Quote from: dacoinminster on August 10, 2011, 05:48:50 PM

So how about we contemplate the doomsday scenario for stablecoin:

stablecoin starts out wildly successful, miners get rich, everybody is happy
Stablecoin 2.0 comes out, and nobody wants the original stablecoins anymore
Everyone tries to sell their stablecoins all at once, price drops 99%
All confidence in the protocol is lost except a couple hardcore believers holding out hope that the protocol will somehow correct itself

What should the protocol do to transfer fees in this case? Is there a 90% transfer fee? 50%? 10%? If the transfer fee is too high, who is going to want to buy stablecoins? Transfer fees penalize buyers as well as sellers. If nobody wants to buy OR sell, there is no incentive for prices to go up. Stablecoin simply dies.

It would seem that the transfer fee needs to be pretty small even when the price diverges by a large amount from the underlying asset, otherwise the new currency is completely ruined. On the other hand, if the coins cease to track the underlying asset, nobody wants to hold the coins anymore, and the currency is completely ruined.

Morpheus - have you considered how to handle a doomsday scenario like this?

I'm not sure what would happen in a total doomsday scenario, but I doubt the above would happen. I don't think a new "better" currency would cause everyone to suddenly jump all at once away from Stablecoin. Instead, it would be a gradual migration where the price of Stablecoin would be consistently under the target. The transfer fee would kick in to destroy the Stablecoins at a regular rate which is exactly what we would want.

A doomsday scenario which is very likely to occur would be like the Mt Gox hack. What happens if a bunch of Stablecoin was stolen and the thief doesn't care about the exchange rate and just dumps the coins on the market. Since something like that has already happened with bitcoin, we can assume this would happen with just about any digital coin.

This scenario will cause some issues, but I think Stablecoin would survive. Lets look at each step of the thief's sale to see how Stablecoin would react.

1. The thief initially tries to dump all of his stolen coins on the market. All of the bids are cleared from the market and the price of Stablecoin drops. If the thief is able to dump all of his coins, he gets away with the money, and a bunch of others buy really cheap Stable coins. If not, He has to wait for more bids.

2. The thief still has more coins to dump and some of those with cheap coins may want to sell at a slightly higher price than they bought them at. If the transaction fees haven't change yet, this is really step one with the addition of more people selling below the fair value. When the transaction fees change, the program will now calculate a very low value for Stablecoin and end up with really high transaction fees. If the thief tries to sell, he will lose much of his stolen coins to transaction fees. Also, anyone who purchased cheap Stablecoins and wants to sell out, or anyone panicking will also pay high transaction fees. Some people will choose to pay the transaction fees, others will not.

There's the important distinction, choice. Some people will choose to return some coins to the either because the coins didn't cost them anything to begin with or they have lost faith in Stablecoins. Either way, coins are destroyed. Hoarders can hoard their coins until the price comes back up. Of course, with so many coins being destroyed, the price will come back up.

Also, the transaction fees are a disincentive for the thief to dump his coins all at once. If he does, he won't make as much money as he would if he sold them slowly. There will likely be some level where he doesn't care about the transaction fee and just wants to dump the coins. But, that would just allow some people to buy cheap coins for a while and allow some of the stolen coins to disappear.

3. Finally, some coins are destroyed, others end up with some cheap coins. The big downside, Stablecoin isn't as stable as the name suggests. It will be influenced by the market, but the goal is to always go back to a specific price. I believe it will do that even in this doomsday scenario.