Author Topic: BitAssets 2.0 (formally 3.0)  (Read 11396 times)

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Offline xiahui135

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  1.  The further BitUSD gets from $1 the more incentive there is for for BitUSD holders to take profits and sell. 
  2.  The further BitUSD gets from $1 the less demand there is to buy BitUSD
  3.  The further BitUSD gets from $1 the more demand there is to short BitUSD


This will happen, only when there is at least one bridge, gateway or market maker do the 1:1 exchange.
Or the price will not follow effeciently.

Offline starspirit

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In my view, assuming we can achieve it, the ultimate control mechanism is a yield that works both ways. When demand is too high relative to supply, and bitUSD is priced at a premium, yield falls (also allowed to become negative if necessary), encouraging sellers (and new shorts) until parity is returned. Then you solve all the problems mentioned -

- consumers, merchants, market-makers and shorts can all have confidence that parity is the equilibrium level, enforced by changes in yield either way
- there is no need for scheduled black swans or anything similar
We can not count on the bitusd yield. Why you hold a money, because it is stable. But if there is negative yield, it hurts for bitusd holders. Let's assume that the credit changes everytime you check it, how do you feel?
And the yield will not help peg. If bitusd is lower than usd, so the bitusd holder will get yield to cover the lost, people need not to buy more. And it is not need to short, because the short can not earn something. The earning will be eayen by yield. Thus the bitusd will keep lower than realUsd.
When the bitusd is premium, it will similiarly keep premium.
A yield, if implemented, would be market driven and automatically adjust so that at the peg, all open shorts are prepared to pay at least that yield (taking into account their own views on BTS), and all bitUSD holders are happy to hold at that yield. If bitUSD is at a discount, the yield rises to attract buyers until that balance is a achieved, and visa versa at a premium. It works just the same way as interest rates are set competitively in the banking system between depositors and borrowers (except with the bank intermediary taking a spread). So the yield would take account of all market views.

It is a good question whether negative rates would be acceptable at all, and whether we actually need it. To a small degree this seems to be the case now for fiat in US and Europe, once you account for fees. I think yield would actually vary within a band around external interest rates, reflecting arbitrage costs, and possibly other risk factors. So its mainly an issue while external rates by comparison are also low or negative, made worse by crypto being in a bear market.


Offline xiahui135

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Edited:

And the yield control to the bitAsset and short holders will not help peg instantly. but yield control to new orders maybe will help. (why? check here https://bitsharestalk.org/index.php/topic,16378.msg209425.html#msg209425)

If yield control to the already orders:
If bitusd is lower than realusd, so the bitusd holder will get yield to cover the lost. people need not to buy cheap bitusd, because when bitusd become premium, the earning will be eaten up by yield.When the bitusd is premium, it will similiarly keep premium, because of the yield.
« Last Edit: May 17, 2015, 02:52:43 am by xiahui135 »

Offline xiahui135

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In my view, assuming we can achieve it, the ultimate control mechanism is a yield that works both ways. When demand is too high relative to supply, and bitUSD is priced at a premium, yield falls (also allowed to become negative if necessary), encouraging sellers (and new shorts) until parity is returned. Then you solve all the problems mentioned -

- consumers, merchants, market-makers and shorts can all have confidence that parity is the equilibrium level, enforced by changes in yield either way
- there is no need for scheduled black swans or anything similar
We can not count on the bitusd yield. Why you hold a money, because it is stable. But if there is negative yield, it hurts for bitusd holders. Let's assume that the credit changes everytime you check it, how do you feel?
The USD and CNY ratio is determined by the buy and sell walls on the currency market, we need to do the similiar. Market make is one solution, and supply control is another. But the yield should be won only when you lend the money to help others. Such as lend the money to the market make fund.
« Last Edit: May 17, 2015, 01:46:50 am by xiahui135 »

Offline starspirit

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In my view, assuming we can achieve it, the ultimate control mechanism is a yield that works both ways. When demand is too high relative to supply, and bitUSD is priced at a premium, yield falls (also allowed to become negative if necessary), encouraging sellers (and new shorts) until parity is returned. Then you solve all the problems mentioned -

- consumers, merchants, market-makers and shorts can all have confidence that parity is the equilibrium level, enforced by changes in yield either way
- there is no need for scheduled black swans or anything similar

Offline maqifrnswa

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All the solution mentioned by BM, is to make a fair trade market. This make the bitasset exist and be collateraled.
As to the bitusd price, we must do market make to finish the peg. 1 dollar is 1 dollar when many people will accept it as 1 . The money just be used like 1 dollar, so it is 1 dollar.
We need some people to accept 1 bitusd as 1 usd. If nobody do, we the community should be the first. (Such as establish the market make fund, the profit dividen to the fund share holders.)

the reason 1 dollar is 1 dollar is because we trust the federal reserve will control supply such that inflation is at a rate which allows sustainable economic development. Therefore, 1 dollar today is pretty much 1 dollar tomorrow - a stable store of value in the short term and the world has faith that supply will be controled to maintain a stable system.

We can't just declare a currency to be worth something just because we say it is, without a mechanism to give the market faith that supply will be controlled. If you create the money making system to externally enforce the peg, you will have to support that bot it with a constant influx of money. And merchants will start having two prices: bitUSD and realUSD, because 1 bitUSD is not 1 realUSD. It's like saying "If everyone sold products priced the saqme in both canadian dollars and us dollars, then US and Canadian dollars would be equal to each other."

Our supply control system is built into the blockchain: shorting and covering rules designed such that supply=demand at the peg.
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Offline xiahui135

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So what remains is the "deflation of BitUSD" caused by shorts backing further and further from the price feed as BitUSD holders HODL and never sell except at just below what Shorts are willing to sell at.   I think that this scenario ignores other market realities:

  1.  The further BitUSD gets from $1 the more incentive there is for for BitUSD holders to take profits and sell. 
  2.  The further BitUSD gets from $1 the less demand there is to buy BitUSD
  3.  The further BitUSD gets from $1 the more demand there is to short BitUSD

So what remains is a scenario where a larger player buys up BitUSD and holds it ransom for a high premium in a bear market and forcing shorts that want to stop their losses to pay a price.   This is a form of short-squeeze and is present in all markets that allow shorts.    This same whale that the shorts complain about when they want to cover is the whale that provided them liquidity when then wanted to enter their position.     

In other words, whenever the price is above $1 neither party is guaranteed liquidity at the price they entered the position at and the market is balanced.   

You cannot have BitUSD go to infinity without BTS going to 0 and the further BitUSD gets from real USD the more people will use real USD to buy BitUSD to sell for BTS.  All liquidity for using BTS to buy BitUSD will dry up very quickly once it gets too far from the feed.   BTS holders wanting USD would simply opt for the real thing.  Therefore we know that there exists a narrow range in which BitUSD will actually trade and it will have a floor of $1 and a likely ceiling of $1.10. 

The only other solution is to have scheduled "black swans" (aka global forced settlement) which is good for traders but bad for merchants and consumers.

I agree with the conclusion that the only solution seems to be scheduled black swans, but they are not the right mechanism

I see why one would want to sell bitUSD closer to the feed, based on 1 and 2 BM listed above. There will be demand for bitUSD so people can close out their positions. But I still ask, why would bitUSD be created in the first place? The reason why it would be created is only if you think BTS will increase in value faster than what I will be able to buy bitUSD for in the future.

The problem is bitUSD is impossible to price as a short. Even if BTS value will increase at a known rate compared to realUSD, there is no mechanism by which I can anticipate what bitUSD will be worth relative to realUSD at any time in the future. That means I can't price, and if I can't price there is no reason I should enter the market (since it is just as likely to be right as it is wrong). Now there is a short squeeze, which reinforces the belief that no one can properly price shorts. Then you get into the "discount" war between merchants where everyone starts offering larger and larger discounts for using bitUSD, also driving the value of bitUSD away from the peg.

Yield won't fix this, unless the yield is based on the PEG value and not bitUSD value. I think that might be prefered to forced settlement, which is horrible for merchants.
All the solution mentioned by BM, is to make a fair trade market. This make the bitasset exist and be collateraled.
As to the bitusd price, we must do market make to finish the peg. 1 dollar is 1 dollar when many people will accept it as 1 . The money just be used like 1 dollar, so it is 1 dollar.
We need some people to accept 1 bitusd as 1 usd. If nobody do, we the community should be the first. (Such as establish the market make fund, the profit dividen to the fund share holders.)

Offline maqifrnswa

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So what remains is the "deflation of BitUSD" caused by shorts backing further and further from the price feed as BitUSD holders HODL and never sell except at just below what Shorts are willing to sell at.   I think that this scenario ignores other market realities:

  1.  The further BitUSD gets from $1 the more incentive there is for for BitUSD holders to take profits and sell. 
  2.  The further BitUSD gets from $1 the less demand there is to buy BitUSD
  3.  The further BitUSD gets from $1 the more demand there is to short BitUSD

So what remains is a scenario where a larger player buys up BitUSD and holds it ransom for a high premium in a bear market and forcing shorts that want to stop their losses to pay a price.   This is a form of short-squeeze and is present in all markets that allow shorts.    This same whale that the shorts complain about when they want to cover is the whale that provided them liquidity when then wanted to enter their position.     

In other words, whenever the price is above $1 neither party is guaranteed liquidity at the price they entered the position at and the market is balanced.   

You cannot have BitUSD go to infinity without BTS going to 0 and the further BitUSD gets from real USD the more people will use real USD to buy BitUSD to sell for BTS.  All liquidity for using BTS to buy BitUSD will dry up very quickly once it gets too far from the feed.   BTS holders wanting USD would simply opt for the real thing.  Therefore we know that there exists a narrow range in which BitUSD will actually trade and it will have a floor of $1 and a likely ceiling of $1.10. 

The only other solution is to have scheduled "black swans" (aka global forced settlement) which is good for traders but bad for merchants and consumers.

I agree with the conclusion that the only solution seems to be scheduled black swans, but they are not the right mechanism

I see why one would want to sell bitUSD closer to the feed, based on 1 and 2 BM listed above. There will be demand for bitUSD so people can close out their positions. But I still ask, why would bitUSD be created in the first place? The reason why it would be created is only if you think BTS will increase in value faster than what I will be able to buy bitUSD for in the future.

The problem is bitUSD is impossible to price as a short. Even if BTS value will increase at a known rate compared to realUSD, there is no mechanism by which I can anticipate what bitUSD will be worth relative to realUSD at any time in the future. That means I can't price, and if I can't price there is no reason I should enter the market (since it is just as likely to be right as it is wrong). Now there is a short squeeze, which reinforces the belief that no one can properly price shorts. Then you get into the "discount" war between merchants where everyone starts offering larger and larger discounts for using bitUSD, also driving the value of bitUSD away from the peg.

Yield won't fix this, unless the yield is based on the PEG value and not bitUSD value. I think that might be prefered to forced settlement, which is horrible for merchants.
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Offline liondani

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Quote

Conclusion
I don't see the incentive for short sellers (BTA creators) to profit from creating BTA to keep supply=demand. Yes, short sellers will need to sell at a premium, thus driving the price away from the peg. What market force is driving it back towards the peg?

Similar thoughts crossed my mind... the hope i guess is that the demand for bitUSD is organic ( for the product as a payment) so the increased demand for the product will soon lead to increased company share price -BTS... but if the demand is for hedging the bts price we might be for some trouble...

I think it would help if delegates get paid only via bitAsset's  ;)

Offline wuyanren

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I think. wallets Without a good user experience, that is again good, are false

Offline bytemaster



Quote

Conclusion
I don't see the incentive for short sellers (BTA creators) to profit from creating BTA to keep supply=demand. Yes, short sellers will need to sell at a premium, thus driving the price away from the peg. What market force is driving it back towards the peg?

Similar thoughts crossed my mind... the hope i guess is that the demand for bitUSD is organic ( for the product as a payment) so the increased demand for the product will soon lead to increased company share price -BTS... but if the demand is for hedging the bts price we might be for some trouble...

There are only three places from which money can come:  Longs, Shorts, and Innocent 3rd Parties.

The Longs want a product that has as its core feature something that is always worth at least $1 (with a ton of liquidity) and which cannot be called/converted into something else except in extreme market events which the longs equate to "never".

The Shorts want leverage, with minimal margin requirements.   They never want to be called, yet want the liquidity to cover at any point in time.

If the longs can never be called (to keep BitUSD fungible and usable as a currency) then how can the Shorts be guaranteed liquidity?   The easy answer is to say "they are not guaranteed liquidity".    In which case every short is taking a speculative bet about the liquidity (ability to buy USD) in the future. 

Depending upon his assessment of the future ability to buy USD the short will charge different premiums.   There are two sources to buy BitUSD, from USD holders wanting liquidity and from future shorts.    A short can always trust that eventually USD holders will want liquidity, especially since everyone looking to buy BTS should be buying BitUSD which they will sell for BTS providing liquidity to the shorts.   

So what remains is the "deflation of BitUSD" caused by shorts backing further and further from the price feed as BitUSD holders HODL and never sell except at just below what Shorts are willing to sell at.   I think that this scenario ignores other market realities:

  1.  The further BitUSD gets from $1 the more incentive there is for for BitUSD holders to take profits and sell. 
  2.  The further BitUSD gets from $1 the less demand there is to buy BitUSD
  3.  The further BitUSD gets from $1 the more demand there is to short BitUSD

So what remains is a scenario where a larger player buys up BitUSD and holds it ransom for a high premium in a bear market and forcing shorts that want to stop their losses to pay a price.   This is a form of short-squeeze and is present in all markets that allow shorts.    This same whale that the shorts complain about when they want to cover is the whale that provided them liquidity when then wanted to enter their position.     

In other words, whenever the price is above $1 neither party is guaranteed liquidity at the price they entered the position at and the market is balanced.   

You cannot have BitUSD go to infinity without BTS going to 0 and the further BitUSD gets from real USD the more people will use real USD to buy BitUSD to sell for BTS.  All liquidity for using BTS to buy BitUSD will dry up very quickly once it gets too far from the feed.   BTS holders wanting USD would simply opt for the real thing.  Therefore we know that there exists a narrow range in which BitUSD will actually trade and it will have a floor of $1 and a likely ceiling of $1.10. 

The only other solution is to have scheduled "black swans" (aka global forced settlement) which is good for traders but bad for merchants and consumers. 





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Offline bytemaster

HOW to guarantee that each bitUSD could be changed back to one-USD-worth of BTS in a black swan event, especially when there is a daily % set?

In black swan there are no limits, everyone is settled all at once.
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Offline starspirit

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This system will sometimes trade below 99% of the peg when there are risk concerns with bitUSD, and will often trade above the peg when there is a lack of collateral supply.
When there are large flows in bitUSD, this will expand spreads, as arbitragers between the internal and external markets are constrained by the liquidity in the internal market.
I believe a tighter peg in both directions can be obtained by using a floating market yield between longs and shorts. Why is yield no longer being considered as a regulating mechanism?
If the external market is offering a high yield, how much will this affect use of a no-yield substitute? What is the thought on combining BTA 2.0 with an interest-bearing at-call deposit market to provide at-call parking of funds for transactional purposes?
How much does it matter if USD-based returns earned in the bond market are affected by the continuous movement of bitUSD from its peg before expiry?
Does introducing a settlement process for longs legally bring bitAssets under derivative regulations?
« Last Edit: May 11, 2015, 04:51:09 am by starspirit »

Offline abit

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HOW to guarantee that each bitUSD could be changed back to one-USD-worth of BTS in a black swan event, especially when there is a daily % set?
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Quote

Conclusion
I don't see the incentive for short sellers (BTA creators) to profit from creating BTA to keep supply=demand. Yes, short sellers will need to sell at a premium, thus driving the price away from the peg. What market force is driving it back towards the peg?

Similar thoughts crossed my mind... the hope i guess is that the demand for bitUSD is organic ( for the product as a payment) so the increased demand for the product will soon lead to increased company share price -BTS... but if the demand is for hedging the bts price we might be for some trouble...

Offline Musewhale

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Offline maqifrnswa

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Rather than thinking of floors, I've been thinking in terms of supply and demand: bitassets can control supply but not demand. There must be a reward for those that work to maintain the peg. Thinking of this from the game theory perspective:

The Goals:
When demand for an bit asset (BTS/BTA) exceeds the feed, BTA must be created.
When demand for an bit asset (BTS/BTA) is less than the feed, BTA must be destroyed.

Who should profit:
The player triggering destruction/creation should profit from these rules to "reward" them for maintaining the peg. The spread is thus a function of liquidity and cost of extracting this profit as the reward for maintaining the peg

The Rules:
Current system:
The current system doesn't give market rewards and incentives for following the "musts" above.
When demand for a bit asset is less than the feed +10%, assets are destroyed based on when they expire (or manually in the right condition). Current BTA holders (and shorters) have to provide BTA for clearing and have no incentive to maintain the peg, in fact they have an incentive to drive the peg to the best value for them. That value is feed+10%. (I'm one of those players at the moment, sorry :( )
Shorters are in the same boat, why short at the feed when I can short at feed+10% - especially since I'll only be able to cover at feed +10%. I should short at feed>10% and I'll be rewarded by selling to those clearing at feed+10%, thus rewarded for maintaining a peg at feed+10%.
There is no profit for maintaining peg.

BTA2.0 (or 3.0):
When demand for an bit asset (BTS/BTA) is less than 99% of the feed, BTA are destroyed by the new manual forced clearing due to an arbitrage opportunity. (Remember he primary rules that tokens must be destroyed when demand is not equal to the feed. 99% is ok - if you can think of it destroying bitUSD at 100% feed minus a 1% fee. The fee is arbitrary, but something that can be changed to remain competitive with other payment processors.) The one triggering the clearing profits by "correcting" the peg, or pays a premium for convenience if the market is below the peg. This is excellent, there is profit for maintaining the peg.

If demand (BTS/BTA) exceeds peg, why should I short? Where is the market-enforced arbitrage opportunity to reward me for maintaining peg? I know BM was saying that he wants to ensure a minimum value, but now there runs the risk of hyper-deflation. Why should I short today when I can short for even more tomorrow? To protect merchants, the system puts consumers at risk. BM's argument is that shorters will short because they will charge a premium. That only works if they can convert that premium into profit instantly (or at least a quick arbitrage), I don't see the mechanism by which they can do that. BM says that they could post bts sell orders right above the feed and make money on the spread. However, there is no feedback pushing the ask/bid median back to the feed - we'll end up like the first BTA (before short selling rules) where the price will just drift away. Once it drifts away, no merchant will execute the market clearing (since they'll lose money), and no short will want to short since there is no upper bound to where price is going - and supply will not equal demand at the feed.

Conclusion
I don't see the incentive for short sellers (BTA creators) to profit from creating BTA to keep supply=demand. Yes, short sellers will need to sell at a premium, thus driving the price away from the peg. What market force is driving it back towards the peg?
« Last Edit: May 04, 2015, 03:47:37 pm by maqifrnswa »
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Offline bitmarley

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Conclusion
The rules of BitAssets need to guarantee a floor on the value of BitUSD of $1.00 and the cost of providing this floor is certainly greater than 0.


Therefore the shorter should be receiving interest and not paying interest.

Offline Stan

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In my opinion the existence of bitUSD-USD gateways is the crucial assumption here and it needs to be fulfilled before we consider anything that is based on this assumption. In other words, there is no point in discussing the upgrade to BitAssets 2.0 (which I generally like) if we keep avoiding the subject of gateways.

The funny thing is that BM seems to realize this:
...

BM, before we discuss BitAssets 2.0 please let us know what your road-map regarding bitUSD-USD gateways is? How realistic is it that this fundamental issue will ever be solved? Would you agree that without the gateways there is no real future for BitShares, no matter if we have BitAssets 1.0 or 2.0? If you don't agree please explain your way of thinking.

I am asking this not because I have anything against BitAssets 2.0 but because I do care about BitShares and I would like to make sure that our priorities are defined correctly.

Bytemaster has been occasionally known to walk and chew gum at the same time...  :)

Gateways involve partners with the appropriate licenses. 
Partners have their own agendas and timetables and NDA agreements.
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Ive observed that BM announces technical changes, he does not generally announce gateway/integration progress. Its too market sensitive.
If that's the case I'd like to know which of the following is "more true":
1. The upgrade to BitAssets 2.0 is going to improve the liquidity of the BTS/bitUSD market and this improvement will prepare ground for bitUSD/USD gateway (as it will make it more profitable to run such business)
or
2. We assume that bitUSD/USD gateway will somehow come into existence one day and only when it does BitAssets 2.0 will be able to function as intended.

Offline speedy

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In my opinion the existence of bitUSD-USD gateways is the crucial assumption here and it needs to be fulfilled before we consider anything that is based on this assumption. In other words, there is no point in discussing the upgrade to BitAssets 2.0 (which I generally like) if we keep avoiding the subject of gateways.

The funny thing is that BM seems to realize this:
but fails to address what the plan to make it happen is.

Ive observed that BM announces technical changes, he does not generally announce gateway/integration progress. Its too market sensitive.

jakub

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In my opinion the existence of bitUSD-USD gateways is the crucial assumption here and it needs to be fulfilled before we consider anything that is based on this assumption. In other words, there is no point in discussing the upgrade to BitAssets 2.0 (which I generally like) if we keep avoiding the subject of gateways.

The funny thing is that BM seems to realize this:
Instead BitUSD to USD becomes the market that matters and it should develop a very narrow spread as USD flows from users bank accounts to BitUSD to merchants which then sell the BitUSD back to other users. The spreads in BitUSD to USD would be so insignificant that everyone would consider them equal. 
but fails to address what the plan to make it happen is.

This reminds me of discussing the construction of a great ship but forgetting that our shipyard is located 1000 miles from the sea.
Are we having the bike-shedding syndrome?
http://en.wikipedia.org/wiki/Parkinson%27s_law_of_triviality

Fortunately, others seem to share my concerns:
The model seems to rely heavily on there being BitAsset to real asset gateways which we don't have yet.
Merchants can settle into USD in 24hrs for less than 3% with other digital currencies (credit cards/paypal/etc) and there are an endless supply of gateways begging for their business.
Since you already know this, I'm going to assume (due to the above mention of bitUSD to USD conversion being very key) that you already have a third party lined up to be this bitUSD/USD gateway, is that correct?
Otherwise, this entire proposal is merely speculation for many years down the road while someone is located that is willing to handle that business, get all KYC'd up, regulated and more. It seems highly illogical, that you would be making this proposal on the "hope" that someone would come along one day and be that gateway, correct? 

BM, before we discuss BitAssets 2.0 please let us know what your road-map regarding bitUSD-USD gateways is? How realistic is it that this fundamental issue will ever be solved? Would you agree that without the gateways there is no real future for BitShares, no matter if we have BitAssets 1.0 or 2.0? If you don't agree please explain your way of thinking.

I am asking this not because I have anything against BitAssets 2.0 but because I do care about BitShares and I would like to make sure that our priorities are defined correctly.

zerosum

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My writing skills (not spelling mind you... my spelling and grammar are laughable at best and non existent at werst) are good enough...

Good enough? For what, a 2nd grade essay in a Spanish elementary school? (No offense to Shakira, who has an excellent mastery of English, not to mention other things :-* ).

Ha!

OK Tom...I will try something simpler for your benefit  the next chance I get. We already established that the sentence "Your collection of antique cars" puts you in a perplexed and uneasy state of mind... So I promise, I will try working on something for your comprehension level.

Offline Thom

My writing skills (not spelling mind you... my spelling and grammar are laughable at best and non existent at werst) are good enough...

Good enough? For what, a 2nd grade essay in a Spanish elementary school? (No offense to Shakira, who has an excellent mastery of English, not to mention other things :-* ).

Ha!
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Offline Thom

I do not follow the logic or your conclusions? Where did I say those are your thoughts or statements?  I said collection (as in something produced by others and gathered by you in one way or another).  I was just more or less admiring how you managed to collect and extract the parts with said qualities....  :)

As per your own opinions and thoughts I left them on their own...not because I find them right or wrong in general, but because they were on a more or less different subject imo.

Your skill with the English language is terrible Tony. You said the collection was "...purposeless, nonsensical, controversial and..." Since I was the author of the collection, not to mention that you strongly implied there was no rhyme or reason to it, I considered it a slam on me not BM who you didn't mention in your reply. If your issue was not with me but BM you had a very strange way of expressing it, and I doubt anyone would consider what you wrote (if it were a reply to their post) to be complimentary

As for the opinions I expressed, yes they weren't directed at the technical aspects of the OP, but were related to it and to things others posted. So they weren't off in left field. BM was soliciting comments and he didn't restrict them to be only technical or economic in nature.

Good thing I know you have a rather, shall we say, "caustic" style of communication, so even if you were trying to be offensive towards me I doubt it would have an impact.

The two issues I have with you Tony are:
1) how your style puts people off, especially newbies in the community
2) that it's difficult to hear the merits of your position through the layer of inflammatory language you so often use.

Other than that I appreciate your contributions, especially to the opportunities you present me to chk my defensiveness :)

Injustice anywhere is a threat to justice everywhere - MLK |  Verbaltech2 Witness Reports: https://bitsharestalk.org/index.php/topic,23902.0.html

Offline Troglodactyl

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...
The main floor on the value of BitAssets is formed by the value to shorters of freeing their collateral.  Forced settling by either expiration or other systems forms another floor at the value in BTS at which the longs expect to be able to force settlement.  With sufficient liquidity, this secondary floor should be unnecessary, but if it is considered necessary it should be at the targeted peg value, not an offset from that.

If the longs are able to cancel settlement, that defeats the purpose of the 24 hour delay I think.  In that case they might as well constantly request settlement and constantly cancel unless settlement is going to occur on a spike in their favour.  If price feed volatility is an issue, they could trigger 24 hour delayed settlement at the average feed price over those 24 hours.  Again, I think forced settling is less than ideal anyway.  The real floor should be the value that BitAssets have to shorters who need them in order to recover their collateral.

While your main point might be correct you are just declaring how this should be rather than suggesting way to do it so!

That and I have no Idea what you  mean by:
"The main floor on the value of BitAssets is formed by the value to shorters of freeing their collateral."
Clarification would be appreciated!
Let me point why I ask - The value of recovering the collateral for 'Would be shorter" is 0, so in this regard the value of the bitAsset is also 0?

To create 1 BitUSD currently at the feed, a shorter must lock up at least 2USD worth of BTS collateral, plus 1 USD worth of BTS from the buyer.  To retrieve that collateral, the shorter must provide 1 BitUSD.  The break even position is for the shorter to buy back 1 BitUSD for 1 USD (or 1 USD worth of something) and use it to claim all 3 USD worth of BTS.  The more liquid the market, the lower the margins, and the nearer to break even you can expect to find trades happening at any given moment.  This establishes the price floor: 1 BitUSD is worth 1 USD to shorters because that's what they can pay for it and break even.

Given that such a price floor exists, we can expect price of BitUSD to follow that floor with spread determined by liquidity unless a higher floor supersedes it.  Currently this higher floor is created by the knowledge that shorters are required to cover at feed + 10% when shorts expire, which they've been doing with some regularity.  As long as BitUSD holders expect regular expirations, we should have a peg at about $1.10 instead of $1.

Given that the lower floor should track the peg we actually want, either eliminating expirations completely or forcing them to cover at the feed rather than at feed + 10% should solve this problem.

Offline Thom

Right back at ya TonyK, i.e. the part about "a collection of doubtful, purposeless, nonsensical, controversial and... straight wrong statements!" you have made, so very typical of you dude!

These were pulled straight out of the OP, so apparently you didn't read it very carefully. Sure I paraphrased it a bit, but the meaning is preserved.
Injustice anywhere is a threat to justice everywhere - MLK |  Verbaltech2 Witness Reports: https://bitsharestalk.org/index.php/topic,23902.0.html

zerosum

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  • Buying 1 BitUSD should always be the most cost effective means to purchase BTS
  • USD : BitUSD market price + BitUSD : BTS market price should be factored into the BTS : USD price feed
  • It is far better for price feeds to error in the favor of BitUSD holders than in the favor of shorts
  • Cashing out of BTS is done more efficiently (for USD through other channels) than using BitUSD
  • Creating BitUSD will always cost more than $1.00
  • BitUSD will initially be created by individuals who want to stay in a crypto currency but wish to have a price floor.


I have no idea how did you come up with those.... but this a collection of doubtful, purposeless, nonsensical, controversial and... straight wrong statements!





The main floor on the value of BitAssets is formed by the value to shorters of freeing their collateral.  Forced settling by either expiration or other systems forms another floor at the value in BTS at which the longs expect to be able to force settlement.  With sufficient liquidity, this secondary floor should be unnecessary, but if it is considered necessary it should be at the targeted peg value, not an offset from that.

If the longs are able to cancel settlement, that defeats the purpose of the 24 hour delay I think.  In that case they might as well constantly request settlement and constantly cancel unless settlement is going to occur on a spike in their favour.  If price feed volatility is an issue, they could trigger 24 hour delayed settlement at the average feed price over those 24 hours.  Again, I think forced settling is less than ideal anyway.  The real floor should be the value that BitAssets have to shorters who need them in order to recover their collateral.

While your main point might be correct you are just declaring how this should be rather than suggesting way to do it so!

That and I have no Idea what you  mean by:
"The main floor on the value of BitAssets is formed by the value to shorters of freeing their collateral."
Clarification would be appreciated!
Let me point why I ask - The value of recovering the collateral for 'Would be shorter" is 0, so in this regard the value of the bitAsset is also 0?
« Last Edit: May 04, 2015, 12:23:19 pm by bytemaster »

Tuck Fheman

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Note:  What we have been calling BitAssets 3.0 I am renaming to BitAssets 2.0 for this paper because otherwise everyone outside this forum would be confused if we started talking about 3.0 when 2.0 never existed.     

hah! this totally screws up Buck Fankers's comic strip, although I'm not sure anyone caught the "BitAssets 2.0" jab or not.

maintain a minimum value for the asset but do not attempt to control the maximum value.
+5%

The model seems to rely heavily on there being BitAsset to real asset gateways which we don't have yet.

 +5%

BM,

Merchants can settle into USD in 24hrs for less than 3% with other digital currencies (credit cards/paypal/etc) and there are an endless supply of gateways begging for their business.

Since you already know this, I'm going to assume (due to the above mention of bitUSD to USD conversion being very key) that you already have a third party lined up to be this bitUSD/USD gateway, is that correct?
(please don't say bter is the solution).

Otherwise, this entire proposal is merely speculation for many years down the road while someone is located that is willing to handle that business, get all KYC'd up, regulated and more. It seems highly illogical, that you would be making this proposal on the "hope" that someone would come along one day and be that gateway, correct? 
(yes, it's the same question rephrased =b )

« Last Edit: May 03, 2015, 09:02:50 pm by Tuck Fheman »

Offline Agent86

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Yea, forced conversion at 99% seems random to me, may as well just make it convertible at 100% if you are going to do it, although I'm generally not a big fan of bitAssets 2.0 formally (formerly?) 3.0.

Should we let people who are force settling at the feed place a limit on what price feed they would accept at the time of settlement?  i.e.  Some news is announced and someone with bitUSD decides BTS is cheap and they request force settlement but by the time 24hrs is over the price has moved so much they don't want to settle at that price.  Or maybe just preventing someone from being completely screwed by a momentary price feed error like a script goes awry.

The main floor on the value of BitAssets is formed by the value to shorters of freeing their collateral.  Forced settling by either expiration or other systems forms another floor at the value in BTS at which the longs expect to be able to force settlement.  With sufficient liquidity, this secondary floor should be unnecessary, but if it is considered necessary it should be at the targeted peg value, not an offset from that.

If the longs are able to cancel settlement, that defeats the purpose of the 24 hour delay I think.  In that case they might as well constantly request settlement and constantly cancel unless settlement is going to occur on a spike in their favour.  If price feed volatility is an issue, they could trigger 24 hour delayed settlement at the average feed price over those 24 hours.  Again, I think forced settling is less than ideal anyway.  The real floor should be the value that BitAssets have to shorters who need them in order to recover their collateral.
Sure, but Dan is essentially doing away with the main floor on the value of BitAssets by doing away with the rule: no shorting below the feed.  So the only floor left in bitAssets 3.0 is the forced settling.  I also wasn't suggesting allowing longs to cancel settlement; only allow them to specify a floor to the settlement up front at the time they request settlement.  Anyway, I think I'm generally on the same page as you here and I didn't say this is my preferred way of doing things.

Offline Troglodactyl

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What I mean is you are saying that "$1.00/bitUSD should be the floor, and fail in explaining why it will be the floor. [Actually I believe that about $0.99 will be the floor and that if you set the settlement at 0.99 and all (not only 5% or whatever % can settle in 24h]

Here is one of the main points where it all goes wrong.
The real underlying demand that drives BitUSD:USD to 1:1 is from arbitrage bots and speculators buying BitUSD first as a means to buy the BTS more cheaply than via alternative channels.    This means that buying 1 BitUSD for $1.00 should always be the most cost effective means to purchase the underlying crypto-currency, BTS.   This realization has many implications for the design goals of BitAssets 2.0.
Actually it does not mean that   buying 1 BitUSD for $1.00 should always be the most cost effective means to purchase the underlying crypto-currency, BTS.  That means that buying for as little as possible should be the best price for them! So buying for $0.95 will be better!

Now we come to the next point - is there gonna be conditions at which there will be sellers at $0.95?

The answer is generally 'Yes' - At bull market times it is feasible to short below 1:1 and still profit [*1]

The question then becomes how much below $1.00/bitUSD will such shorting  still be profitable?
In the proposed system "0.99*feed price settlement with no restriction on the % of bitUSD longs that can request a settlement" the answer is about 0.99 adjusted for 1day volatility.


So in other words the bitAsset 2.0 will effectively put the floor on bitUSD on a number directly proportional to the chosen settlement price compared to the feed price [other factors such as - margin requirements, % of all longs that can request settlement, as well as all other market rules that shift the risks for the short/longs - will also influence the exact floor of the bitUSD]

[*1] There is a very simple  explanation why it is so. Will try to explain if anybody interested.
Yea, forced conversion at 99% seems random to me, may as well just make it convertible at 100% if you are going to do it, although I'm generally not a big fan of bitAssets 2.0 formally (formerly?) 3.0.

Should we let people who are force settling at the feed place a limit on what price feed they would accept at the time of settlement?  i.e.  Some news is announced and someone with bitUSD decides BTS is cheap and they request force settlement but by the time 24hrs is over the price has moved so much they don't want to settle at that price.  Or maybe just preventing someone from being completely screwed by a momentary price feed error like a script goes awry.

The main floor on the value of BitAssets is formed by the value to shorters of freeing their collateral.  Forced settling by either expiration or other systems forms another floor at the value in BTS at which the longs expect to be able to force settlement.  With sufficient liquidity, this secondary floor should be unnecessary, but if it is considered necessary it should be at the targeted peg value, not an offset from that.

If the longs are able to cancel settlement, that defeats the purpose of the 24 hour delay I think.  In that case they might as well constantly request settlement and constantly cancel unless settlement is going to occur on a spike in their favour.  If price feed volatility is an issue, they could trigger 24 hour delayed settlement at the average feed price over those 24 hours.  Again, I think forced settling is less than ideal anyway.  The real floor should be the value that BitAssets have to shorters who need them in order to recover their collateral.

zerosum

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continued from here: https://bitsharestalk.org/index.php/topic,16127.msg206546.html#msg206546

Quote
BitUSD will initially be created by individuals who want to stay in a crypto currency but wish to have a price floor.   They must sell their BTS and receive less BitUSD than they would have received by selling their BTS for real USD.    The difference will depend upon the demand from shorts looking for leverage.   For the sake of an example, lets assume that there is a bear market and thus shorts are conservative and asking for $1.05 worth of BTS per BitUSD.   This means that the first BitUSD had to pay this spread.   It also means that he could turn around and ask $1.04 worth of BTS to exit his position.  In all likely hood there would be offers to buy at 1.03.  In other words, the BitUSD / BTS market should never be expected to trade centered on the price feed, but above the feed by an amount proportional to how bearish the market is.   In other words the spread of BTS to BitUSD will depend upon willingness of shorts to borrow and ultimately the how bullish/bearish the market is.

The above is somewhat correct [very broadly speaking] analyses in a bear market scenario only!

The  problem/analyses are very straight forward if we use synthetic positions.

a long BTS position =  long call BTS option + short put BTS option [both options at the same strike]

short bitUSD - is in reality leveraged long  BTS position; so in the current design if one shorts bitUSD he/she can be long up to about 150% BTS he owns.


So without going into too much details lets assume:
price of BTS - 100 BTS/USD;

There are call and put options with strike of  100 BTS/USD;

and
a) we are in bear market [as in expected bear market]
b) we are in bull market


The question is:
Is the price of the put  gonna be "more than the call price", "< of the call price" or "about the same" - in scenario  a) (i.e. bear market)?
Same question for case b) (bull market)?


assuming you all reached the correct and intuitive answer even without the math to prove it... It is the correct one though

......


So the above max short bitUSD position is (long) 1.5*BTS  = 1.5*( -call price   +put price) 
In other words in order to get the synthetic position one must buy the call and pay for it (so money outflow and minus) and can/should offset the total with the money received by selling the put, i.e. plus the amount received from the put sell!

In other words - When one is shorting he goes from 1.00*BTS to 1.5*BTS [assuming current collateral numbers and max recklessness of the shorter]; If we express this in its equivalent  synthetic position:
 This results in cash outflow (selling below the peg in a bull market) and cash inflow in a bear market (selling above the peg).
 Because 0.5*( +put price - call price) and (put price > call price in a bear market; put price < call price for options with the same strike in a bull market)



« Last Edit: May 03, 2015, 07:42:19 pm by tonyk2 »

Offline Agent86

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What I mean is you are saying that "$1.00/bitUSD should be the floor, and fail in explaining why it will be the floor. [Actually I believe that about $0.99 will be the floor and that if you set the settlement at 0.99 and all (not only 5% or whatever % can settle in 24h]

Here is one of the main points where it all goes wrong.
The real underlying demand that drives BitUSD:USD to 1:1 is from arbitrage bots and speculators buying BitUSD first as a means to buy the BTS more cheaply than via alternative channels.    This means that buying 1 BitUSD for $1.00 should always be the most cost effective means to purchase the underlying crypto-currency, BTS.   This realization has many implications for the design goals of BitAssets 2.0.
Actually it does not mean that   buying 1 BitUSD for $1.00 should always be the most cost effective means to purchase the underlying crypto-currency, BTS.  That means that buying for as little as possible should be the best price for them! So buying for $0.95 will be better!

Now we come to the next point - is there gonna be conditions at which there will be sellers at $0.95?

The answer is generally 'Yes' - At bull market times it is feasible to short below 1:1 and still profit [*1]

The question then becomes how much below $1.00/bitUSD will such shorting  still be profitable?
In the proposed system "0.99*feed price settlement with no restriction on the % of bitUSD longs that can request a settlement" the answer is about 0.99 adjusted for 1day volatility.


So in other words the bitAsset 2.0 will effectively put the floor on bitUSD on a number directly proportional to the chosen settlement price compared to the feed price [other factors such as - margin requirements, % of all longs that can request settlement, as well as all other market rules that shift the risks for the short/longs - will also influence the exact floor of the bitUSD]

[*1] There is a very simple  explanation why it is so. Will try to explain if anybody interested.
Yea, forced conversion at 99% seems random to me, may as well just make it convertible at 100% if you are going to do it, although I'm generally not a big fan of bitAssets 2.0 formally (formerly?) 3.0.

Should we let people who are force settling at the feed place a limit on what price feed they would accept at the time of settlement?  i.e.  Some news is announced and someone with bitUSD decides BTS is cheap and they request force settlement but by the time 24hrs is over the price has moved so much they don't want to settle at that price.  Or maybe just preventing someone from being completely screwed by a momentary price feed error like a script goes awry.

Offline Thom

I've been looking for a summary of the new BitAsset approach since the discussion began, and with the OP I now have it. There are a number of points brought up here worthy of highlighting:

  • Buying 1 BitUSD should always be the most cost effective means to purchase BTS
  • USD : BitUSD market price + BitUSD : BTS market price should be factored into the BTS : USD price feed
  • It is far better for price feeds to error in the favor of BitUSD holders than in the favor of shorts
  • Cashing out of BTS is done more efficiently (for USD through other channels) than using BitUSD
  • Creating BitUSD will always cost more than $1.00
  • BitUSD will initially be created by individuals who want to stay in a crypto currency but wish to have a price floor.

The last item tells me it's not likely BitAssets 2.0 is going to help in adoption or improving the marketcap in the short term.

Does this system assume USD<>BitUSD gateways/markets?

In that case it would seem to me that Bitassets 1.0 is a more resilient system as it only assumes itself (Bitshares internal exchange) and a decentralized data feed.

Resiliency and independence from the outside world is the essence of cryptocurrency.
Without it we can just use the damn bank account.

+5% for this post. Although I don't expect BM can say yay or nay to the question, it does cause me to ask if this was a factor in these new BitAsset changes. It also strikes to a core issue of autonomy from the corrupt FIAT banking system.

I'll confess to not really understanding what the problem is with the current bitUSD and bitAsset approach.
...
Did the peg actually break?

At the moment, all the proposals for bitassets v2, 3 are sending the message that the Bitshares peg 'experiment' has failed. Yet I'm not convinced this has been clearly demonstrated. If it is actually broken, then remedial changes to the protocol, ought to be justified solely in terms of their ability to fix current problems.

As I see it, the problems Bitshares faces are marketing, the cost of end-user conversions / issues around bitcoin maximalism, bugs, and the fact that web support isn't a good fit with the c++ codebase, such that the creation of an integrated web-wallet has been delegated outside the core Bitshares dev team (moonstone).

These too are excellent observations IMO, especially the last paragraph. I'm not convinced there is a plan or budget in the works for marketing of BitShares ecosystem beyond the existing community driven efforts which have largely dissipated. There certainly doesn't seem to be much marketing leadership or vision. IMO we should be focusing on what is lacking in performance and UX of the client software product.

I do not know how much of the performance issue resides on the server-network/blockchain side vs the client side. I DO know the poor UX (except performance related UX issues) is squarely on the client side. It is clear from watching the evolution of the client that we just don't have enough manpower with UI skills, or, there is no design vision for the UI that the community sees much value in. Contrast the core team's UI vision with that of the moonstone wallet and it's clear which is more popular and appealing. As a former UI developer I can attest to the difficulty of the task, and that it involves as much or more artistic talent than coding skills, not withstanding the need to be highly attuned to human factors such as user psychology / use case analysis.

Getting back to the topic of BitAssets 2.0, I think the current bear market has challenged BM to analyze BitAssets to assess if its original goals are still valid or could be improved. It is still not clear to me if the new approach should be adopted, or whether BitAssets 1.0 can co-exist with BitAssets 2.0. I see the new approach as being a new layer of economic analysis based on what has been learned to date from the BitAssets 1.0 experiment. As good as the OP is in explaining what the BitAsset 2.0 approach is, it doesn't provide a cost-benefit analysis for implementing it, including the opportunity costs such as what features will pushed further out. Even if coding time is not a major factor, design time and the thought required to write a position paper and think through the issues is bound to take away from other immediate development issues.

It's just not clear to me that there is much to gain from BitAssets 2.0 in the short term but it does have a negative short term impact by injecting something else to consider that takes away from the laser focus we need to produce a better user experience.
« Last Edit: May 03, 2015, 05:44:34 pm by Thom »
Injustice anywhere is a threat to justice everywhere - MLK |  Verbaltech2 Witness Reports: https://bitsharestalk.org/index.php/topic,23902.0.html

zerosum

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BM -
1. I like the idea the bitUSD/BTS price to be included (fed back) in the price feed for USD:BTS.

2.Other than that, I honestly do not like your analyses. They are more like a wishful thinking more than anything else.[and I do like bitAssets 2.0 far more than the current model!]

What I mean is you are saying that "$1.00/bitUSD should be the floor, and fail in explaining why it will be the floor. [Actually I believe that about $0.99 will be the floor and that if you set the settlement at 0.99 and all (not only 5% or whatever % can settle in 24h]

Here is one of the main points where it all goes wrong.
The real underlying demand that drives BitUSD:USD to 1:1 is from arbitrage bots and speculators buying BitUSD first as a means to buy the BTS more cheaply than via alternative channels.    This means that buying 1 BitUSD for $1.00 should always be the most cost effective means to purchase the underlying crypto-currency, BTS.   This realization has many implications for the design goals of BitAssets 2.0.
Actually it does not mean that   buying 1 BitUSD for $1.00 should always be the most cost effective means to purchase the underlying crypto-currency, BTS.  That means that buying for as little as possible should be the best price for them! So buying for $0.95 will be better!

Now we come to the next point - is there gonna be conditions at which there will be sellers at $0.95?

The answer is generally 'Yes' - At bull market times it is feasible to short below 1:1 and still profit [*1]

The question then becomes how much below $1.00/bitUSD will such shorting  still be profitable?
In the proposed system "0.99*feed price settlement with no restriction on the % of bitUSD longs that can request a settlement" the answer is about 0.99 adjusted for 1day volatility.


So in other words the bitAsset 2.0 will effectively put the floor on bitUSD on a number directly proportional to the chosen settlement price compared to the feed price [other factors such as - margin requirements, % of all longs that can request settlement, as well as all other market rules that shift the risks for the short/longs - will also influence the exact floor of the bitUSD]





[*1] There is a very simple  explanation why it is so. Will try to explain if anybody interested.



Offline triox

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Does this system assume USD<>BitUSD gateways/markets?

In that case it would seem to me that Bitassets 1.0 is a more resilient system as it only assumes itself (Bitshares internal exchange) and a decentralized data feed.

Resiliency and independence from the outside world is the essence of cryptocurrency.
Without it we can just use the damn bank account.

Offline lastagile

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Do u mean we will go live the 3.0 without modification?

Make it simple, what are the changes?
« Last Edit: May 03, 2015, 02:56:26 pm by lastagile »

Offline sittingduck

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The current system barely works even when there are no bugs.  This system is much simpler to explain.  I believe bytemaster is trying to say that a lack of shorts selling at the feed is ok.  I also agree that even without fiat ramps, the most cost effective way to buy bts should be by buying bitusd first.  This is the only way we can be sure bitusd is the most directly liquid. 


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julian1

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I'll confess to not really understanding what the problem is with the current bitUSD and bitAsset approach.

There is a terrible bug, that prevents shorts from covering (with their own collateral), but I believe it has been fixed in devel?

I also understand that nobody wants to short bitusd into existence, due to exposure to the falling bts price. However, the corollary is that there is (virtually) no real demand for bitusd as a currency, so the quantity of bitusd on issue isn't posing a genuine barrier to adoption. If there was fundamental demand for bitusd, then there would be corresponding demand for bts, which would result in more market-makers/speculators shorting.

Did the peg actually break?

At the moment, all the proposals for bitassets v2, 3 are sending the message that the Bitshares peg 'experiment' has failed. Yet I'm not convinced this has been clearly demonstrated. If it is actually broken, then remedial changes to the protocol, ought to be justified solely in terms of their ability to fix current problems.

As I see it, the problems Bitshares faces are marketing, the cost of end-user conversions / issues around bitcoin maximalism, bugs, and the fact that web support isn't a good fit with the c++ codebase, such that the creation of an integrated web-wallet has been delegated outside the core Bitshares dev team (moonstone).

Offline mdj

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BitAssets 2.0 (or 3.0/whatever) is an interesting proposition but I do have a couple of concerns.

The model seems to rely heavily on there being BitAsset to real asset gateways which we don't have yet. Even if we did have one, the initial monopoly would cause the spreads to lead to BTS:BitUSD still being a cheaper option that converting to real USD.

I like the idea of real dollars being cheaper than BitUSD when converting from BTS as it takes into account the fact that BitUSD is far more convenient thus must come at a premium.

I'm quite averse to this model being directly implemented as a hard fork and would first like to see how it fares with DevShares. How else can this be tested? Perhaps a staggered release of the new algorithm on an asset to asset basis?

Offline bytemaster

Note:  What we have been calling BitAssets 3.0 I am renaming to BitAssets 2.0 for this paper because otherwise everyone outside this forum would be confused if we started talking about 3.0 when 2.0 never existed.     

BitAssets 2.0
Stable Decentralized Digital Currencies

This paper introduces a practical approach to creating a stable digital currency.  There have been many proposed strategies for “price fixing” a digital currency to a national currency or other commodity.    Historically the goal is for the asset to have a market value within a very tight tolerance of an outside asset.    This paper would like to challenge that goal and instead propose a different goal: maintain a minimum value for the asset but do not attempt to control the maximum value.
   
For the purposes of this paper BitUSD will refer to any digital crypto-currency that is intended to be worth $1.00.  BitUSD is merely an example to facilitate discussion and in general could be substituted with any other commodity or currency.   For a crypto currency token we will assume BTS, but it could just as easily be any other crypto-currency. 
When two people get together to barter goods, it is often the case that neither party knows the *exact* value of the goods they are trading.   Instead, each party considers the “minimum value” each item may have to them and uses this minimum value to set their prices.    This principle holds true for almost all merchants that accept crypto-currencies as payment for goods and services.   These merchants set their prices based upon the risk of the crypto-currency falling in value between the time they accept payment and the time they convert the payment to a stable store of value.    A customer paying for something with Bitcoin often does so at an exchange rate that is lower than what they could theoretically get if they sold instantly at an exchange.   

Each and every day people trade pennies which have $0.02 worth of copper in them as if they were only worth $0.01.   The fact that somewhere there exists someone willing to pay $0.02 for the penny does not change the fact people use it at face value.   

Attempting to construct a crypto-currency that is “pegged” to the dollar means that every merchant accepting BitUSD is willing to do so at the same ratio as they would cash.   Conversely, every customer is willing to part with their BitUSD to buy a good without feeling they were overpaying.    This is a far looser definition of a pegged currency than many people attempt to construct, but it is also a far more useful one.

Creating BitUSD
All crypto-currencies are free floating assets with a value that is constantly changing with market perception.  This is the basic building block from which a stable currency must be forged.  The systems that have been proven to work are essentially variations on a *contract for difference* (CFD) where there is sufficient collateral tied up to honor the contract.   In a contract for difference one party agrees to pay the other party an amount equal to the change in price between two assets over time.     In this way the parties can gain opposite exposure to the price movements without ever having to own the asset they are speculating on.   

BitUSD is the long position of a CFD based on the exchange rate between BTS and a US Dollar and is collateralized with BTS.   All CFD contracts need a judge and this means either a trusted price feed, an arbitration agent, or voluntary settlement between the long and short side of the contract.    BitShares provides all three of these options.   Normally longs and shorts will choose to voluntarily settle at a fair price because it is the fastest and lowest risk option; however, at any time a long (BitUSD holder) may request to have their position settled at the median of a set of trusted price feeds with sufficient delay to ensure that neither party has access to information faster than the price feed can be updated.   

The magic of BitUSD is that it makes all long positions fungible and they can be used to settle any short position.   When a forced settlement is requested it is simply matched against the least collateralized of the short positions.    Thus we can say that any individual BitUSD is at least as valuable as the long position of the least collateralized CFD.  Its value takes into consideration the risk of the collateral becoming insufficient.     Based upon this construction we can clearly see that BitUSD will meet the necessary requirement to be accepted at face value by merchants. 

The precise exchange rate between BitUSD and the underlying crypto-currency is not relevant from the perspective of the users of BitUSD (merchants and consumers).  All merchants and consumers care about is knowing that if they pay $1.00 for a BitUSD they can sell it for $1.00 in the future.    In general merchants and consumers should need little if any knowledge about the underlying crypto currency (BTS) and therefore we should presume these users will never look at the BTS/BitUSD market.   The only people who care about the BTS/BitUSD market are crypto-currency speculators, market makers, and arbitrage bots.   

To establish BitUSD as a viable USD alternative simply means minimizing the arbitrage opportunity between merchants accepting BitUSD at $1.00 and selling to speculators for slightly more than $1.00.    Most users do not want to go from BitUSD through a crypto-currency to get to USD nor do they want to go from USD through a crypto-currency to get BitUSD.   Instead BitUSD to USD becomes the market that matters and it should develop a very narrow spread as USD flows from users bank accounts to BitUSD to merchants which then sell the BitUSD back to other users.  The spreads in BitUSD to USD would be so insignificant that everyone would consider them equal. 

While the spreads between BitUSD and USD may be low, the spread between BitUSD and the backing crypto-currency could be much larger due to the high volatility of the crypto-currency.   It is economically unviable to have large buy and sell walls any where near the price feed for the same reason that selling a large quantity in any market results in slippage.  The value of a crypto-currency is far to “fuzzy” in the mind of the market for anyone to make money making the market with a very narrow spread.
The real underlying demand that drives BitUSD:USD to 1:1 is from arbitrage bots and speculators buying BitUSD first as a means to buy the BTS more cheaply than via alternative channels.    This means that buying 1 BitUSD for $1.00 should always be the most cost effective means to purchase the underlying crypto-currency, BTS.   This realization has many implications for the design goals of BitAssets 2.0.

First and foremost this means that BitUSD holders should always be able to force settle at a fair price in just about any quantity in a relatively short period of time.  A whale looking to buy BTS in bulk would get the best price possible by buying BitUSD with USD and then selling it for BTS on the internal exchange.  In a worst case they could force settle it in a large quantity and still end up buying the BTS cheaper than alternative means.

  This would put pressure on the BitUSD:USD price lifting it to $1.01 USD per BitUSD.   The USD : BitUSD market price combined with the BitUSD : BTS market price can and should be factored into the BTS : USD price feed.  Thus a whale buying up BitUSD and raising the price would also move the price feed and keep the market balanced.
If the most effective means for buying BTS is through BitUSD then it means that selling BTS for BitUSD should also be the least efficient means of cashing out.  Instead BTS should be sold for USD through other channels more efficiently than through BitUSD.   The ability to sell BTS for USD is the foundation of the value of the collateral behind BitUSD.   If the collateral received by forced settlement cannot be sold for USD of equal or greater value then the price feed was off.  If it ever becomes more efficient to cash out of BTS into USD though BitUSD then the market will sometimes push BitUSD down to $0.99 and break the floor that merchants and consumers are counting on.
From this we can conclude that it is far better for price feeds to error in the favor of BitUSD holders than in the favor of shorts.   We can also conclude that the spread on the internal market should not be of any concern so long as buying BitUSD for $1.00 remains the most cost effective means of buying BTS.

Impact on Shorts
As a result of this analysis it is clear that those shorting BitUSD into circulation must by necessity sell at price above the feed and that creating BitUSD will always cost more than $1.00.  After all if buying BitUSD with USD at 1:1 is always going to be the most efficient means of buying BTS then that means someone buying BitUSD with BTS is always going to pay more than $1.00.   Thus someone buying BitUSD from a short will have to pay more than $1.00 worth of BTS for it otherwise the BitUSD will fall to less than $1.00.

BitUSD will initially be created by individuals who want to stay in a crypto currency but wish to have a price floor.   They must sell their BTS and receive less BitUSD than they would have received by selling their BTS for real USD.    The difference will depend upon the demand from shorts looking for leverage.   For the sake of an example, lets assume that there is a bear market and thus shorts are conservative and asking for $1.05 worth of BTS per BitUSD.   This means that the first BitUSD had to pay this spread.   It also means that he could turn around and ask $1.04 worth of BTS to exit his position.  In all likely hood there would be offers to buy at 1.03.  In other words, the BitUSD / BTS market should never be expected to trade centered on the price feed, but above the feed by an amount proportional to how bearish the market is.   In other words the spread of BTS to BitUSD will depend upon willingness of shorts to borrow and ultimately the how bullish/bearish the market is.

In a BTS bull market then the premium to create BitUSD would be low, perhaps $1.01 or even $1.00.    In a BTS bear market then the premium to create BitUSD would be high, perhaps $1.10 or more.   Shorts have no way to force a BitUSD holder out of their position and thus must price in the risk of being unable to buy BitUSD cheaply to cover.    In either case the result is proper, in a bear market BitUSD becomes the cheapest way to buy BTS and thus causes new money to flow in through BitUSD and ultimately allows shorts to cover from this new money at a fair price.   

Conclusion
The rules of BitAssets need to guarantee a floor on the value of BitUSD of $1.00 and the cost of providing this floor is certainly greater than 0.   Therefore, the cost of buying BitUSD from a short and thus creating new BitUSD should always be more than $1.00.   When things are bullish for BTS then the cost of providing the floor is lower than when things are bearish.   In a bear market the BitUSD supply would contract as all new money flowing into BTS via BitUSD would be sucked up by shorts covering. 





« Last Edit: May 03, 2015, 07:32:37 am by bytemaster »
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