Re: OFFICIAL LAUNCH: New Protocol Layer Starting From “The Exodus Address”
Very interesting stuff. I love seeing the brilliance among this community. However, I sit in the camp that says the escrow agents aren't going to work.
Whenever someone says the word "peg" in relation to monies or commodities or assets of any kind, huge red flags should go up. We have seen often in discussion regarding Bitcoin, people have suggested, "well why not just peg it to gold, or to dollars, or some other other stable asset to eliminate the volatility?" (Max Keiser suggested such a thing a couple months ago...
) The reason is that you cannot peg one asset to another in an open market. The peg will be broken.
The reason is what some of the others here have described - it will become the target of a speculative attack. And the attacker has a nearly guaranteed chance of winning if he has enough money to throw at it. In the real world, we have seen such speculative attacks on government currencies including the Thai Baht and UK pound (that's how Soros got famous). If private actors can break the pegs of government currencies, it can be reasonably inferred that breaking a crypto-asset peg with a market cap of only several million dollars would be trivial.
An escrow fund cannot be expected to keep an exchange rate stable when set against the forces of hostile speculators.
Dacoinminster says
He's suggesting that currencies/assets which don't move in a volatile manner, like 10% a day, would be able to be successfully tracked long term by the escrow fund. What he's missing is that when you add speculative attacks, the attacker can turn any otherwise stable asset into an asset that is trying to appreciate/depreciate 10% per day! That's the problem. Anyone with a bunch of money can come in and start acquiring or dumping the asset in question. The escrow fund will bankrupt itself trying to re-balance in perpetuity.
I do not believe there is a way around this problem. If there was, why don't we just create an escrow agent for Bitcoin, right now, that keeps the price forever between $95 and $105? Why doesn't MtGox create a capital pool of $100m in escrow to enforce this peg? Because someone with $200m will break the peg, and make a killing (and the attacker probably doesn't even need that much when you throw in various leveraged instruments).
I don't want to throw the baby out with the bathwater here, however. Dacoinminster - do you believe your system is worthy of development if we assumed the escrow/stability idea was proven to be unworkable? Is that escrow/stability system for user-defined currencies the core value proposition of your idea?
For the record, I don't think "stability" of an asset price can be achieve through the machinations of market actors. Stability is something which must be arrived at, over time, as a market finds equilibrium. It's an organic process, which cannot be counterfeited, though so many central planners have tried.
In any case, this is really fascinating technology being discussed and kudos to you OP for the creativity and work that's gone into this.
Whenever someone says the word "peg" in relation to monies or commodities or assets of any kind, huge red flags should go up. We have seen often in discussion regarding Bitcoin, people have suggested, "well why not just peg it to gold, or to dollars, or some other other stable asset to eliminate the volatility?" (Max Keiser suggested such a thing a couple months ago...
) The reason is that you cannot peg one asset to another in an open market. The peg will be broken.The reason is what some of the others here have described - it will become the target of a speculative attack. And the attacker has a nearly guaranteed chance of winning if he has enough money to throw at it. In the real world, we have seen such speculative attacks on government currencies including the Thai Baht and UK pound (that's how Soros got famous). If private actors can break the pegs of government currencies, it can be reasonably inferred that breaking a crypto-asset peg with a market cap of only several million dollars would be trivial.
An escrow fund cannot be expected to keep an exchange rate stable when set against the forces of hostile speculators.
Dacoinminster says
Quote
You are quite right that some currencies will fail. For instance, if I define a currency that appreciates at 10% a day, it will definitely not be able to track that.
He's suggesting that currencies/assets which don't move in a volatile manner, like 10% a day, would be able to be successfully tracked long term by the escrow fund. What he's missing is that when you add speculative attacks, the attacker can turn any otherwise stable asset into an asset that is trying to appreciate/depreciate 10% per day! That's the problem. Anyone with a bunch of money can come in and start acquiring or dumping the asset in question. The escrow fund will bankrupt itself trying to re-balance in perpetuity.
I do not believe there is a way around this problem. If there was, why don't we just create an escrow agent for Bitcoin, right now, that keeps the price forever between $95 and $105? Why doesn't MtGox create a capital pool of $100m in escrow to enforce this peg? Because someone with $200m will break the peg, and make a killing (and the attacker probably doesn't even need that much when you throw in various leveraged instruments).
I don't want to throw the baby out with the bathwater here, however. Dacoinminster - do you believe your system is worthy of development if we assumed the escrow/stability idea was proven to be unworkable? Is that escrow/stability system for user-defined currencies the core value proposition of your idea?
For the record, I don't think "stability" of an asset price can be achieve through the machinations of market actors. Stability is something which must be arrived at, over time, as a market finds equilibrium. It's an organic process, which cannot be counterfeited, though so many central planners have tried.
In any case, this is really fascinating technology being discussed and kudos to you OP for the creativity and work that's gone into this.
Hi Erik!
I'm super-pleased that you have taken a look at my paper. (By the way, anybody who hasn't seen Erik's excellent talk at the San Jose conference should do so right now: http://www.youtube.com/watch?v=H2YllvbJo6g)
I think it is worth taking a minute to define how a speculative attack on a pegged currency works. A government can actually peg their currency indefinitely just fine, and not worry about speculative attacks. The problem comes when they ALSO try to set interest rates (i.e. control the money supply to juice their economy). In a free market, this creates an arbitrage opportunity which means one of the government's goals (interest rate control or price stability) will always collapse eventually. This is called the "impossible trinity". I would suggest anybody worried about speculative attacks on my escrow fund read this article: http://en.wikipedia.org/wiki/Impossible_trinity
I suggested that it would be possible to crash a pegged escrow-backed currency by creating one which RISES 10% a day forever. (In fact, I intend to create a few such currencies, just to watch them die, and learn from them.) An escrow-backed currency can handle massive volatility just fine. It only corrects very long-term deviations from the target.
For the record, even without escrow-backed currencies, I think message-based currencies like MasterCoin add a lot of value to bitcoin.