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Offline Ander

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Advantage of Bitshares: trading enforced by the blockchain.
« on: November 21, 2014, 11:48:01 PM »

Chinese bitcoin exchange Huobi just took 46% of its BTC futures traders (margin traders) profits from the past week in order to cover a loss of 1 million dollars that it suffered when a customer went bankrupt trading bitcoin at 20x leverage during the huge rise last week, and then it couldn't exit the trade. 

Read here:
http://www.coindesk.com/huobis-bitvc-takes-trader-profit-cover-1-million-loss/


First off, 20x leverage in bitcoin is utter insanity.  This market is nowhere near liquid enough, and the moves are too large, for 20x leverage to work.  This is shown by the fact that Huobi managed to lose 1 million dollars because it allowed its traders to use 20x leverage.  At that amount of leverage, in a market as small as bitcoin, there is no way to unwind the losing trade properly once you give the margin call to the trader.  Apparently this margin call took the price all the way down to 2378 CNY, after being issued at 2817!  If you want to know why bitcoin went up to 2900 last week and then crashed back down, this is why!) 


But this event points out the benefit that Bitshares has over a trusted 3rd party exchange.

With Bitshares, you make trades on the blockchain.  If you short bitUSD (essentially taking a margin long position in BTS), the result is going to be enforced in the blockchain.

If you make profits, they are your profits, and no one can take them from you without your private key.

Because you are using a decentralized system, rather than trading in a central exchange, there is no one who can do what Huobi just did, and steal your profits.

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Offline bytemaster

Re: Advantage of Bitshares: trading enforced by the blockchain.
« Reply #1 on: November 21, 2014, 11:54:52 PM »
20x leverage... means initial collateral of just 105%  vs 300%... 5% margin vs 200% margin... 40x more risky.
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Offline Ander

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Re: Advantage of Bitshares: trading enforced by the blockchain.
« Reply #2 on: November 21, 2014, 11:57:22 PM »
20x leverage... means initial collateral of just 105%  vs 300%... 5% margin vs 200% margin... 40x more risky.

Yes, the 20x leverage is insane and is 40x riskier.


But in this case, it wasnt just the trader who took the 20x bet and was wrong who lost his money.  Huobi had to steal the profits from everyone ELSE who had done trades and had made money, to cover the loss!  Other people who hadn't even used that amount of leverage got robbed!

With Bitshares, margin calls and balances are handled by the blockchain, not a central exchange.  No one can steal your profits if SOMEONE ELSE goes bankrupt and their loss is greater than can be recovered in the margin call, like Huobi just did.



Its an example of why trading on a blockchain is so much safer than trusting a 3rd party exchange!
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Offline arhag

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Re: Advantage of Bitshares: trading enforced by the blockchain.
« Reply #3 on: November 22, 2014, 12:16:02 AM »
But in this case, it wasnt just the trader who took the 20x bet and was wrong who lost his money.  Huobi had to steal the profits from everyone ELSE who had done trades and had made money, to cover the loss!  Other people who hadn't even used that amount of leverage got robbed!

With Bitshares, margin calls and balances are handled by the blockchain, not a central exchange.  No one can steal your profits if SOMEONE ELSE goes bankrupt and their loss is greater than can be recovered in the margin call, like Huobi just did.

I believe in the case of BitShares the money to cover the loss would come from reduced profits to BitUSD holders. The yield would drop to zero for as long as it takes to reduce the BitUSD supply to a level that it is fully backed by the BTS collateral held in the short positions. Worst case, the value of a BitUSD would be significantly below the peg until the system returns back to full collateralization. So other people do lose in some sense because of the failure of someone else; I am afraid we don't get around that. We are just being more sensible in the case of BitAssets to use 0.5x leverage rather than 20x leverage to reduce the probability of such black swan events.

I think your point would work better if you weakened it to say that the rules of whose profits can be "stolen" in the event of various black swan events is transparent and well described in code and can not be changed on the whims of some small group of people in charge of the centralized exchange. And while those rules can be changed with majority consensus of the stakeholders of the BitShares decentralized exchange, that process is formal and also extremely transparent which allows the users of the system to react and take their money out if they don't like the changes.
« Last Edit: November 22, 2014, 12:29:38 AM by arhag »

 

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