These constraints are artificial. The market is much bigger than your system.
I must be losing my mind after so many posts with bytemaster. This is another post which makes no sense to me. Maybe I just need to be done for the day . . .
I'll elaborate: Your response was that your system prevents fully solvent competitors from stepping in and wiping out a currency that has just become insolvent, by the mechanism I described. Namely, where the simple existence of the better positioned competition forces the market price of the currency below its target, and thus forces perpetual buying by the escrow fund until it's emptied. My point is that there will always be competition from outside your constrained system that you must take into account, and as soon as the backing of a currency in your system drops below 100%, then it's automatically at a competitive disadvantage with any freshly created one in an outside system.
Now THAT is an interesting point. An escrow fund could continue to operate successfully in a closed system, but given another competing GoldCoin launched by someone else, people might flock to the new one which would start at 100% backing.
Of course, over-funded escrow funds would work just fine, but it may be that under-funded ones will immediately face competition.
Very interesting. I'll need to think about this.
This also provides a profitable avenue for attack: short sell a bunch of insolvent OldCoins, and use a portion of the proceeds from this sale to issue your own solvent NewCoins at a discount. Wait until OldCoin's escrow fund is overrun and OldCoins become worthless, and your short sale is automatically covered for free.