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Offline bytemaster

How to measure the PEG....
« on: October 15, 2014, 02:44:11 PM »

I have been attempting to quantify the PEG and compare it to NuBits or other "IOU" based assets and define what success looks like and what a "market peg" really means. 

We have proven in another thread that BitUSD will always be sellable at the PRICE FEED within the 30 day forced covering period.  In this sense we have incontrovertible proof that BitUSD can be sold for about $1 worth of BTSX within a small percent at all times.   But this begs the question: "what is a dollars worth of BTSX"?    This value is constantly changing and never exactly defined because the BTSX/USD spread and volume is subject to the BTC/USD spread/volume and the BTC/BTSX spread/volume.   In other words the markets ability to value BTSX is only accurate within say 5% and everything else is noise until the system matures. 

So I think that viewing the peg on an "instantaneous basis" by looking at the spread between BitUSD on chain and USD off chain is about as accurate as claiming that the USD on two different exchanges (Bitstamp, Coinbase, etc) has broken the peg because they are not trading at the exact same BTC price.   We should instead focus the peg over time:

1) Assume USD per BTSX is $1.00
2) Assume BitUSD per BTSX is at 1.05  (ie: BitUSD is worth 95% of a real USD)
3) Assume USD per BTSX fell from $1.00 to $0.80?
4) Did BitUSD per BTSX fall to 0.84 BitUSD per BTSX?  YES    Did the spread widen... NO

If so then we can claim the PEG is 100% perfect because a 20% fall in USD price == a 20% fall in BitUSD price.

Everything else is nothing but spreads associated with transaction costs:

Bank->USD->BTC->BTSX->BitUSD
BitUSD->BTSX->BTC->USD->Bank

Anyone holding BitUSD isn't worried about losing their relative purchasing power (it cannot happen). 

So when someone from NuBits enters the picture and claims they have a 1:1 instant peg at all times then it means that all NuBits were sold for USD and the USD was held and could be sold back.  It is only possible because the "market makers" are not taking any risk *AT ALL* and they have real USD on deposit with an exchange.   In fact, they are so clever they hide the interest they charge you for using their NuBits in the spread...  100% guaranteed profit.  You buy NuBits for $1.00 and you can sell them back to them for $0.995   0.4% goes to the exchange, .1% goes to the market makers.   You are exposed to counter party risk and paying them for the privilege.  This might be their whole plan, to disguise a user issued asset as a decentralized trust-free crypto currency.   

What if they take the real USD *off of the exchange* and spend it on something (to fund infrastructure).... now the "market makers" have to increase their spread to cover transaction costs *AND* NuBits has just gone fractional reserve.  It is the same old fractional reserve ponzi scheme... build confidence by maintaining redeem-ability for a long enough period of time to earn "trust" then slowly remove the backing.    My conclusion here is that NuBits will continue to hold with a much tighter spread simply because of how they were issued... "sold for USD" rather than "sold for crypto" the backers of NuBits will not spend much of the USD they received by selling NuBits.  So NuBits can be viewed as a "basket of USD" held on multiple different exchanges where the issuers reserve the right to spend the depositors money and not redeem it.   As a NuBits holder you are now subject to the combined risk of all USD exchanges that the market makers are participating in PLUS the risk of NuShare holders spending the deposited funds.   There is never anything that returns value to NuBits except market maker spreads... only things that can suck value of of it.   It is a one way valve.   

I would contend that the spread we see on BitUSD is actually a badge of honor and proves we are the real deal.  Their "perfect peg" is proof that it is just another uncollateralized "user issued asset" that will pay interest proportional to the credit worthiness of the issuer.  At least with other USD coins the issuer is committed to 100% reserve and can hold the funds in a separate account from the exchanges.

Don't want to leave your money on an exchange... don't buy NuBits... it has the combined risk of all exchanges + issuer risk. 

I only bring up NuBits because it serves as a great point of contrast to BitUSD and helps us others understand our own system better. 
 
« Last Edit: October 15, 2014, 02:46:37 PM by bytemaster »
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Offline happybit

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Re: How to measure the PEG....
« Reply #1 on: October 15, 2014, 02:53:35 PM »
Thank you for this great post!

I understand BitUSD much better now.. though still not fully.  I would love to see the NuBits community's reaction to this post.  Do they linger here, or can I post it there to see what they say?

Offline xeroc

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Re: How to measure the PEG....
« Reply #2 on: October 15, 2014, 02:59:48 PM »
I only bring up NuBits because it serves as a great point of contrast to BitUSD and helps us others understand our own system better.
First smash them .. then play nice .. :) lol

anyway .. makes totally sense to me!
every read having  nubits and NOT selling the instant he finished reading this chould be a ..... (place random stupid word here)
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Offline Bitcoinfan

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Re: How to measure the PEG....
« Reply #3 on: October 15, 2014, 03:17:28 PM »
This is essentially what ETF's called Tracking Error.  You could just adopt this measure.

http://www.investopedia.com/articles/exchangetradedfunds/09/etf-tracking-errors.asp


Offline bytemaster

Re: How to measure the PEG....
« Reply #4 on: October 15, 2014, 03:47:45 PM »
You don't need to convince the Nubits guys simply because -----They think they are practicing Heyek theory of "Denationalization of Money",everything they're doing is in the name of Heyek .

Heyek was an economist who supports competition of private currencies,use a good control method to print good money to maintain stable purchasing power. Heyek claims that if someone can print money and make the money have stable purchasing power,then this money will become good money and win the market competition .

Yeah,well,the idea of printing stable good money is actually kinda cool ----as long as you can keep it good and stable and not fail over time.

This all comes down to the definition of "stable"...
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Offline CoinHoarder

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Re: How to measure the PEG....
« Reply #5 on: October 15, 2014, 04:00:32 PM »
Good point as to counterparty risk regarding market makers and centralized exchanges.

In a hypothetical situation where an exchange went insolvent for some reason, it could leave all Nubits owners holding the bag. If the original market makers lose all (or most) of their money due to exchange insolvency, they could decide not to be market makers anymore. At that point after the original market makers losing a lot of money, who would sign up for that job to be their successors? You would have to be crazy... and thus the "market peg" could be broken just like that. It would take a long time for a market maker to make enough money to where exchange insolvency would not put them in the red considering the amount of money they have on the exchanges.

That added to the risk of fractional reserve lending and quasi ponzi-like schemes that could be done by market makers without anyone knowing about it, Nubits looks like quite a risky alternative to bitUSD. Not to mention all the other hypotheticals..

Does anyone know how much Nushares are selling for? They have been using Nubits volume as a selling point, but I think this could be easily manipulated at very little cost by the developers. Assuming they had a lot of capital, and I am assuming they do seeing as though there were at least $2 million Nubits printed and the potential to sell 1 Billion Nushares for this purpose, $100,000 in volume could be bought with only $400.

It would be a sneaky/slimy marketing scheme to give confidence to Nubits buyers under the guise of actual volume. There would be no way anyone could prove this isn't happening.. I just find it hard to believe they are doing $100,000 plus in volume per 24 hours on a consistent basis like coinmarketcap reports. I have seen it higher than $200,000 at times and it just seems suspicious considering how new the technology is. Suspicious in that people are blindly trusting it for large sums of money right after its release without it being extensively tested in the real world and the solution proven to work consistently over a certain amount of time to trust that it will function properly.
« Last Edit: October 15, 2014, 04:02:33 PM by CoinHoarder »

Offline Empirical1.1

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Re: How to measure the PEG....
« Reply #6 on: October 15, 2014, 04:01:03 PM »
You don't need to convince the Nubits guys simply because -----They think they are practicing Heyek theory of "Denationalization of Money",everything they're doing is in the name of Heyek .

Heyek was an economist who supports competition of private currencies,use a good control method to print good money to maintain stable purchasing power. Heyek claims that if someone can print money and make the money have stable purchasing power,then this money will become good money and win the market competition .

Yeah,well,the idea of printing stable good money is actually kinda cool ----as long as you can keep it good and stable and not fail over time.

I predict a reasonable rise in NuBit interest rates will actually lead to panic selling not parking.

At the moment the market doesn't worry about what is backing NuBits because the absence of a meaningful interest rate implies there is enough new NuBit demand.

Only when the interest rate starts rising does the market know demand is less than supply and then at that point they have to question how much decentralised backing NuBits have, how much interest they can afford to pay and how long the custodians will pay it before giving up.

As none of that is transparent as far as I know then the optimal decision will be to panic sell while NuBits still have value because at some point the custodians will also throw in the towel (take the remaining money and run) once the market starts to get too far away from them.

So NuBits will be short lived or not be able to compete with BitUSD + good yield anyway.

Edit: Shareholders not Custodians. Maybe I should read the thing properly first. I guess the same cycle still applies if the interest is backed by NuShares? As once demand for NuBits drops then NuShares will drop in value too. Anyway I probably got to read this more.
- Ok yeah 'think' I understand it better. Same thing as soon as interest rate gets too high (5-7%?) or if net demand is absent for a little too long (1 month?) then confidence is rapidly lost and market collapses.
« Last Edit: October 15, 2014, 05:04:19 PM by Empirical1.1 »

Offline CoinHoarder

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Re: How to measure the PEG....
« Reply #7 on: October 15, 2014, 04:34:46 PM »
You don't need to convince the Nubits guys simply because -----They think they are practicing Heyek theory of "Denationalization of Money",everything they're doing is in the name of Heyek .

Heyek was an economist who supports competition of private currencies,use a good control method to print good money to maintain stable purchasing power. Heyek claims that if someone can print money and make the money have stable purchasing power,then this money will become good money and win the market competition .

Yeah,well,the idea of printing stable good money is actually kinda cool ----as long as you can keep it good and stable and not fail over time.

This all comes down to the definition of "stable"...

well,Heyek did solved the stable purchasing power issue by market operations like Nubits,but he did't tell people how to make it last forever.
He said that winner comes from competition----meaning a lot private printing money has to fail until a good one can be found.

Probably because there is no good solution to making it last forever. :)

To play devil's advocate, what are the risks of bitUSD? A "black swan" crash is the only plausible downfall I have heard thus far. I have been thinking of ways to mitigate it.

One possible solution is to develop an infrastructure for bitUSD such so that there is no benefit of holding real USD in its place.. in terms of things you can do with it. Once that statement is true (or even mostly true), a community awareness campaign can be marketed that if someone feels like a BTSX bubble is approaching that they should diversify into bitUSD or Bitassets instead of cashing out into FIAT or other cryptos. That way no money ever leaves the BTSX economy and therefore no bubble could occur as Bitassets are backed by BTSX. It relies on a large portion of the community realizing this and putting it into practice, but it is the only solution I can come up with thus far.

Offline xeroc

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Re: How to measure the PEG....
« Reply #8 on: October 15, 2014, 05:02:52 PM »
using the reserve funds to pay the unbacked bitUSD was one proposal to mitigate .. i think BM proposed it himself already somewhere
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Offline Chronos

Re: How to measure the PEG....
« Reply #9 on: October 15, 2014, 05:41:40 PM »
Does anyone know how much Nushares are selling for?
It looks like it's currently $0.002 per share, which would give a market cap of $2 million if all shares were worth this amount. However, they still appear to be screening applicants to buy shares. See http://discuss.nubits.com/t/undistributed-nushares/125 and see also http://discuss.nubits.com/t/nushare-price-increase/334

I just find it hard to believe they are doing $100,000 plus in volume per 24 hours on a consistent basis like coinmarketcap reports.
Based on my analysis, I think the recent 24-hour volume is due to the fact that they are putting buy/sell walls on NuBits-to-BTC currency pairs. See https://bter.com/trade/NBT_BTC. When their walls get a little off due to a jump in BTC price, I suspect that arbitrage traders are stepping in with huge orders to take advantage of this, creating a lot of volume. That's not necessarily long-term demand, but it is volume. Also, because of these walls, if traders expect a crash in BTC, they might be dumping high volume into NuBits (and out again) as a temporary hedge.

Offline CoinHoarder

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Re: How to measure the PEG....
« Reply #10 on: October 15, 2014, 05:43:56 PM »
using the reserve funds to pay the unbacked bitUSD was one proposal to mitigate .. i think BM proposed it himself already somewhere

I'm not trying to be negative in such a positive thread, but I feel this subject could use some thought and brainstorming from the community.

A reserve fund that generates about 1.5% APY doesn't seem like it would generate sufficient collateral as 1.5% APY is small compared to the possibly large percentage (50%+ ??) that would be needed to cover bitassets in the event of a black swan. I understand that the yield is dynamic and could change, but it is what it is currently and without mass adoption or changing the way it works it won't increase significantly. I understand shorts will soon be able to compete as to this, so that should help, but is it enough to cover? Disregarding the fact that 1.5% is rather large compared to what you can get with banks, it would not be enough to cover them... or is my understanding wrong of how it would work?
« Last Edit: October 15, 2014, 05:46:19 PM by CoinHoarder »

Offline CoinHoarder

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Re: How to measure the PEG....
« Reply #11 on: October 15, 2014, 06:22:38 PM »
Does anyone know how much Nushares are selling for?
It looks like it's currently $0.002 per share, which would give a market cap of $2 million if all shares were worth this amount. However, they still appear to be screening applicants to buy shares. See http://discuss.nubits.com/t/undistributed-nushares/125 and see also http://discuss.nubits.com/t/nushare-price-increase/334

I just find it hard to believe they are doing $100,000 plus in volume per 24 hours on a consistent basis like coinmarketcap reports.
Based on my analysis, I think the recent 24-hour volume is due to the fact that they are putting buy/sell walls on NuBits-to-BTC currency pairs. See https://bter.com/trade/NBT_BTC. When their walls get a little off due to a jump in BTC price, I suspect that arbitrage traders are stepping in with huge orders to take advantage of this, creating a lot of volume. That's not necessarily long-term demand, but it is volume. Also, because of these walls, if traders expect a crash in BTC, they might be dumping high volume into NuBits (and out again) as a temporary hedge.

Yeah there is probably a more reasonable explanation for it and what you describe could be plausible, but what I stated is a possibility... truth is no one really knows for sure. Conspiracy theories are more fun than your explanation. :p

Offline biophil

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Re: How to measure the PEG....
« Reply #12 on: October 15, 2014, 06:46:12 PM »

I predict a reasonable rise in NuBit interest rates will actually lead to panic selling not parking.


This would make for an interesting Best Response analysis!

Let's say I hold NuBits, and I believe that the interest rate is positively correlated to the likelihood that NuBits is about to collapse. In other words, I believe there is a function t(r) that describes how many days before the NuBits collapse as a function of the interest rate r (to make the math easy, assume r is in %/day). Then if I have N NuBits, for any interest rate r, I have two options:

1) sell now and profit N.
2) park for a little less than t(r) days, sell right before the collapse, and make over N*(1+t(r)*r). (I'm not compounding interest; this is a lower bound)

Well look at that! Unless t(r)=0, option (2) always gives me a higher payoff than option (1)! So we should expect that even when the NuBits collapse is imminent, there will probably always be some risk-seeking individual(s) out there who are going to park for one more day in the hopes of making away with one more dollar. Of course, at some point the risk-averse people, who have been selling all along, will reach some critical mass of selling volume that the market-makers can't keep up with and the peg will break and the risk-seekers will lose all their money.

Interestingly, the custodians (aka the fat cats who make NuBits possible) will also have a choice to make:

1) Keep buying excess NuBits, trying to maintain the peg
2) Abandon their responsibility to buy excess NuBits because the collapse is imminent and the longer they wait the more they lose.

Clearly, some custodians will abandon earlier than others; the ones who hold out longer will lose more money. So notice here that in a collapse scenario, the custodians have a strong incentive to abandon the holders of NuBits!

Offline bytemaster

Re: How to measure the PEG....
« Reply #13 on: October 15, 2014, 06:50:12 PM »
using the reserve funds to pay the unbacked bitUSD was one proposal to mitigate .. i think BM proposed it himself already somewhere

I'm not trying to be negative in such a positive thread, but I feel this subject could use some thought and brainstorming from the community.

A reserve fund that generates about 1.5% APY doesn't seem like it would generate sufficient collateral as 1.5% APY is small compared to the possibly large percentage (50%+ ??) that would be needed to cover bitassets in the event of a black swan. I understand that the yield is dynamic and could change, but it is what it is currently and without mass adoption or changing the way it works it won't increase significantly. I understand shorts will soon be able to compete as to this, so that should help, but is it enough to cover? Disregarding the fact that 1.5% is rather large compared to what you can get with banks, it would not be enough to cover them... or is my understanding wrong of how it would work?

I suppose the "minimum price feed" should be  ALL USD / (ALL COLLATERAL) and that if the price feed is below this point then all shorts are immediately called and all BitUSD becomes redeemable at at this price ratio and a new BitUSD market is created.   

In other words, no amount of insurance fund is able to protect against all black swans.   The best we can do is give all BitUSD holders and all shorts a fair settlement.  The value of BitUSD is always <= the value of the collateral.       
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Offline bitmeat

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Re: How to measure the PEG....
« Reply #14 on: October 15, 2014, 11:31:39 PM »
The only way to measure it in a meaningful manner is to take into account size of order. If I was to convert $100k of BitUSD to BTSX at market and then back, how much would I lose? It's probably close to 10-20% at the moment.

 

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