Firstly

Excellent work here. It will take awhile to digest, but it is plenty interesting.

I am struggling to understand the backed currency feature. Please allow me to present my sticking point. Thanks in advance to anyone who can resolve it.


Scenario

Consider an honest entity, MintX, which issues a MasterCoin derivative known as PlatinumCoin with the intention that it will track the price of 1 oz of Platinum bullion denominated in USD.

To issue PlatinumCoin, MintX accepts a nominal amount of MasterCoin equal to the USD price of 1oz Platinum, and in exchange the buyer receives one platinumcoin. MintX continues to issue at this rate to establish a market for PlatinumCoin. The mastercoins it accepts in the process are stored in escrow.

Should the secondary market price of PlatinumCoin fall below the intended price (1 oz Platinum:1 PlatinumCoin), MintX is expected to serve as a market maker. MintX destroys platinumcoins by accepting back any issued PlatinumCoin for a nominal amount of MasterCoin equal to the USD denominated price of 1 oz Platinum.


Caveat

The above scenario is presented under the assumption that the issuing entity, MintX, is honest, and we need not worry that it might sell off its escrowed MasterCoin, which is reserved solely for market making purposes.

The problem instead is that should the price of MasterCoin fall, the value of all MasterCoin in escrow will not meet the intended value of all issued PlatinumCoin. A similar price mismatch will arise should the USD price of 1oz Platinum rise.

In this condition, in which all MintX owned MasterCoin do not cover the intended value of all PlatinumCoin issued, what options are left for MintX should the market require MasterCoin in volume excess of that which is escrowed?


Example

1 MasterCoin = $500 USD
1 oz Platinum = $1500 USD

MintX issues 300 PlatinumCoin @ 1 PlatinumCoin:3 MasterCoin
MintX escrows 900 MasterCoin worth $450k

The USD price of MasterCoin tumbles
1 MasterCoin = $100 USD
MintX escrow = $90k USD

PlatinumCoin price falls, prompting MintX to buy PlatinumCoin @ 1 PlatinumCoin:15 MasterCoin

It would require only 60 PlatinumCoins to bankrupt the MintX escrow.
60 PlatinumCoin = $90k USD = 900 MasterCoin


What then?