Monday, January 19, 2015

PayBase and PayFlash: the Problem with New Features

The weekend was rather interesting, as Paycoin actually managed to get back above the market cap of Litecoin late last week...and then GAW decided to roll out a new feature. Stop me if you've heard this one before, but apparently the new feature had some unintended consequences; specifically: it totally crashed the price of Paycoin. Oops. So the new feature, PayFlash, was turned off again "until the market settles". But I don't think that's what's really happening; rather, the feature is off until GAW can be sure that it won't totally kill the price of Paycoin again.

Here's what happened as I understand it. PayFlash was introduced, and it allowed you to buy "usable funds at the largest merchants in the world". I think what that actually means is that you could get gift cards or some equivalent thereof. Imagine what happens when people can actually trade Paycoin directly for currency, though -- they decide to try it for one. So the price is $4 per Paycoin at the start let's say, and the first user comes along and says, "I want $100 to spend at Target." He transfers in 25 XPY and gets the code for his $100 at Target. Other users come along doing the same thing, and suddenly it's like hundreds of people decided to simultaneously sell XPY.

And that's the problem: GAW was using the open market to take care of the orders, which in turn resulted in the price crashing as suddenly there wasn't enough (any) buying pressure. At one point the price dropped as low as $0.10 for certain, though I'm curious if trades were actually being fulfilled at that price. If so, even $10 could have made a killing as it would have bought 100 XPY that would now be worth roughly 30X as much.

This is the frustrating thing with GAW and Paycoin. What they were doing sounded good on paper, but the way they implemented it was bound to cause problems. If you want people to be able to buy products with Paycoin, you need to have people buying Paycoin to buy those products first or it all blows up in your face. If GAW had put a few hundred thousand dollars into supporting the current price of Paycoin first, it would have gone a long way to prevent problems -- those that wanted to try PayFlash could do so, while those looking for higher XPY prices first would hold off.

At some point GAW is basically going to need to buy out most of the existing Paycoin (or at least put in a sufficient amount of funds to support a minimum price to buy all existing Paycoin). There are 12.4 million XPY now, and GAW probably holds/controls at least 75% of those. So if they wanted to support a price floor of $3 with PayFlash, then they need to put about $9.3 million towards that goal. Or put $6.2 million towards a $2 price floor, or even $3.1 million to a $1 price floor. Otherwise, releasing features that allow people to effectively sell Paycoin to buy product will push the price down.

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