Well, my reasoning was that the difficulty is calculated from the time it takes to generate 240 blocks, and that time varies +-20% all the time. However, you are correct that limiting increases to 2%, 6% and 10% stabilizes the difficulty, but it stabilizes it to a level below where you would get a block every 3 minutes. But apparently that's what is wanted?
That is exactly what I wanted. I do not want to "target" 3 minute blocks like 3 minutes is some magic ideal number to hit (like BTC people think 10 is). It's simply the maximum where you want to be to conduct business reliably.
I still claim, that difficulty drops can be quite big just from the variance, if not as big as in my example (33%), but say 20%. It certainly will not "maintain that level within 2%", or I'm completely misreading the source. However, since those kinds of drops are corrected very fast, it might not be a problem in the end.
Difficulty drops of small amounts will exactly match whatever the drop off is. There is only a limit of a 4x dropoff, and this is kept at 4x to make malicious mining pools have to wait before attempting another attack, thereby reducing their profits from such a thing.
If the difficulty drops "too much" so that 3 minute blocks aren't hit, and it less than 3 minutes, that is fine, and part of the algorithm. SolidCoin's api is changing so that businesses can rely not on some "confirmation" magic number, but a base of time and confirmations. Again, as a business owner and experienced programmer I know exactly what is needed for bulletproof handling of real transactions.