The 'why' aspect is fairly simple to understand. The 'how' is pretty heavy going!
Basically we want to have an asset-backed crypto-currency. The price of which stays in parity with something say the dollar or 1oz of Gold.
By having crypto-USD, which has all the advantages of Bitcoin, but which can always be bought and sold for $1 would be very useful. It would make it far easier to get fiat in and out of the crypto economy without the exchange rate risk that exists with Bitcoin.
Having a crypto representation of fiat would allow for truly P2P currency/commodity exchanges to arise.
Most people seem to think that the only way to achieve this is by trusting a single authority to issue redeemable USD-tokens - IOUs which could be implemented as colored Bitcoins. Bob accepts $1, gives you Bob-IOU-colored-bitcoin, and promises to redeem it back at a later date.
The problem with this is that we rely 100% on Bob redeeming our IOUs and not running off with the money or going bankrupt.
The OPs proposal aims to achieve the same thing but where we don't need to trust anyone.
The complexity behind his proposal is there to allow market forces to operate on keeping price parity between crypto-USD and USD.
Ok, that does clear up a few holes in my understanding. Thanks for that. I still have more but we'll get that eventually I'm sure.
I wouldn't worry too much about price parity, as bytemaster's already mentioned (and you probably already know), the market will take care of that. What's more important is what role this is going to take in the general consumption market. The important thing you mention here is the IOU part, and that means this is intended to replace the USD, not bitcoins, but replace it in a way that is both decentralized and as forgery proof as bitcoins are - one of the reasons we trust the USD (or any fiat) is because they make them difficult to forge. This is part of what government backing actually means (along with legal tender etc).
I think I have laid this out fairly clearly in my latest posts that describe how an anonymous peg could make crypto-Gold always equal the price of gold and operate at a profit. Because the 'peg' is anonymous no one could *ever* hold that peg on the hook to honor an IOU, instead you are trusting their profit motive (and that of everyone competing against them) to keep the VALUE peged.
I would gladly explain more later, but I think you could benefit from reading a few more of my existing posts (or ree-reading them).
I had written a couple posts some time ago regarding one of the fundamental flaws of bitcoin as a trade device, links
here, and
here. The summary of those posts is that bitcoins are actual units of value, while fiat currencies are 'worthless' IOUs. Trading goods of value for other goods of value (coffee for tea, bitcoins for bread, etc), is nothing more than bartering, an inelegant and clumsy trade mechanism on a large scale. What modern economies run on, very efficiently, is debt: Sometimes you want something of value, but don't currently have something of value that the other person
wants, so you borrow what they do want, and pay it back later - everyone knows they can resupply with fiat. Fiat is also a way of tracking this debt, even if you did not take out the original loan that created the money. There has to be a system to track and manage
debt, and
that is what the USD and all other fiats are used for. That is their value, and what we pay 3-10% a year to the banks to run. That's what they provide that no other commodity can provide. Fiat is not wealth, it's access to the wealth up for sale at any one time. Bitcoins are wealth due to their scarcity.
Bitcoins provide the easiest transfer of actual wealth so far, but they still aren't very good for running an economy. For trade, it's slow, and needs 3rd party to work properly in this context (mtgox USD, for example, is instant only between mt gox accounts...how fast will yours be?). You still need the separate account of who borrowed what from whom, and this is where centralization occurs (eg mtgox's books being taken by a government).
Are you guys designing a way to track and manage debt via p2p? If so, good, this is exactly what the market needs...if not, you should be, because it's far bigger than bitcoins. Anything else will just be wasting your time, as fiat is extremely good at being fiat already. If you're purely creating a system to allow arbitrage against currencies then it will have marginal success, I'm sure, but I don't see it as world changing as btc. I know you've said you follow an Austrian Economics viewpoint, so I don't know how this fits into your existing views, but trade excels more with an inflating currency than with a deflating one. No one wants to hold on to cash for long if it's worth less next year, and that gets them trading it "for what they want". It just so happens with fiat that increasing debt means an inflating currency, so fiat is fantastic for both tracking debt and trade. It sucks for keeping value, therefore gold, silver, and bitcoins arise. Bitcoins only allow you to trade with other people who want bitcoins, which as long as governments exist, will always be less than those who want fiat. How often does one use gold? How often does one buy a coffee? In this context a person might want both; a way to save, and a way to quickly get minor commodities. Crypto-IOUs, would track debt, which will always increase due to property laws, and if they were widely held and accepted (this is a must, of course), would they also be perfect for economic activity, and have tremendous value for the world.
You did mention backing IOUs with the interest from pre-paid bits of wealth (bitcoins), which goes against the grain a little of what I'm saying here, but that is the risk taken by the investor, both in fiat and in this. As a microbank, do you give someone $10 or not? They say they will pay you back, but what if they don't? Is credit rating built in? (I suppose it might be, actually)
How does what your doing hold in this light?
