Let's begin with some simpler examples and build it up gradually. First, Joe consumer:
Joe wants to play poker online, but the idea of playing the market at the same time doesn't interest him. He makes a bank transfer to an exchange for $505 and withdraws 500 cvTokenDollars to a local wallet on his computer, paying a $5 fee to the exchange. He goes to an online poker room, deposits the cvTokens, and starts playing. 5 hours later he's up 12 cvTD and tired of poker, so he logs out for the night and withdraws the cvTD back to his local wallet. The next day his wife goes into labour and he forgets all about online poker for 18 months.
Finally, when he starts getting some sleep again, he remembers the 512 cvTokenDollars on his computer and thinks, "I could buy some diapers with that." So he boots up his computer, transfers them to the exchange, and has them send him a cheque for $507 (after the $5 fee). He cashes it and buys diapers.
This is how cvTokens are supposed to work. Joe treats cvTokens the same way he treats any other type of cash, and he doesn't need to worry about markets and all of that when trying to figure out how many diapers he can buy. It's not that cvTokens haven't varied against the Yen, the Euro, and the Argentine Peso. It's just that they haven't varied much against the things he wants to buy. Joe isn't interested in the risk of holding BTC, and he isn't interested in the profits of holding BTC. He just wants to play poker and buy diapers.
In order to give Joe what he wants, we're going to harness the wants of two other people--call them Stacy and Bill. Bill's case is the simplest, so we'll start there first.
Bill owns a pseudonymous online poker room which currently operates in bitcoins. Business is good, because lots of Bill's customers see the risks and rewards of Bitcoin as just another gambling opportunity, and they like that. But Bill can't help but think he could get a lot more customers if people like Joe had a way to play too.
Bill could begin supporting credit cards, Paypal, bank transfers, etc. But then he would have to deal with chargebacks, fees, and a lot of paperwork. Besides, he prefers to remain pseudonymous. So instead, he decides to create a new option on his website--BillBucks. BillBucks can be bought with BTC at the same rate as Aussie Dollars, and when you withdraw BillBucks you get BTC at the same rate as Aussie Dollars. This way people can buy BTC on an exchange, deposit them at his online poker room, and get the same number of BillBucks as AussieDollars. It's just like Paypal, except using bitcoins so that Bill doesn't have to worry about chargebacks and accounts getting frozen.
Bill has a problem, however--it turns out people don't trust a pseudonymous online poker room very much. With BTC they can withdraw their winnings at the end of the day, and not worry about whether Bill's business flops or gets hacked or something like that. BillBucks can't be withdrawn except as BTC, so people like Joe can't keep them on their own computers. Bill decides to solve this problem in two ways. First, he uses coloured bitcoins to issue the BillBucks so that they are publicly auditable and customers can withdraw them at the end of the day. Second, he takes some of his business' BTC reserves and places them in a public escrow account so that even if his website is hacked or he goes out of business, his customers' BillBucks will be guaranteed.
For Bill, cvTokens are just a way to accomplish this last step without needing a trusted party to be the escrow. Instead, the cvToken protocol fills this job--a perfectly trustable escrow account because it works in a purely mathematical fashion. There's one last step that Bill needs to take, though, to make himself less vulnerable to speculators who might use BillBucks during a Bitcoin bubble in order to avoid the crash at his expense. He opens an account at a BTC-Aussie Dollar exchange, completely separate from his online poker business. Now, when users want to deposit BTC into BillBucks, he sells the same amount of BTC on the exchange. If BTC are in a bubble and crash, then when people go to withdraw those BillBucks again, he just buys back BTC on the market and happily cashes them out without having taken on any new risk for his business. When Bill takes this approach with cvTokens, we say he is operating in "gift-card mode".
Everything good so far? If so, I'll move on to Stacy the speculator.