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Offline Rune

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Insurance, bounties and bail-outs
« on: October 23, 2014, 09:49:24 PM »

To accommodate the rapid growth I described in my other thread, I have some ideas for policies we can implement through voting functionality to avoid some of the mistakes bitcoin did.

Bug insurance.

We can implement a policy that says if you follow the security instructions and still manage to lose your coins somehow through a bug, e.g. that sends your coins to a dead address or loses them in some other way. If you can present proof beyond doubt to the community that you lost it due to a bug, a delegate will inflate the money back and give to you (for small amounts) or the community will hard fork a genesis block that pays you back (for large amounts). Obviously this would require ridiculously strict security/identification measures, but if implemented and with successful precedence of use I think it would attract massive investor confidence in us. No more "tough luck". Also the community wouldn't even be paying anything for this insurance, because the coins that were inflated would simply make up for the coins that were lost.

Bounties

The insurance model would not work for hacks, scams or thieves because without clear proof the coins were destroyed it would be almost impossible to determine if a hacking victim isn't simply defrauding us bitcoin "we got hacked" style. However the blockchain will be able to put up massive bounties for the capture of a hacker or scammer or rogue exchange that targets bitshares users. If we put up a massive bounty many times the size of the first hack that is done against the community, we will set a strong example that stealing from bitshares users will be much more dangerous than from other crypto coin communities. Once again this would require some quite ridiculous levels security and investigation, but the upside would also be enormous as it would once again massively increase investor confidence in our system.

Bail outs

I case of a black swan event tanking bitshares and making one of our bitassets insolvent, we could simply have an official policy of having BTS shareholders take the loss in order to preserve the peg by hardforking a genesis block that sends the missing amount to the yield fund. It would be expensive for stakeholders, but I think it would overall be very valuable as it once again increases investor confidence in our system, and makes bitassets pretty much 100% safe. It would also mean bitAsset holders would NOT pull out their bitassets in a case of a crash, which would contribute positively towards preventing a crash from causing insolvency. With bail outs as an official policy we could also experiment with lowering the collateral requirements to something that encourages margin trading a bit more, while still being secure, thus increasing the utility of the internal exchange and increasing yields for bitAsset holders.

Offline mf-tzo

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Re: Insurance, bounties and bail-outs
« Reply #1 on: October 23, 2014, 09:59:51 PM »
If the first 2 can be implemented then the sky is the limit. Add some Trezor security and we are done.
However regarding hardforks I am not so sure how easily can be implemented. What in the same time that someone got hacked someone else made a huge deal and earned huge profits and with the hard fork his deal is cancelled? How will this increase confidence?

I am not so sure about the bail out proposal. I don't think there should be bailout options at all costs. If there is a black swan event and the DAC is not able to succeed then so be it.. Bailout options imho could cause market manipulation...


Offline starspirit

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Re: Insurance, bounties and bail-outs
« Reply #2 on: October 23, 2014, 10:04:09 PM »
Definitely interesting ideas and hope they are explored further. For bail-outs, I'm not clear what the impact of 'hardforking a genesis block' is. Who effectively pays this, or is it paid via inflation of the number of BTS shares?

Offline arhag

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Re: Insurance, bounties and bail-outs
« Reply #3 on: October 23, 2014, 10:05:31 PM »
Bail outs

I case of a black swan event tanking bitshares and making one of our bitassets insolvent, we could simply have an official policy of having BTS shareholders take the loss in order to preserve the peg by hardforking a genesis block that sends the missing amount to the yield fund. It would be expensive for stakeholders, but I think it would overall be very valuable as it once again increases investor confidence in our system, and makes bitassets pretty much 100% safe. It would also mean bitAsset holders would NOT pull out their bitassets in a case of a crash, which would contribute positively towards preventing a crash from causing insolvency. With bail outs as an official policy we could also experiment with lowering the collateral requirements to something that encourages margin trading a bit more, while still being secure, thus increasing the utility of the internal exchange and increasing yields for bitAsset holders.

Bytemaster originally proposed something like that (search FDIC). This can be a dangerous policy for BTS holders. You don't want to do it for any BitAsset. If the underlying of a BitAsset shoots up in price relative to BTS than BTS holders need to pay for that. I would like to allow people to experiment with various BitAssets without being able to steal value from BTS. The holders of the BitAssets would be the ones to take the risk of not gaining the defined value. For example, BitDouble holders shouldn't get double their real world value every year through BTS dilution if BTS growth cannot keep up. They should just have their peg stop working. On the other hand, for certain BitAssets it might make sense for BTS to cover the peg through dilution because the confidence it provides to holders and the resulting investment of funds into the system would be more than worth any risk of dilution. But the shareholders should be allowed to decide on which BitAssets this policy holds for. For example, we could let it apply for BitUSD and other BitCurrencies (things that should have price stability) and perhaps not let it apply for BitSPY or BitDJIA for example.

Offline Rune

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Re: Insurance, bounties and bail-outs
« Reply #4 on: October 23, 2014, 10:08:19 PM »
Definitely interesting ideas and hope they are explored further. For bail-outs, I'm not clear what the impact of 'hardforking a genesis block' is. Who effectively pays this, or is it paid via inflation of the number of BTS shares?

It simply inflates the total number of shares, so all BTS holders pay a cut out of pocket through dilution. The airdrops to PTS/AGS are done this way, I think. It wouldn't necessarily have a negative impact on the price though, because bitAsset holders would feel safe and would keep their money on the blockchain where as without a bailout they would probably lose faith and make a run on the bank, reducing the BTS price even more.

Offline Rune

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Re: Insurance, bounties and bail-outs
« Reply #5 on: October 23, 2014, 10:10:59 PM »
Bail outs

I case of a black swan event tanking bitshares and making one of our bitassets insolvent, we could simply have an official policy of having BTS shareholders take the loss in order to preserve the peg by hardforking a genesis block that sends the missing amount to the yield fund. It would be expensive for stakeholders, but I think it would overall be very valuable as it once again increases investor confidence in our system, and makes bitassets pretty much 100% safe. It would also mean bitAsset holders would NOT pull out their bitassets in a case of a crash, which would contribute positively towards preventing a crash from causing insolvency. With bail outs as an official policy we could also experiment with lowering the collateral requirements to something that encourages margin trading a bit more, while still being secure, thus increasing the utility of the internal exchange and increasing yields for bitAsset holders.

Bytemaster originally proposed something like that (search FDIC). This can be a dangerous policy for BTS holders. You don't want to do it for any BitAsset. If the underlying of a BitAsset shoots up in price relative to BTS than BTS holders need to pay for that. I would like to allow people to experiment with various BitAssets without being able to steal value from BTS. The holders of the BitAssets would be the ones to take the risk of not gaining the defined value. For example, BitDouble holders shouldn't get double their real world value every year through BTS dilution if BTS growth cannot keep up. They should just have their peg stop working. On the other hand, for certain BitAssets it might make sense for BTS to cover the peg through dilution because the confidence it provides to holders and the resulting investment of funds into the system would be more than worth any risk of dilution. But the shareholders should be allowed to decide on which BitAssets this policy holds for. For example, we could let it apply for BitUSD and other BitCurrencies (things that should have price stability) and perhaps not let it apply for BitSPY or BitDJIA for example.

Ah yes, this is very true. It should probably only apply to fiat currencies of very large economies. I don't think there's a history of a fiat currency ever jumping in price :p

Also I think it's important that the bail out is in fact not implemented through code, but is simply a social consensus. Having a coded bailout could be dangerous if there's some sort of manipulation. A social consensus bail out would be almost 100% safe for bitassset holders anyway because BTS voters would know that if they don't do the bailout there will be a run on the bank and they will lose more.

Offline starspirit

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Re: Insurance, bounties and bail-outs
« Reply #6 on: October 23, 2014, 10:35:53 PM »
Definitely interesting ideas and hope they are explored further. For bail-outs, I'm not clear what the impact of 'hardforking a genesis block' is. Who effectively pays this, or is it paid via inflation of the number of BTS shares?

It simply inflates the total number of shares, so all BTS holders pay a cut out of pocket through dilution. The airdrops to PTS/AGS are done this way, I think. It wouldn't necessarily have a negative impact on the price though, because bitAsset holders would feel safe and would keep their money on the blockchain where as without a bailout they would probably lose faith and make a run on the bank, reducing the BTS price even more.
Dilution would devalue the collateral further, so mathematically this could only work if the size of a bailout were moderately small relative to the cap of BTS. Not sure if that is always necessarily the case(?). But some form of insurance on BitUSD at least is probably worth exploring.

Offline fuzzy

Re: Insurance, bounties and bail-outs
« Reply #7 on: October 23, 2014, 10:43:48 PM »
 +5% +5%

Awesome post.  Can you be there tomorrow on the Mumble around the time we are doing the hangouts?  This way we can all talk about it.  Maybe give 15 minutes (or so) to the conversation topic.  With new delegate roles, it looks like we might have a lot more ability to protect the network by creating these kinds of things.

Great initiative...getting so pumped.
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ShareBits and WhaleShares = Love :D

Offline Rune

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Re: Insurance, bounties and bail-outs
« Reply #8 on: October 23, 2014, 10:45:09 PM »
Definitely interesting ideas and hope they are explored further. For bail-outs, I'm not clear what the impact of 'hardforking a genesis block' is. Who effectively pays this, or is it paid via inflation of the number of BTS shares?

It simply inflates the total number of shares, so all BTS holders pay a cut out of pocket through dilution. The airdrops to PTS/AGS are done this way, I think. It wouldn't necessarily have a negative impact on the price though, because bitAsset holders would feel safe and would keep their money on the blockchain where as without a bailout they would probably lose faith and make a run on the bank, reducing the BTS price even more.
Dilution would devalue the collateral further, so mathematically this could only work if the size of a bailout were moderately small relative to the cap of BTS. Not sure if that is always necessarily the case(?). But some form of insurance on BitUSD at least is probably worth exploring.

Actually that would only be the case if bitAsset shareholders started selling off their bitassets, which is more likely to happen without a bailout than with it, I think.

Offline starspirit

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Re: Insurance, bounties and bail-outs
« Reply #9 on: October 23, 2014, 11:57:28 PM »
Definitely interesting ideas and hope they are explored further. For bail-outs, I'm not clear what the impact of 'hardforking a genesis block' is. Who effectively pays this, or is it paid via inflation of the number of BTS shares?

It simply inflates the total number of shares, so all BTS holders pay a cut out of pocket through dilution. The airdrops to PTS/AGS are done this way, I think. It wouldn't necessarily have a negative impact on the price though, because bitAsset holders would feel safe and would keep their money on the blockchain where as without a bailout they would probably lose faith and make a run on the bank, reducing the BTS price even more.
Dilution would devalue the collateral further, so mathematically this could only work if the size of a bailout were moderately small relative to the cap of BTS. Not sure if that is always necessarily the case(?). But some form of insurance on BitUSD at least is probably worth exploring.

Actually that would only be the case if bitAsset shareholders started selling off their bitassets, which is more likely to happen without a bailout than with it, I think.
Another approach for the bail-out is to have it funded by a voluntary group of insurers (non-dilutive) rather than from dilution of all BTS holders.
For example, suppose anybody could send their BTS to a reserve, and receive interest on their BTS for providing insurance, in return for capital loss if there is ever a bailout required. The interest could be funded as a portion of the interest that would otherwise be earned by BitAsset owners, in return for insurance. (Longs are only deserving of this interest in any case because they are taking on some risk they might not get fully paid by shorts if under-collateralisation occurs). I haven't thought through the implications of such an approach and how feasible it might be, just food for thought. It doesn't resolve the issue either that if BTS fell dramatically there might never be enough.

Offline Rune

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Re: Insurance, bounties and bail-outs
« Reply #10 on: October 24, 2014, 12:01:19 AM »
+5% +5%

Awesome post.  Can you be there tomorrow on the Mumble around the time we are doing the hangouts?  This way we can all talk about it.  Maybe give 15 minutes (or so) to the conversation topic.  With new delegate roles, it looks like we might have a lot more ability to protect the network by creating these kinds of things.

Great initiative...getting so pumped.

Yes, I will make sure to be there tomorrow :)

Ggozzo

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Re: Insurance, bounties and bail-outs
« Reply #11 on: October 24, 2014, 12:04:19 AM »
Quote
We can implement a policy that says if you follow the security instructions and still manage to lose your coins somehow through a bug, e.g. that sends your coins to a dead address or loses them in some other way. If you can present proof beyond doubt to the community that you lost it due to a bug, a delegate will inflate the money back and give to you...

There would be no way to prove that the loser doesn't have access to the privkey and will access it later on.

Hard fork would require a large premium for users to agree to that since it would require all users to "work".

Offline Rune

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Re: Insurance, bounties and bail-outs
« Reply #12 on: October 24, 2014, 12:10:29 AM »
Quote
We can implement a policy that says if you follow the security instructions and still manage to lose your coins somehow through a bug, e.g. that sends your coins to a dead address or loses them in some other way. If you can present proof beyond doubt to the community that you lost it due to a bug, a delegate will inflate the money back and give to you...

There would be no way to prove that the loser doesn't have access to the privkey and will access it later on.

Hard fork would require a large premium for users to agree to that since it would require all users to "work".

The hard fork can delete the lost funds. The trick is to ensure that it isn't someone else's, active coins.

 

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