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Offline starspirit

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Are price feeds a permanent feature of market-pegged assets?
« on: April 04, 2015, 11:37:49 AM »

I am noticing quite a strong opinion that price feeds are just a temporary hack required until liquidity improves. And on the basis of this opinion, there is some resistance to ideas that build on top of the feed price. So I feel this is a useful issue to attempt to clarify at this point.

I personally think that for market-pegged assets to operate successfully it is critical there is some form of obligation on issuers (shorts) to redeem (destroy) units at the peg level at some point in time. So I currently see price feeds as a permanent feature.

I think if there were no redemption obligations on issuers, then all market participants would now choose to own and sell the bitAsset purely on the basis of their own individual perceptions of utility and future prospects. There would be no reason for any seller below the peg level to instead hold for a better price on the prospect that redemption may be available at the peg price. Likewise any buyer at this level takes on a risk that the market's evaluation might go lower instead of higher. Even if there are more liquidity providers over time, they would be forced to place orders around the current market rather than the peg price in order to make profits instead of losses.

I guess its possible issuers (shorts) could collectively choose to adjust supply to manipulate prices toward the peg price. They may be disincentivised from allowing peg failure if they believe that would jeopardise the valuation of their personal BTS holdings. However, I'm skeptical such an indirect incentive can be relied upon. BitShares may one day be much more than just bitAssets. Smaller bitAssets might not make much difference. And competitors may attack Bitshares by self-creating unlimited supply and driving certain bitAsset prices toward zero. BitAsset users would be asked to rely on trust in a group of unknown issuers and their unknown desires.

Placing an obligation on issuers to redeem at the price feed means that each market has a separate valuation anchor, related directly to the value of that "contract". No trust or reliance on issuer incentives is involved. While certain market conditions can still devalue that contract more than usual - for example, a quickly declining BTS price may lead to a discount reflecting lower collateral levels and greater uncertainty in converting any BTS received to real assets - I would take comfort that the existence of a contract places limits around how far the market will allow the price to deviate from the peg price.

I know others differ in view, so interested in thoughts.

Offline toast

Re: Are price feeds a permanent feature of market-pegged assets?
« Reply #1 on: April 04, 2015, 08:06:39 PM »
Price feeds and forced turnover are different things. You could havr forced turnover without price restrictions. Sounds like you're suggesting it may be sufficient. I don't think so though
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Offline starspirit

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Re: Are price feeds a permanent feature of market-pegged assets?
« Reply #2 on: April 04, 2015, 10:29:06 PM »
Price feeds and forced turnover are different things. You could havr forced turnover without price restrictions. Sounds like you're suggesting it may be sufficient. I don't think so though
I'm saying that you need both - forced turnover (redemption) AT the feed price. Price feeds are irrelevant without any trading conditions built around them, and forced turnover is irrelevant without price feed constraints since positions are simply reestablished at market. I hope this is clearer.

Offline bytemaster

Re: Are price feeds a permanent feature of market-pegged assets?
« Reply #3 on: April 05, 2015, 04:17:45 AM »
Price feeds do TWO things:

1) They prevent market manipulators from "selling a BitAsset to 0" and stealing all value from the BitUSD holders.
2) They prevent market manipulators from "buying a BitAsset to infinity" and triggering a short squeeze / margin call or "black swan" event and thus stealing all of the collateral. 

The price feed does not need to be AT the spot price to accomplish this objective.  In fact these two purposes can be served by two DIFFERENT price feeds.  Today we have the margin call "feed" defined to be 90% of the spot and the short feed set at 100% spot.   In reality the market would still function perfectly if we allowed shorts to sell at up to 110% spot.   In theory we could even allow delegates to publish two feeds that define a variable threshold.   With this "protection" in place, the internal market would still help establish price.   

Forced Turnover breaks the deadlock when one party wants to exit their position but the other party wants to keep their position.  Currently shorts are at the mercy of BitUSD holders who want to keep price stability in the bear market... they have no way to exit because BitUSD holders are not forced to sell UNTIL a black swan.  BitUSD holders on the other hand can collude to force the shorts to cover at the feed (or even up to 10% higher) by refusing to sell and having the blockchain force them to sell.  This one-sided forced turn over is enough to prevent shorts from getting overly bullish and attempting to "short to 0" which means that the "short sell limit" could be very far from the current feed price and no shorts would dare "manipulate" the price away from a fair market value.   

You can define these three properties (call price limit, short price limit, and turn over interval) and the system will work with very loose limits and very long intervals because market makers can charge for liquidity to bridge the gap.   In fact I would argue the limits should be very wide ( +/- 25% ) and the interval very long (1 year +) which is different than what BitShares has today.    I think that these settings should be tunable by delegates because the parameters that make sense in a immature market do not make sense in a mature market.   



 

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Offline starspirit

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Re: Are price feeds a permanent feature of market-pegged assets?
« Reply #4 on: April 06, 2015, 11:59:20 PM »

You can define these three properties (call price limit, short price limit, and turn over interval) and the system will work with very loose limits and very long intervals because market makers can charge for liquidity to bridge the gap.   In fact I would argue the limits should be very wide ( +/- 25% ) and the interval very long (1 year +) which is different than what BitShares has today.    I think that these settings should be tunable by delegates because the parameters that make sense in a immature market do not make sense in a mature market.   

BM, for clarification, are you suggesting that expiring shorts might be forced to cover up to a bitAsset premium of 25% over the feed price? Or is the +/- 25% just referring to the price at which new shorts can be established?

The concern I have with expiring shorts being forced to cover beyond the feed price is they are at the mercy of longs. For example, a large player or several in collusion could buy every unit that comes up for sale below the limit (even at premiums), and force shorts to buy them back at the limit. This would make shorting very risky and subject to attack. That's why I think expired shorts should only have to pay to the price feed and never more.

Offline starspirit

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Re: Are price feeds a permanent feature of market-pegged assets?
« Reply #5 on: April 08, 2015, 10:20:44 PM »
Price feeds do TWO things:

1) They prevent market manipulators from "selling a BitAsset to 0" and stealing all value from the BitUSD holders.
2) They prevent market manipulators from "buying a BitAsset to infinity" and triggering a short squeeze / margin call or "black swan" event and thus stealing all of the collateral. 


From this I believe you are inferring that price feeds do serve an essential purpose for setting some market limits. So regarding the key question of my OP, would you agree they are a permanent feature of the current model?

The secondary question to be considered then is how trading engine limits are positioned around this price feed...

The critical limit in my mind is the price limit for expiring shorts, as this sets the "contract settlement terms" (continuing my OP analogy) on which bitAssets are valued. I wasn't clear from your post on your view on this, but I think the price limit for expiring shorts should be at exactly 100%. Otherwise it leads to one of the two following outcomes - lack of assurance to bitAsset owners that shorts ever need to pay full value, or conversely, the ability for market manipulators to steal collateral from shorts to the extent the limit allows, as per this...


You can define these three properties (call price limit, short price limit, and turn over interval) and the system will work with very loose limits and very long intervals because market makers can charge for liquidity to bridge the gap.   In fact I would argue the limits should be very wide ( +/- 25% ) and the interval very long (1 year +) which is different than what BitShares has today.    I think that these settings should be tunable by delegates because the parameters that make sense in a immature market do not make sense in a mature market.   

BM, for clarification, are you suggesting that expiring shorts might be forced to cover up to a bitAsset premium of 25% over the feed price? Or is the +/- 25% just referring to the price at which new shorts can be established?

The concern I have with expiring shorts being forced to cover beyond the feed price is they are at the mercy of longs. For example, a large player or several in collusion could buy every unit that comes up for sale below the limit (even at premiums), and force shorts to buy them back at the limit. This would make shorting very risky and subject to attack. That's why I think expired shorts should only have to pay to the price feed and never more.

A 100% limit is still also required on new shorts so that they can't undercut sell orders and roll their shorts indefinitely, at least on the current bitAsset model where we have individual shorts.

One has to be careful with the turnover interval, because the longer it is, the larger the bitAsset discount that will be allowed before arbitragers step in. Market-makers will charge for this liquidity in the form of a return on capital over such period.

What do you think of this analysis?

[Edit: edited original comment on price limit for opening shorts, which might suggest less scope to widen limits.]
« Last Edit: April 22, 2015, 10:50:38 PM by starspirit »

Offline Ander

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Re: Are price feeds a permanent feature of market-pegged assets?
« Reply #6 on: April 08, 2015, 10:32:49 PM »
I personally think that for market-pegged assets to operate successfully it is critical there is some form of obligation on issuers (shorts) to redeem (destroy) units at the peg level at some point in time. So I currently see price feeds as a permanent feature.

I completely agree.  This part is critical.  Without it bitAssets are basically just Nubits.


I also agree with Bytemaster's post, except for the bit where he suggests the price could change by up to 25% of the feed price.  I think that is too wide of a range, and the current 10% is better.
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Offline Globally Distributed

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Re: Are price feeds a permanent feature of market-pegged assets?
« Reply #7 on: April 08, 2015, 10:35:46 PM »
I personally think that for market-pegged assets to operate successfully it is critical there is some form of obligation on issuers (shorts) to redeem (destroy) units at the peg level at some point in time. So I currently see price feeds as a permanent feature.

This part is critical.  Without it bitAssets are basically just Nubits.


Ummm, not quite
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