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Offline monsterer

Neolithically simple alternative bitasset peg
« on: November 17, 2014, 06:51:49 PM »

The current bitasset pegging system is so fantastically complex because the assets are traded on a free market, which can be manipulated by any other market participants.

A neolithically simple alternative way to peg a bit asset to an external price would be to remove the other participants from the equation.

Create a different class of asset, which can only be bought and sold by the issuer. The issuer maintains a buy and sell price with a spread which takes into account adverse selection costs.

Issues:

100% trust is required of the issuer. Trust that they don't sell you the asset and then raise their buy price to $1M USD. Trust that they have enough liquidity to cope with adverse selection costs, so they're able to buy back the assets they sold you after the price goes up.

Now, take that idea and make the blockchain the issuer.

You then gain 100% transparency on the algorithm controlling the prices. You'd be able to see the 'balance' of the blockchain in advance to be sure it has liquidity reserves.

In addition, bitshares is ideally placed to implement this idea, since the necessary price feeds are already a fundamental component.

The only real remaining issue is designing the algorithm to set the bid/ask prices - perhaps something like the kalman filter (http://www.r-bloggers.com/the-kalman-filter-for-financial-time-series/) could be used over the feed data.

Thoughts?
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Offline xeroc

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Re: Neolithically simple alternative bitasset peg
« Reply #1 on: November 17, 2014, 07:05:51 PM »
the issuers are then the 101 delegates as they publish the price feeds .. is that desired?
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Offline Ander

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Re: Neolithically simple alternative bitasset peg
« Reply #2 on: November 17, 2014, 07:34:42 PM »
the issuers are then the 101 delegates as they publish the price feeds .. is that desired?

Right, this isn't better than the free market solution.

Better for the decentralized free market to determine the price rather than 101 delegates.


All we need is liquidity and the peg will work incredibly well.
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Offline monsterer

Re: Neolithically simple alternative bitasset peg
« Reply #3 on: November 17, 2014, 07:37:56 PM »
the issuers are then the 101 delegates as they publish the price feeds .. is that desired?

Well, I don't think the trust requirement is any different than it is now since the price feed still controls everything either way?
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Offline toast

Re: Neolithically simple alternative bitasset peg
« Reply #4 on: November 17, 2014, 07:40:15 PM »
the issuers are then the 101 delegates as they publish the price feeds .. is that desired?

The delegates aren't the issuers, it's still the BTS holders. Delegates only set feeds, they don't place orders.
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zerosum

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Re: Neolithically simple alternative bitasset peg
« Reply #5 on: November 17, 2014, 08:48:34 PM »
Just want to make clear that I already suggested this as plan 'E' several months ago...the problem is we went from plan A to plan B without any need for doing so, other than delaying the whole project with a good 2 month and counting...


Offline bytemaster

Re: Neolithically simple alternative bitasset peg
« Reply #6 on: November 17, 2014, 09:16:57 PM »
Just want to make clear that I already suggested this as plan 'E' several months ago...the problem is we went from plan A to plan B without any need for doing so, other than delaying the whole project with a good 2 month and counting...

There was a need to move to the feed... you could short a BitAsset out of existence and market confidence in the peg would force it to 0 allowing shorts to cover cheaply.    Plan A only works in very large and liquid markets that are relatively equally balanced between bulls and bears.   
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Offline Ander

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Re: Neolithically simple alternative bitasset peg
« Reply #7 on: November 17, 2014, 09:24:13 PM »

There was a need to move to the feed... you could short a BitAsset out of existence and market confidence in the peg would force it to 0 allowing shorts to cover cheaply.    Plan A only works in very large and liquid markets that are relatively equally balanced between bulls and bears.   

Indeed, the way it worked in itially back in august, you could short infinitely at any price without needing to ever cover (unless you got a margin call), and thus the price of bitUSD could simply go to 0.

Now this is virtually impossible, because you cannot short below the feed, and shorts must cover eventually, so the price must rise back towards the feed price eventually.
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Offline speedy

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Re: Neolithically simple alternative bitasset peg
« Reply #8 on: November 17, 2014, 09:33:17 PM »
The current peg design is working great. We just need more people to use it & more volume.

Offline bytemaster

Re: Neolithically simple alternative bitasset peg
« Reply #9 on: November 17, 2014, 09:39:17 PM »
Lets say the delegates produce a feed and offer to sell USD for 1% over the feed.... and then buy it back at 1% below the feed.... then the BTS holders can lose money any time the price moves more than 1% and arb bots take advantage of the unlimited liquidity to rob BTS holders.    Consider for a moment that the "feed price" represents only the price that very small amounts are trading for on the real markets.   If someone attempted to dump 1M BTS on the real market they would get far less than the feed price.

Thus price is a function of liquidity.   So if you are going to fix the price then you will have to vary the liquidity. 

So this means a variable spread based upon redemption demand.   If only $1 BitUSD is demanded you can do it at the feed.  If $1 Million BitUSD is demanded it will have to be at a steep premium. 

So if you can identify the proper function for adjusting the price relative to liquidity demands then you can emulate what the market is already doing today....

If you fix the price/liquidity curve wrong then the market will rob value from the BTS.
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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

zerosum

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Re: Neolithically simple alternative bitasset peg
« Reply #10 on: November 17, 2014, 09:41:23 PM »
Just want to make clear that I already suggested this as plan 'E' several months ago...the problem is we went from plan A to plan B without any need for doing so, other than delaying the whole project with a good 2 month and counting...

There was a need to move to the feed... you could short a BitAsset out of existence and market confidence in the peg would force it to 0 allowing shorts to cover cheaply.    Plan A only works in very large and liquid markets that are relatively equally balanced between bulls and bears.   

It was never tried!

I am fully aware that Vitalik and Agent86 think so...this does not make it a proven fact.

Speaking of things that work, we are all waiting for either of those 2 geniuses [no sarcasm, I really think they are both extremely smart] to actually produce something that actually works, instead of having their opinions on the BTS system and design...


And @ speedy the same is true for plan A... the bitUSD is discounted up  to 10% in plan B, it was discounted upto about 5-6% during plan A.

Offline bytemaster

Re: Neolithically simple alternative bitasset peg
« Reply #11 on: November 17, 2014, 09:44:32 PM »
Just want to make clear that I already suggested this as plan 'E' several months ago...the problem is we went from plan A to plan B without any need for doing so, other than delaying the whole project with a good 2 month and counting...

There was a need to move to the feed... you could short a BitAsset out of existence and market confidence in the peg would force it to 0 allowing shorts to cover cheaply.    Plan A only works in very large and liquid markets that are relatively equally balanced between bulls and bears.   

It was never tried!

I am fully aware that Vitalik and Agent86 think so...this does not make it a proven fact.

Speaking of things that work, we are all waiting for either of those 2 geniuses [no sarcasm, I really think they are both extremely smart] to actually produce something that actually works, instead of having their opinions on the BTS system and design...


And @ speedy the same is true for plan A... the bitUSD is discounted up  to 10% in plan B, it was discounted upto about 5-6% during plan A.

What do you think I do, take their opinion without thinking it through?   You imply that they are wrong and at the same time I am not able to evaluate their opinions and draw my own conclusions. 
For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

zerosum

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Re: Neolithically simple alternative bitasset peg
« Reply #12 on: November 17, 2014, 09:54:51 PM »
Just want to make clear that I already suggested this as plan 'E' several months ago...the problem is we went from plan A to plan B without any need for doing so, other than delaying the whole project with a good 2 month and counting...

There was a need to move to the feed... you could short a BitAsset out of existence and market confidence in the peg would force it to 0 allowing shorts to cover cheaply.    Plan A only works in very large and liquid markets that are relatively equally balanced between bulls and bears.   

It was never tried!

I am fully aware that Vitalik and Agent86 think so...this does not make it a proven fact.

Speaking of things that work, we are all waiting for either of those 2 geniuses [no sarcasm, I really think they are both extremely smart] to actually produce something that actually works, instead of having their opinions on the BTS system and design...


And @ speedy the same is true for plan A... the bitUSD is discounted up  to 10% in plan B, it was discounted upto about 5-6% during plan A.

What do you think I do, take their opinion without thinking it through?   You imply that they are wrong and at the same time I am not able to evaluate their opinions and draw my own conclusions.

I find them too persuasive for my liking...

How they manage it...I have no clue...I am totally lacking this talent, so it is a mystery to me. Honestly it is.


Offline starspirit

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Re: Neolithically simple alternative bitasset peg
« Reply #13 on: November 17, 2014, 09:57:31 PM »
The current bitasset pegging system is so fantastically complex because the assets are traded on a free market, which can be manipulated by any other market participants.

A neolithically simple alternative way to peg a bit asset to an external price would be to remove the other participants from the equation.

Create a different class of asset, which can only be bought and sold by the issuer. The issuer maintains a buy and sell price with a spread which takes into account adverse selection costs.

Issues:

100% trust is required of the issuer. Trust that they don't sell you the asset and then raise their buy price to $1M USD. Trust that they have enough liquidity to cope with adverse selection costs, so they're able to buy back the assets they sold you after the price goes up.

Now, take that idea and make the blockchain the issuer.

You then gain 100% transparency on the algorithm controlling the prices. You'd be able to see the 'balance' of the blockchain in advance to be sure it has liquidity reserves.

In addition, bitshares is ideally placed to implement this idea, since the necessary price feeds are already a fundamental component.

The only real remaining issue is designing the algorithm to set the bid/ask prices - perhaps something like the kalman filter (http://www.r-bloggers.com/the-kalman-filter-for-financial-time-series/) could be used over the feed data.

Thoughts?
Not sure I understand the reserving. At the moment we have 3x collateral in BTS, 1x contributed by the buyer, and 2x contributed by the issuers (the shorts). What liquidity reserves are held in this proposal to back the USD, and from where are they contributed?

Offline monsterer

Re: Neolithically simple alternative bitasset peg
« Reply #14 on: November 17, 2014, 10:11:20 PM »
So this means a variable spread based upon redemption demand.   If only $1 BitUSD is demanded you can do it at the feed.  If $1 Million BitUSD is demanded it will have to be at a steep premium. 

So if you can identify the proper function for adjusting the price relative to liquidity demands then you can emulate what the market is already doing today....

These are excellent points. There is undoubtedly a proper function for this, I think that's what the famous Kyle market maker paper was written about http://people.stern.nyu.edu/lpederse/courses/LAP/papers/Information,Fundamental/Kyle85.pdf.

The thing is, this plan is scuppered if the price is permanently altered away from the feed after just such a massive order (just as it would be in a free market). I'm not sure if that would be a requirement, or whether the risk associated with filling the order is completely covered by the fact that the spread changes as the volume in the order is consumed by the system.

edit: I.e. does it elastically snap back to what it was pre-order.
« Last Edit: November 17, 2014, 10:13:27 PM by monsterer »
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