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When talking about options to tackle volatile cryptocurrency prices, Ethereum's white paper has the following discussion:

Such a contract would have significant potential in crypto-commerce. One of the main problems cited about cryptocurrency is the fact that it's volatile; although many users and merchants may want the security and convenience of dealing with cryptographic assets, they may not wish to face that prospect of losing 23% of the value of their funds in a single day. Up until now, the most commonly proposed solution has been issuer-backed assets; the idea is that an issuer creates a sub-currency in which they have the right to issue and revoke units, and provide one unit of the currency to anyone who provides them (offline) with one unit of a specified underlying asset (eg. gold, USD). The issuer then promises to provide one unit of the underlying asset to anyone who sends back one unit of the crypto-asset. This mechanism allows any non-cryptographic asset to be "uplifted" into a cryptographic asset, provided that the issuer can be trusted.

Any one can elaborate on the concept "issuer-backed assets", especially the words in bold above? Does it mean the issuer raise the funds in USD/gold/etc and repay them in Ether? Any link to ICO here?

Confused here. Thanks a lot!

  • DC does exactly that. They release FIAT currency-backed ERC20 tokens through deposit on their exchange. – SilverCookies Aug 6 '17 at 19:45
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The passage you quoted above is referring to the concept of a stable coin.

Stable coins are crypto-assets which are tied to, or "pegged," to some other asset as a way to maintain a stable value and mitigate the high volatility found in most existing crypto-assets. Examples of stable coins include Digix's gold-backed asset which attempts to peg their asset to gold bullion. Another project attempting to create a stable coin (in a more decentralized way) is MakerDAO Dai which has an interesting mechanism of using a twin asset MKR to absorb the variability of price fluctuations and therefore make Dai stable. Stable coins are still an area of experimentation in the ethereum community and more ideas about how to best employ them are a hot topic of discussion.

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An issuer-backed asset is one in which the asset (digital token) is backed (supported) by the issuing party. With the US gold standard, the US government promised to give the holder of US currency a particular amount of gold for each dollar held. In the case of an issuer-backed asset as described here, the issuer promises to give a widget/USD/some commodity per token.

When backed like this, the value of the token should never dip below what it can be redeemed for, so long as the issuer can still be trusted. For example, the USDT token (another cryptocurrency) is redeemable for a US dollar, less a small fee. The price of a single USDT token should therefore never trade below a US dollar (less the fee for redemption). If it did, an arbitrageur could buy USDT and immediately convert it to US dollars. However, when there were doubts that Tether, the issuer, was solvent because it had over-issued USDTs relative to its supply of US dollars, the price of a USDT fell. Tether was/is supposed to destroy (revoke) USDTs as US dollars are redeemed and can create (issue) new tokens as the need arises, provided they have sufficient US dollars to back the tokens.

This is related to, but not the same as, the concept of book value. The DAO had a book value of just over 1 ether per 100 DAO tokens when it was created, but there was no guarantee that one could always get an ether for every 100 DAO tokens (indeed, in Ethereum Classic, very few people did). There was also no third-party issuer who could issue/revoke tokens after the initial crowd sale.

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