It's a noble enough idea, IdeaMan, but it won't work. I don't think I can explain it better than others have already tried. So how about we play a game?
Oooo, I love games, gogogo!
We can pen & paper a small bitcoin economy with an exchange.
Sounds interesting! Where are we going to get enough hands to simulate a market of thousands of people though?
You play the bot, I play a forex trader, someone else plays the rest of the market which is trying to buy M&Ms for a price that's roughly equivalent to USD$2/pack.
This is not the way shopping works - The market tries to buy M&M's for the cheapest price they can reasonably get in a window of time short enough to satisfy their craving for chocolate candy. If there is no price cheap enough, shoppers spend too much or don't buy it. If the price is low, shoppers buy many and save them for later chocolate cravings. But no shopper ever goes to the store thinking, "I'll only buy M&M's if they're within 7% fluctuation range of $2.00" - they go thinking that they want M&M's, and expect them not to cost $2.75 today if they cost $1.49 yesterday.
I'll start with 100 RevCoins, you'll start with $100 USD. You try to hold a floor of $1/RC. We take turns issuing market orders.
This is not the way the bot or the market works. A better example would be if you and I were in the middle of running this example, and then 5000 other people came in and contributed $0.01 towards the goal of holding a floor at $0.50. In that example, I move my price to $0.51, since there's little point offering you twice what the market as a whole offers you in exchange for your Coins, but I still want to buy first. The bot pool may eventually surpass my offer and hit $0.52, but I can always move my bid.
In the end, I guarantee that:
You can prevent the price from going under $1, as long as you don't try to do anything else.
Yes, that is correct. But the bot's goal is not to set a fixed floor price - it's to aggregate spare change from users into a democratically priced backing floor, regardless of what the price at the floor is.
I can make the price fluctuate wildly (several orders of magnitude).
You can make the
ask price fluctuate wildly. If I suddenly decide to spend $90.00 on a Coin, I'm being a fool. If I suddenly decide to spend $50.00 on a Coin, I'm being a fool. If I decide to set my bid within +15% of the floor, you have no choice but to meet me around that range if you want to sell.
I will end up with all your USD.
Sure, assuming the bot locked at a stable price of $1.00 apiece. In practice, the bot would actually end up not being sold to, and the market would move towards the stabilized floor price. You could sell all your Coins to me, but likely I would be unwilling to pay 1:1 for them when the rest of the market clearly values them at a lower price. Really, you would end up with no coins and maybe $20-30 USD, $60 tops.
You probably won't even end up holding all the RevCoins unless you stick to a straight $1/RC exchange rate.
If I was the only buyer (very little demand for RevCoins) then I would be a fool to set the bid at $1.00 when I could easily set it at $0.10. Then you get $10.00, but I get all 100 Coins. What if I set my bid at $0.01? $0.001? What if the floor is set at $0.00001? What if buy 20 Coins at $1.00 and sell them at $0.75 to the rest of the market, lowering the speculative perceived value? Then when you lower your price below $0.75 for the remaining Coins (since you're trying to sell them), and I buy your Coins then?
Some M&M buyers will get screwed for a notable percentage of their money.
If they take prices near your wildly fluctuating ask price, yes. If they take prices near the bot's comparatively stable bid floor (at any value less than $1.00, for instance), then no.
I'm not sure I actually am up to really doing this
Me either, this would take forever if we intended for it to actually hit the floor the bot would set, but it would be faster than the BitCoin economy, since it's a smaller pool of players.
(it'd involve a few hundred trades to show you all the ways the market will slap you around and achieve all my goals above),
It would also require the bot to behave very differently, the market to behave very differently, and for you to be the only seller and for me the only person in the bot's pool, and for me to be foolish enough not to realize that while you have 100% of the supply, I have 100% of the demand. What if I just waited for your price to approach the backed value, which is less than $1.00?
but I'm hoping just thinking about how you'd approach it will make you think about where the problems are.
Right now the majority of the problems with the idea come from the potential user base not understanding the concept or the execution because they'd rather jump to their own idea of the way it operates than read the incredibly detailed description in this thread.
It's an exercise you should certainly try doing on your own notepad, though.
We just did it right here on a public notepad. It turned out your theory was incorrect. But this was a very fun game! Let's play again some time!