Quote from: vector76 on June 19, 2011, 10:33:35 PM

Backing and pegging are similar in that they both influence the price.

Backing protects the value from falling but it does not prevent the price from rising. Pegging stabilizes the value in both directions. Backing also does not require active intervention in the market, as demonstrated with silver dollars. The backing is connected to the currency when it is created. Pegging requires active management over the lifetime of the currency. Whether this is manipulation or "free market" is somewhat beside the point. What matters is if it's practical and trustworthy.

Under a system of backing the price is usually prevented from rising by people bringing gold or some other asset to the issuer in exchange for new money.

The difference between backing and pegging is only whether the supply of currency is managed actively or passively.

Quote from: vector76 on June 19, 2011, 10:33:35 PM

The problem is precisely falling value when there is not an expectation that demand will pick up.

I agree that this is a potential problem. The assumption would have to be that the demand for currency tends to grow over time. This is generally true, but not guaranteed.

A potential solution I have been thinking about is that exchanges would provide special accounts for arbitraging the dips in the currency. The buying and selling on these accounts would be automated and not subject to discretion, so that they would always buy below parity and sell at or above parity. Also the money would have to be unaccessible for a while (say 30 days at a time) to prevent people from panicking and closing their account on a drop in demand.

There would of course have to be some special benefits to having such accounts if anyone should be expected to take the risk. This could be priority in the bidding process, so that these accounts would be first in line to buy whenever the price drops below parity, and lower or no transaction fees. Transaction fees on the buying and selling of others could perhaps even be awarded these accounts as a payment for their risk taking if a larger incentive is needed.

Generally speaking such an account would generate profits, but you would risk losing the money if the currency still fails.

I must stress that this is still just an idea that I am playing with, and I am not yet certain whether this would be viable or not.