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Offline bitmarket

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I just answered this question on /r/bitcoin and I think its the shortest answer I have ever figured out how to deliver to answer it.  I thought I would share it. Feel free to use as you see fit.

Answer:
The easiest way to understand it is to consider the COMEX can have a wheat futures contract without having any wheat on hand. How do they do it?

Lets say I think the price of what will fall and I want to profit. I can sell wheat today, and then buy it later for cheaper and I can profit by selling high and buying low. But how can I sell that which I don't have? I can place $'s as collateral with the exchange. If I sell a bushel of wheat at $200, the purchaser now has an IOU from me that says I owe him 1 bushel of wheat in the future. If the price goes up and I have to buy a bushell for $250, then that $50 loss I made is taken from my collateral. Notice I both bought and sold wheat and yet there was no wheat... just $'s. In this case, it is said that the settlement instrument was $'s.

So what if rather than have a wheat futures contract settled in $'s. We had a dollar futures contract settled in cryptocurrency?

Instead of selling a bushel of wheat, I sell $1. I place cryptocurrency on an exchange as security for the buyer. Now in the future I owe the buyer $1 no matter the excahnge rate. Either the rate moved up an I made a profit, or the rate moved down and money was taken from my collateral and I made a loss. Either way, the buyer receives $1 in the future no matter the exchange rate.

Therefore the buyers fully securitized IOU for $1 is always worth $1. ie: it has a stable value. And it is always backed by collateral (the cryptocurrency held on the blockchain.) Hence the $1 IOU is fully securitized and has no counter party risk.

This is what bitshares has achieved.
Host of BitShares.TV and Author of BitShares 101

Offline speedy

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Re: How can you have a stable cryptocurrency without counter party risk?
« Reply #1 on: January 31, 2015, 10:46:59 AM »
Max its a great explanation, but its still too long for most people to casually read, even though youve condensed it to a minimum amount possible to get all the important details.

I think all the details could be conveyed in a short cartoon video in the style of the "What is Bitcoin" video. Youve basically got the script for it right there. This would be more watchable than reading several paragraphs of text.

Offline btswildpig

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Re: How can you have a stable cryptocurrency without counter party risk?
« Reply #2 on: January 31, 2015, 11:01:35 AM »
Too many numbers , those who sucks at maths like we will be confused .....
I'll revise it when I have the time . :P
这个是私人账号,表达的一切言论均不代表任何团队和任何人。This is my personal account , anything I said with this account will be my opinion alone and has nothing to do with any group.

Offline Empirical1.1

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Re: How can you have a stable cryptocurrency without counter party risk?
« Reply #3 on: January 31, 2015, 12:02:05 PM »
It's good but still too complicated still for a casual reader.

I would remove the COMEX reference,  while few Goldbugs are alt-coiners, most alt-coiners are also Goldbugs and the COMEX specifically has very negative connotations associated with it as it is viewed as being the home of 'paper gold' & also at the heart of gold manipulation.

The focus should be on dissociating ourselves from the COMEX by pointing out we have over-collateralised BitAssets that can sustain large price shocks. I also think ideas like our BitSilverEagle (tracking real vs. paper prices.) as well as a PM gateway, so that we can offer and encourage physical delivery will be positive developments that help explain why BitShares is different.

 

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