Re: OFFICIAL LAUNCH: New Protocol Layer Starting From “The Exodus Address”
Hi Erik!
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 don't believe this is true. A government (or any other entity) cannot maintain a peg indefinitely unless they have a indefinite amount of resources with which to do it (and no, money printing doesn't count
). If the entity is ALSO trying to control interest rates, that might make the peg even harder to maintain (or maybe easier in some cases) but in any case the peg will be broken, regardless of the interest rate environment.The Impossible Trinity is indeed impossible. But so is maintaining a peg indefinitely without unlimited resources. Note that a peg CAN be maintained for a long time, years even, but eventually it'll be broken once a group of aggressive, deep-pocket speculators get organized against it. The difficult of doing such a speculative attack on small crypto-currency assets is trivial.
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.
Here's what you're missing... the speculators will take whatever assets exist on this system, and start buying (or selling) them in one direction over and over and over until the escrow system dies. In other words, they will take the asset and cause it to become one which rises 10% (or more) per day forever (or one which falls in a similar way).
This is why the peg will break. Speculators will buy (or sell) the asset in perpetuity because they know the escrow agent will run out of funds trying to fight them. A sustainable peg is an aberration of a market... and will be severed.