Article series: The value proposition of BitShares.
Two articles: Part I - BitShares Core Technology, Part II - BitAssets
I wrote them both for the Bitshares blog back in September, Part I is already published: http://bitshares.org/the-value-proposition-of-bitsharesx-part-i-core-technology/
The idea was to explain where the value proposition of BitShares lies as simple as possible but without loosing too much precision. Actually I was tired of explaining it over and over again to people so I always sent them these articles which contain all my good arguments why BitShares has value. [I might have to update Part I with paid delegates]
I also have written Part II back then but didn't publish it because the market mechanics for BitAssets kept changing. Now I rewrote the "how BitAssets work" Part over the weekend.
I would like your feedback on it. I won't rewrite the whole thing
But if you see mistakes or if you think something is missing then let's add it. Then we can put it on the blog or push it to whatever channel you can come up with. So here it is:
The value proposition of Bitshares – Part II (BitAssets)
In Part I, we covered BitShares’s core technology. Today, I would like to introduce to you what BitShares offers beyond the basic yet genius idea Sathosi introduced with Bitcoin in 2009. We will take a look at one of the core feature of BitShares today, namely BitAssets.
What are BitAssets?
BitAssets, also called market pegged assets, are tokens that are traded on the BitShares blockchain, like the bitcoin tokens are traded on the Bitcoin blockchain. So BitAssets have the same properties as all crypto currencies: they are traded without a middle man to facilitate the transaction, the user stays in full control of his assets (he/she holds the private keys necessary to transfer assets), there are no charge backs for merchants and transactions are fast, cheap and do not depend on business hours. But here is what makes BitAssets different from other crypto currencies: they are stable in price. More specifically, BitAssets are pegged to the value of a real world asset. BitUSD, for example, tracks the value of the US dollar and can be traded and exchanged at the value of the US dollar.
BitAssets can be pegged to the value of anything that is measurable and has an exchange rate, like US dollars, gold, oil, stocks, etc.
BitAssets pay interest to their holders. The interest comes from trading fees.
BitAssets offer value for two groups of people:
(1) Traders and individuals that need to hedge risks.
(2) Shoppers, merchants and savers. That is anyone who is interested in price stability, the convenience of crypto-currencies and above average interest rates.
How does it work?
There is no central party that issues BitUSD so there is no counterparty risk where a centralized issuer could default on his promise to exchange the BitAsset for the real world asset. Instead a decentralized prediction market ensures that 1 BitUSD is always worth 1 USD.
I will illustrate the mechanics of BitAssets with BitUSD as an example: Users can take two sides of a bet, comparable to a well kown finanical instrument called "contracts for difference". If one predicts that the price of the USD compared to BTS will go up they buy BitUSD which can always be exchanged for 1 USD. If someone predicts that BTS will go up in price compared to the USD she can short sell BitUSD, meaning she lends BitUSD into existence by giving up collateral in BTS worth 3 times the value of the BitUSD that are lent into existence. The BitUSD short seller can make a profit (measured in USD) by buying back the BitUSD for less BTS than she sold it before, close her position and get her collateral back. The BitUSD buyer on the other side gets the price stability of the dollar. We can also look at it differently and measure the relative gains and losses of the BitUSD holder in BTS, then the BitUSD holder is making a loss (measured in BTS) if the price of BTS rises compared to the USD.
The 300% collateralization guarentees that there is enough collateral even if the value of the collateral falls quickly. Margin calls are triggered if BTS (the collateal) falls by 33% meaning that the BitShares software automatically buys back BitUSD from the client's internal market and closes the short position taking the bought back BitUSD out of circulation.
BitUSD can only be shorted into existence at or above the exchange rate of USD to BTS which is fed into the system via a price feed1. The price feed is compiled from at least 52 different feeds provided by BitShares delegates (for more info on delegates see http://wiki.bitshares.org/index.php/DPOS_or_Delegated_Proof_of_Stake#Role_of_Delegates). This guarentees that the value of BitUSD does no decrease in case there is a big demand for shorting BitUSD.
Short sellers have to cover their position at or above the price feed at least every 30 days after opening the short position. This is effectively a guarantee to any BitUSD holder that they can sell bitUSD for the dollar equivalent of BTS within a 30 day period.
For a more detailed explanation of how BitAssets work see [Link to Whitepaper on bitshares.org]
What is it good for?
For one, traders are given the possibility to inexpensively and conveniently speculate on the value of anything that can be priced and can do so without any counterparty risk. Anything, including stocks, can be traded at lower costs and without relying on the enforcement of legal contracts with banks and exchanges.
Farmers can hedge against a price decline in corn due to a rainy summer by shorting BitCorn (CBOT).
If you want to trade currency pairs like EUR/USD and assume that the Euro will go up in price against the USD, then you would want to go long on BitEUR and go short on BitUSD.
Savers and shoppers get a price stable crypto currency which pays interest. The interest paid to BitAsset holders comes from trading fees paid by those speculating on the price trend of the underlying BitAsset.
If you think gold is the best money there is but encounter problems cutting out little pieces of your bullion and frequently get rejected by the cashier when you ask if he could verify and weigh your nugget then BitGLD might be your money of choice. BitGLD has the value of an ounce of gold and can be transferred to a merchant or a friend privately, instantly, divisibly and at a minimal cost.
There is no need anymore for a merchant to use a payment processor to protect the merchant from the price volatility of a crypto currency.
Another aspect might be that, having a stable and trust-less asset (no counterparty risk) could help real-world adoption of crypto currency in general because people are more incentivized to spend something that is stable in value rather than something that is horded in expectation of value appreciation.
In economies without a stable currency, BitUSD can serve as a stable and portable medium of exchange today. There is no need to wait for adoption of a crypto currency to begin slowly and increase market capitalization and therefore reduce the volatility of crypto currencies over time.
We can conclude that, BitAssets are market peged derivatives with the transferability characteristics of Bitcoin. BitAssets are a powerful tool for trading as well as everyday applications like e-commerce. The world we live in today suffers from a fragile banking system based on fractional reserve banking and intransparency, both of which raise the bariers to entry and encourage corruption. BitShares offers a 300% reserve alternative, the privacy of public key cryptography and the transparency of a public ledger.
Join our BitShares community, which is open minded and aims to solve problems of centralization through decentralized cryptographic systems.