transactions.  Right now transaction fees are so cheap they are mostly ignored, but that may not always be the case.

[cunicula]

Deleted off-topic post about features of bitshares unrelated to derivatives tracking the value of the USD (sorry bytemaster).

I largely agree with thezerg here, but I think he is missing perhaps the most important issue.

There needs to be a mechanism through which events in the real world impact events in the blockchain derivative world. Bitshares doesn't suggest any mechanism whatsoever. So it is kind of a joke.

MasterCoin does better, proposing published datastreams. That's a great idea. But why should we trust these datastreams? Clearly manipulating a datastream could be profitable if it allows me to cash out an escrow fund. So someone has to get rewarded for publishing good data. And the rewards have to be large enough that they outweigh the benefits of cheating. How does that work?

[thezerg]

Deleted off-topic post about features of bitshares unrelated to derivatives tracking the value of the USD (sorry bytemaster).

I largely agree with thezerg here, but I think he is missing perhaps the most important issue.

There needs to be a mechanism through which events in the real world impact events in the blockchain derivative world. Bitshares doesn't suggest any mechanism whatsoever. So it is kind of a joke.

MasterCoin does better, proposing published datastreams. That's a great idea. But why should we trust these datastreams? Clearly manipulating a datastream could be profitable if it allows me to cash out an escrow fund. So someone has to get rewarded for publishing good data. And the rewards have to be large enough that they outweigh the benefits of cheating. How does that work?

No, I've been going on and on about the trusted oracle problem from day 1.  Here's first post:

Questions:
1. How does information about the price of USD in THC enter the system?

Actually, I wrote yet another big summary including all the issues (including the oracle issue) for this thread and then just lost heart, deleted it and posted the one liner.

Why did I give up?  Because none of the authors are looking at the system from a theoretical perspective.  What I mean is that they pick a specific algorithm and we refute it, and then they modify it.

But, given an anonymous, trustless system, ALL possible interactions can be defined.  There can be no "out-of-band" interactions -- like arresting someone for example -- because the players are anonymous.  All interactions are:
1. Buy from the "mint"
2. Sell to the "mint"
3. Holding
4. trade

This means that you can define classes of algorithms, and show that these classes cover all possible algorithms:
1. All algorithms that create > 100% backing (manipulation of 1 and 2)
2. All algorithms that use a fee to encourage/discourage minting/redemption based on the divergence between X and crypto-X
3. All algorithms that pay dividends, from funds gathered by 1 or 2
4. All algorithms that pay dividends by taxing, demurrage, or printing (mining) X

5. Any hybrid of the first 4.

"Normal" bitcoin volatility breaks all classes of algorithms unless such high safety margins are used that the margin becomes much larger than the pain of using the crypto currency directly.  And that assumes a perfect oracle.  An imperfect oracle can only act to destabilize the system...

[cunicula]

Sorry, I didn't mean to imply that you don't understand this; just that it should have been highlighted in your summary.

Why did I give up?  Because none of the authors are looking at the system from a theoretical perspective.  What I mean is that they pick a specific algorithm and we refute it, and then they modify it.
 

I couldn't agree more. It is like they hope to arrive at a working solution through a guess-and-check design process.