As I begin the real work of developing the smart contract for the Mark Pesce Token, one thing becomes clear — escrow is a problem.
Not because of the smart contract — it’s nearly the easiest thing to do with a smart contract — but rather, because of the value held by the smart contract.
In general the smart contract holds the value of the coin which the smart contract is written in. A smart contract written in Ethereum would hold an escrow of Ethereum, one written in NEO would hold an escrow of NEO, EOS in EOS, and so forth.
The reason for this is that, at essence, smart contracts refer to themselves and their networks as the store of value. All a smart contract can do is move value on the network — it can not (as far as I know) house a store of value that is not on the network.
(Among other things, that would introduce all sorts of security and validation concerns — how would you know whether a store of value not on the network is verifiably real?)
While this doesn’t sound like a terrible problem — after all, who wouldn’t want to own some Ethereum or NEO or EOS? — it means that all escrow activities conducted via smart contract are effectively foreign exchange transactions, and carry the corresponding risks.
If, for example, someone buys a dozen MPT when Ethereum is priced at $2075 — as it was just a few months ago — and redeems them today (15/3/18), when Ethereum is priced at $730, I realise only a third of the value.
Yes, I have the same amount of Ethereum, but I do not live in an Ethereum-based economy. I live in an economy where people trade in Australian dollars. Relative to the currency I use — and which is the basis for my economic relations — I’ve lost two-thirds of my value.
This is the first clear use case I’ve seen for a ‘stablecoin’ — that is, a cryptocurrency that is a true digital representation of a state-backed currency. For example, if there were a digital Australian Dollar available, then the smart contract could hold escrow value in Australian Dollars — dollars that would hold their value indefinitely, relative to the coins and currency in circulation.
It’s hard to see how that would be a bad thing. It derisks one of the essential functions of smart contracts as stores of value, and makes it possible to trade without resort to the risks of foreign exchange.
Can MPT exist without a stablecoin? Yes. But given the intense fluctuations in the crytocurrency markets, it means that I’m always assuming a risk with every token purchase, unless I specifically peg the value of the contract to the value in Australian Dollars at the time of redeption. In that case I’m asking the buyer to assume the risk. That means this is not a good deal for anyone.
For the PAT to work well in the long term, stablecoins are a necessity.
(I gave a talk in New Zealand 3 years ago wherein I made the case for the Kiwi Dollar to become a digital currency — the first stablecoin. Watch the video of that talk here.)