When you decentralize banking with automated exchange-derivatives that short BTC/USD and give you dollar tokens, you freeze up part of the fixed money supply of bitcoins to create a floating supply of synthetic dollars, also Euros, Yuan, ounces of gold, SPY shares and so on. The money supply of fiat-pegs, you could think of it like the total positive balances in all Paypal accounts but on the blockchain, is constrained by the “market cap.” or total fiat-value of all bitcoin. The bitcoin commodity represents a chunk of land on the network, on which fiat value. or an equivalent property, can save a place for itself.
Mastercoin’s technical advantage over v.9 era BTC is that MSC can automatically push and pull. Theoretically bitcoin can also be pushed in a scripted escrow transaction, but Mastercoin implements its own solutions in its meta-level protocol. So you get a problem where you need to go through the bottleneck of the BTC/MSC market to use the tech (currently offering a market depth of equivalent $1750 USD across a 7% price spread between bid and ask).
The solution is same as the solution for BTC price volatility, you park the Mastercoin in an escrow, add in -1 contract of BTC/MSC futures, and create .07 synthetic BTC. This is a smart property that is redeemable for Mastercoins worth the stated value of bitcoin based on the current prices, but it has the push functionality of MSC so you can make two-sided order-books for other smart properties in the synthetic BTC.
The result is that a fraction of the money supply of MSC is taken up to host this boardwalk section of the BTC continent, right near the beach, let’s say after the Omniwallet release and then a few months later when smart leverage and depositing is working, volume picks up in MSC and price rises to .25 BTC each, the market finds an equilibrium in that range, 200,000 MSC end up being shorted and 50,000 BTC get banked into the MSC ecosystem. Of that 50k BTC, 40k is used to issue dollar and euro tokens, let’s say you get 10 million USD and 7 million EUR floating on the blockchain, used for purchase of goods and services, and also cycled through the decentralized spot market for BTC/USD and BTC/EUR. This means a bunch of bitcoin has gone into the Master protocol ecosystem, and most of it is used to represent fiat. There are half as many Mastercoins in the float as there were, and .4% of the bitcoin money supply has siphoned out of that market.
What would happen to the prices of these coins in that scenario?
They wouldn’t necessarily increase in price, however factors relating to the odds of upside volatility do enter in when capital parks itself and order books become thinner. Sparking a rally becomes easiest when volume is lowered for a time against declining volatility. a 40% rise in BTC/USD, amplified 100x by hype of a new economy driven by smart property and the defeat of bitcoin price volatility, could easily result from such a modest milestone, volatile and reactive though it would be.
Now fast forward, BTC stabilizes in the low 500s, more money supply value to park in fiat-pegs. So more money flows into MSC and fiat-pegs. MSC used to create synthetic BTC is redeemed as rising prices causes positions to reset, holders stay long for speculative gains, a tipping point is reached, MSC re-values higher, approaches .5 BTC, its 200k parked slumps to just 100k, but then a new equilibrium is reached, more MSCs come in to re-issue synthetic bitcoin, now 100,000 BTC of value are in the system, with only 240k MSC locked up.
A slow rise in BTC emerges, sideways to higher, volatility declines, new investments are offered on crypto 2.0 ledgers such as Mastercoin. Demand for fiat-pegged tokens via other protocols enters in, more BTC gets absorbed into escrow. The ratio of extreme leverage in price between an increase in MSC-escrow to money supply value is reduced by this competition. The stabilizing, late bear-market price of BTC becomes less speculatively levered when one looks at what fraction is being pegged to fiat and used for simple saving or commerce.
Then we get another bull leg. I’m thinking new price highs are possible in 2014, but even a rally to $1000 will constitute a 100% rally, similar to what we’ve seen in 2012 interregnum period. At that price BTC will have about 12 billion USD in value, 1-2 billion in fiat-pegs would constitute a pretty significant adoption milestone for the use of the technology, and the multiple between use in fiat and speculative hoarded supply would inflate again.
We can go through this cycle repeatedly. At some point, to represent only 4% of BTC money supply, the BTC/MSC price must be at least 1 BTC per 1 MSC, assuming perhaps 50% shorted into synthetic BTC and the rest hoarded, a high ratio, There will only be about 600k MSC once the developer vesting is complete, so 1 BTC per MSC means at most only 600k x BTC/USD worth of crypto-dollars can be issued into use. Not even a billion dollars with bitcoin trading for $1000. So in a bull-case, you could see speculative screamer prices of over 2 BTC for 1 Mastercoin.
The investment case here is based on the math of how hedging/issuing pegged-smart-property works, and the assumption that lots of users will adopt usage of blockchain based dollar/euro/yuan/peso balances.
Here is a simpler way to value Bitcoin based on the need to justify continued momentum with sustained performance. According to this paper the declining profitability of mining dooms bitcoin to various attacks in the mid-to-long term, something we’ve been hip to for over a year now, so the question is whether the network effects of people using fiat balances over the bitcoin blockchain because it “just works” will be sufficient to keep BTC/USD rising year-over-year. We debate about the time frames, but my personal take is bullish on bitcoin for the next few years, for the above reasons.
Final note, the above argument could also apply to XCP just as well, Counterparty tokens just staged a near 100% rally on low volume. Accumulating a decent-sized position will take time but XCP was just revived off a 3.5 million USD valuation, that’s super-low, XCP at 1 billion USD would valuation would be about .4 BTC, with BTC at $1000.
2 out of 3 of the C^3 principals have been paid MSC for work done on the Master protocol. 1 out of 3 of us is speculatively long MSC for personal investment. Our Remittance Market Maker fund (RMM) will be initially traded for in MSC, trading in and out in other currencies such as XCP, BTC and synthetic USD may factor in later. RMM will tend to be structurally long Mastercoins in some allocation so long as there is an up-trend in BTC/MSC: This post is intended to be used for research purposes and not meant to be taken directly as investment advice.