Quote from: edmundedgar on May 08, 2013, 10:53:01 AM

Looks interesting. I'm not sure that I followed it all - if you're trying to peg to (say) AUD don't you have the same problem I mentioned up-thread of needing to trust somebody to provide external information about the exchange rate of your currency to AUD? You say,

Quote from: Croesus on May 07, 2013, 11:14:29 AM

The escrow is aware of the rough market valuation for a cvToken by means of a distributed auction (which is not intended to serve as a primary exchange, those will be developed elsewhere if the cvToken is marketed successfully). It uses this information to enforce rules for issuance and cash-outs of tokens.

But how does that work? The problem everyone has been bumping their heads against with the p2p concept is that nobody has a good way to know what's going on at the fiat end of any given transaction.

each cvToken runs a 3-way distributed auction where:

Sellers of the cvToken post offers to sell for BTC
Buyers of the cvToken post offers to buy and/or create cvTokens for BTC
Backers of the cvToken bid to collateralise any above-market price demand and to help new backers enter the cvToken

In a successful cvToken these buyers and sellers will not be normal users but specialised bulk traders who are incentivised to play these roles. The incentives work out as follows:

Sellers are businesses/exchanges who need larger volumes than can be obtained on standard exchanges (a more in-depth explanation omitted for brevity). If no such entities exist at the actual market value, backers will fill this role themselves to avoid runaway appreciation of cvTokens (cutting into their speculative profits during cash-outs). Thus sell offers are assured at the intended valuation.
Buyers are businesses/exchanges who need larger volumes than can be obtained on standard exchanges, or speculators who think backers are trying to depress the auction price below the actual market value of the cvToken (in which case they are getting a deal), or speculators looking to become backers of the cvToken. The most important of these are the speculators who will be able to turn an immediate profit if they can get a cheaper price on cvTokens than they would at a normal exchange. Thus buy offers are assured at the intended valuation.
If cvToken supply exceeds demand (i.e. popularity of the token is waning) would-be sellers can simply cash them out rather than accept a below-market value for them.
If cvToken demand exceeds supply and bids start to rise significantly above the market valuation of the cvToken, backers can collateralise this excess demand into more cvTokens. Any rise in cvToken demand also incentivises normal BTC speculators to become backers and increase their profits.
Backers have no incentive to lie about what constitutes "above market value demand" because they will then be "overpaying" for the BTC collateralised in this way. On the other hand if no backers are being sufficiently conservative in their approach to collateralisation, it opens up an opportunity for a more conservative backer to join the cvToken and turn them into "organ donors" by calling their bluffs on cash-outs. If it was not a bluff, this strategy will be ineffective since they can only become "organ donors" by failing a cash-out.

All of these factors conspire to keep the auction fairly closely focussed on the actual market price of the cvToken. Note that the incentives assume a healthy market willing to accept cvTokens in payment. If this market collapses, cvTokens will simply be cashed out by those who hold them. So the cvTokens are in fact backed by their market--the virtual escrow system is merely a gatekeeper that allows that market to act with confidence on the genuine utility of having a cvToken without fear of supply mismanagement. But the auction gives the gatekeeper roughly accurate data as to the current exchange rate (the main limitation in this data is latency).