In this post I introduced some economic analysis: https://bitsharestalk.org/index.php/topic,16127.0.html
It has been nicely summed up by Thom.
- 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 should be done more efficiently (for USD through other channels) than using BitUSD
- Creating BitUSD
will *should* 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.
Two which the main critiques were:
1. An assumption that BitAssets 2.0 depends upon USD/BitUSD gateways (false assumption)
2. I didn't say *how* to achieve all of the *shoulds*
3. I need to be laser focused and this whole discussion is a distraction and BitAssets 1.0 is "just fine".
Now I would like to respond:
BTA 2.0 approach does not depend upon USD/BitUSD gateways, it merely indicates that if there was a market between BitUSD and IOU USD that it should trade at 1.00 or greater at all times assuming the IOU was from a reliable source. If we assume that there is an IOU USD issuer on the blockchain, that means that traders have two ways to get into BTS: Buy BitUSD and Sell for BTS and Buy BTS directly with their USD. Both markets would occur on the blockchain. Given the existence of both markets and our target of making sure that BitUSD is always worth *AT LEAST* $1.00 then buying BitUSD for $1.00 should always be a win (or at least equal) if your goal is to buy BTS.
Lets assume that the on chain IOU USD vs BTS market was very liquid and its 1hr moving average was used as the price feed. What incentive would someone with USD have to buy BitUSD first?
1. They must pay IOU USD Trading Fees Either Way
2. They must pay BitUSD trading fees *if* they go through BitUSD
3. Going through BitUSD allows them to "buy" without slippage if they buy in large quantities
4. They are free from counter party risk while trading.
Based upon these points the following things would result in me just buying BTS directly with USD rather than buying BitUSD first.
1. High trading fees for BitUSD would make two hops more expensive
2. A lag/time delay
3. I can get more BTS via IOU USD than via BitUSD
Based upon this analysis I would do the following:
1. 0% fee for forced liquidation
2. As short as possible, I think instant forced settlement at the feed is the way to go.
3. Allow all BitUSD to be force liquidated at the feed at any time.
4. very low trading fees for BitUSD assets
What these rules would imply for the BitUSD shorts:
1. Don't sell below the feed.
2. Don't sell within the error range of the feed
3. Maintain high collateral at all times to minimize risk of being called.
4. There is an implicit "no shorting below the feed" rule.
5. Shorts may have to sell above the feed, but they also have to cover above the feed thus the position is USD neutral
6. In addition to USD price change risk, shorts also face premium change risk that could go for or against them.
What these rules would imply for BitUSD longs:
1. To buy the first BitUSD requires you to pay to cover the shorts risks... a premium equal to the feed error / other factors
2. You can likely sell your BitUSD for a similar premium thus you are still protected from volatility and the "premium" doesn't matter to traders/hedgers.
3. You can easily sell your BitUSD for USD at 1:1 to someone looking to buy BTS (they profit by the premium on internal market).
4. You would almost never request forced settlement because you would end up forfeiting the premium.
What these rules would imply for the Price Feed:
1. The less error it has the lower the premium on the internal market.
2. Shorts carry 99% of the price-feed risk, shorts can be forced to cover at the feed.
3. Longs carry ~0% of the price feed risk, if the feed is manipulated too low they can just refuse to sell.
What the outside world would see:
1. BitUSD always trades for more than $1.00 worth of BTS.
2. BitUSD : IOU USD market is the most liquid / lowest spread
3. BitUSD has the lowest trading fees agains BTS
4. If I accept BitUSD as payment I know I can sell it for $1.00 (or more) worth of value.
In a bull market BitUSD is still not sold below the feed due to instant forced settlement
In a bear market the premium for creating new BitUSD goes up.
In conclusion I would like to submit that from a traders perspective BitUSD constantly trading a couple percent above USD against BTS is just as good as trading near 0% because the RELATIVE price movements are all the same. From the perspective of merchants and everyone else you want them to know that 1 BitUSD to USD is the floor and ALWAYS a safe price to exchange at.