BitAsset 2.0 Requirements & Implied Design

[merivercap]

The basic argument I am seeing is that with 0 forced settlement except margin calls means that some shorts playing on the edge of their margin will provide liquidity. 
The argument I am making is that with a small percent of forced settlement regardless of margin will improve confidence and be irrelevant to any short "on the edge".

Basically, "forced settlement" is a way of allowing some dynamic calculation of the collateralization level. 

Lets say that the minimum maintenance level of collateral was just 110% of the value of the loan.   The existence of forced settlement for a "small percent per day" will mean that the effective collateral requirements will be higher and that most shorts have no fear of being "margin called". 

Like I have said 1000 times, with Privatized BitAssets there are enough variables to achieve almost everything except interest.   No settlement, small settlement, all settlement. High maintenance collateral, low collateral, etc.  Fixed parameters, Variable Parameters, and an infinite number of ways of calculating yield. 

The only reason not to buy BitUSD at more than 1.00 is the name.... call it a USD correlated asset and it works fine.

I honestly have no idea what the market needs or will prefer, I just know we have the tools in place to find it.

Ok if the forced settlement feature is kept at a minimum it may not be that bad.  As long as shorts can have certainty about what level of collateral they need so that their positions will be intact.

Wow.  I think the idea of Privatized BitAssets is fantastic, but I'll have to find out more of the details.. so you're saying we all get to play mad scientist and experiment?

[bytemaster]

The basic argument I am seeing is that with 0 forced settlement except margin calls means that some shorts playing on the edge of their margin will provide liquidity. 
The argument I am making is that with a small percent of forced settlement regardless of margin will improve confidence and be irrelevant to any short "on the edge".

Basically, "forced settlement" is a way of allowing some dynamic calculation of the collateralization level. 

Lets say that the minimum maintenance level of collateral was just 110% of the value of the loan.   The existence of forced settlement for a "small percent per day" will mean that the effective collateral requirements will be higher and that most shorts have no fear of being "margin called". 

Like I have said 1000 times, with Privatized BitAssets there are enough variables to achieve almost everything except interest.   No settlement, small settlement, all settlement. High maintenance collateral, low collateral, etc.  Fixed parameters, Variable Parameters, and an infinite number of ways of calculating yield. 

The only reason not to buy BitUSD at more than 1.00 is the name.... call it a USD correlated asset and it works fine.

I honestly have no idea what the market needs or will prefer, I just know we have the tools in place to find it.

[merivercap]

There is a DAILY LIMIT TO FORCED SETTLEMENT.   

  It wasn't specified in the design, it's arbitrary, and more complex regardless.  (I don't think it's necessary, but it isn't my call to make.)

If the price moved up 27% like it did in the last 24 hours then the first people to ask for forced settlement would consume the daily amount and force everyone else to wait. 

   Isn't that clunky?

I maintain that there exists a PRICE for every contract arrangement and that the "value of the advantage" will be priced in by BOTH SIDES.   The person buying BitUSD doesn't care about the $1.00 peg, they care about ALL of the advantages associated with owning it.  If they are a trader/speculator then they will buy it up expecting to profit from shorts when there is heavy volatility.   Therefore, to the extent that a short asks a premium, a long has incentive to pay a premium.   

  There is a very real psychological barrier in buying a BitUSD for anything more than a dollar just as there is selling for less.

So lets just assume the market settles on $1.30  as the price for creating BitUSD with forced settlement at the feed which is $1.00.   Who cares so long as the premium is relatively stable?    The only thing that can move the premium is market forces based upon volume and market direction.   

  Convince anyone to buy a BitUSD for $1.30... don't think it's going to be easy. 

If you focus ONLY ON TRADERS then BitUSD with forced settlement at the feed is a fine substitute for a USD.

We know that increasing the daily settlement limit will increase the premium, and decreasing it will decrease the premium.   If you have no forced settlement at all then no price feed is necessary and the peg walks toward which ever side of the market is "more stubborn".   

As a short you balance collateralization vs forced settlement risk.   
 

   If you have no user-generated forced settlement, when shorts are undercollateralized I assume they are forced at the feed or market or however you want. That allows a connection to the price feed or at least creates settlement.  Many speculative shorts will be at the margins of their collateral so there should be a natural flow of settlement... If BTS goes down 50% from a fully collateralized position (ie. in one day at daily settlement) the short loses everything. 

I maintain that having BitUSD be worth $1.30 at all times is far better than it being worth $0.70 sometimes or even $0.85 to $1.15.   If you break the buck then merchants are no longer "safe" accepting it at parity.   I would rather a merchant offer a discount to someone paying with BitUSD that is worth $1.30 than charge someone extra with BitUSD worth $0.95.   
 

  Not sure I would make the same argument nor do I want to speak on behalf of merchants.  I think it's just a matter of having $1.15 +/- .15 or $1.00 +/- .15... I think the focus should be narrowing spreads via liquidity so it's $1.00 +/- .02 or $1.15  +/- .02.  I prefer the former.  Also when the external markets are trying to trade BitUSD at $1.00 in the real world, aren't people going to end up selling it in the internal markets at $1.15 and isn't the real world market going to adjust to selling BitUSD for $1.15 on the streets? 

Conclusion:  forced settlement "on demand" that is limited to a reasonable percentage of the supply per day will mean that shorts will prioritize themselves by collateral to the extent they fear the forced settlement.    Keep in mind, that the entire book between $1.00 and $1.30 must be consumed before anyone even initiates a forced settlement.

  Isn't the orderbook extremely thin?  Isn't there a reason for that?  (Ok the new design isn't out yet so we don't know)  But you sure people are going to want to trade?  It takes two to tango and I'm not sure we're playing the right song right now...

[bytemaster]

There is a DAILY LIMIT TO FORCED SETTLEMENT.   

If the price moved up 27% like it did in the last 24 hours then the first people to ask for forced settlement would consume the daily amount and force everyone else to wait. 

I maintain that there exists a PRICE for every contract arrangement and that the "value of the advantage" will be priced in by BOTH SIDES.   The person buying BitUSD doesn't care about the $1.00 peg, they care about ALL of the advantages associated with owning it.  If they are a trader/speculator then they will buy it up expecting to profit from shorts when there is heavy volatility.   Therefore, to the extent that a short asks a premium, a long has incentive to pay a premium.   

So lets just assume the market settles on $1.30  as the price for creating BitUSD with forced settlement at the feed which is $1.00.   Who cares so long as the premium is relatively stable?    The only thing that can move the premium is market forces based upon volume and market direction.   

If you focus ONLY ON TRADERS then BitUSD with forced settlement at the feed is a fine substitute for a USD. 

We know that increasing the daily settlement limit will increase the premium, and decreasing it will decrease the premium.   If you have no forced settlement at all then no price feed is necessary and the peg walks toward which ever side of the market is "more stubborn".   

As a short you balance collateralization vs forced settlement risk.   

I maintain that having BitUSD be worth $1.30 at all times is far better than it being worth $0.70 sometimes or even $0.85 to $1.15.   If you break the buck then merchants are no longer "safe" accepting it at parity.   I would rather a merchant offer a discount to someone paying with BitUSD that is worth $1.30 than charge someone extra with BitUSD worth $0.95.   

Conclusion:  forced settlement "on demand" that is limited to a reasonable percentage of the supply per day will mean that shorts will prioritize themselves by collateral to the extent they fear the forced settlement.    Keep in mind, that the entire book between $1.00 and $1.30 must be consumed before anyone even initiates a forced settlement. 

[merivercap]

Forced settlement will ALMOST NEVER HAPPEN because market participants will have financial incentive to trade at prices that make it very unlikely.

If this is indeed what actually happens when implemented, then that would be the best case scenario and likely work long term.  Perhaps forced settlement could be turned off by default and hidden behind an 'advanced' tab to discourage users from exercising this option.

Keep a potential manipulation tool in the background so new traders have no idea what's coming?  Why have it in the first place?

How sure is the "ALMOST NEVER GOING TO HAPPEN'....? 

Let's say BitUSD would normally trade at 10% above the price feed...  BTS prices can go up or down by 5-10% quickly & frequently (ie.  prices are up about 20% in the last 24hrs.)... so should shorters of BidUSD ask for 15-20% above the feed to be safe?  If so psychologically, BitUSD buyers are going to think that's way too much of a premium and you're preventing the demand side of BitUSD because they would want it as close to 1:1 as possible.  The closer you get to 1:1 the bigger chance shorts are going to get force settled.  So demand side won't budge until it's much closer to 1:1 and supply side won't budge or be prone to getting massively forced out.  Wouldn't that just prevent people from making a trade?

Without thinking about 'pegs' or any other theory, what about the idea of giving BitUSD forced settlement powers.  Whenever you give one side of a trade the right to force-settle at any time that's an advantage.  When one side can force-settle without moving the price, that's even a bigger advantage.  I'm I missing something?

Can someone explain it to me like I'm five?  If people can't understand it, how is anyone going to explain it to the average trader/speculator/person and how are they going to get comfortable wanting to get started?  BTW I wouldn't count on traders/speculators to know the theories or the rules.. they'll just trade and speculate when the market is hot until they lose money and quit playing...

Lastly can we have these trading rules vetted by a variety of trusted & experienced market making professionals, traders, and exchange companies?

[maqifrnswa]

To handle case (2), people have been offering the idea of yield for holding BTA - either positive or negative. However, I've been contesting that you can't peg a floating asset to itself...,

I don't understand what you mean by this.

This wasn't in reference to you, but to one of BM's eariler ideas that people will work to maintain the peg. Your system is fine, the yield is determined at the short sale and thus is fixed at a value determined at the sale.

maqifrnswa, a market can shift its value appraisal at any time even in the absence of volume. Imagine there is a change in the market's view on the value of a bitUSD compared to a USD. This could be driven by a change in interest rates on real USD, regulation risk around bitUSD, or any other point of comparison - it does not matter for our illustration.

Under a yield approach, in principle there is always some level of yield at which longs and shorts would balance out their average evaluation at $1 again. If the movement to premiums drove down yields, and the movement to discounts drove up yields, the appropriate yield can be reached where the market would reset at $1. Granted this is harder than it sounds, but that's the idea.

Under your approach a tax gets paid by one side, which opens up a spread in the market, reducing trading activity. Since there is nothing to force trades that incur the tax, there is also no easy way for the opposite side to price in any yield expectation. So the result is a disincentive on one party to stop negative action that might make the peg deviation worse, no incentive for them to positively act to make it better, and little incentive for the other party to act in a way to make it better either.

that makes sense - I think a positive or negative yield could work. Question: what does it mean to have BTA yield versus simply selling at a discount (e.g. zero coupon yield)?

[maqifrnswa]

The idea that it is as simple as this:

The forced settlement price has a fee equal to the average delta between the trading price and the price feed.    As shorts "back away" from the feed, the forced settlement backs away in the opposite direction.   As shorts get closer to the fee the forced settlement creeps up.  This allows the market to control the feed and keeps things centered on the price feed.

That does help, it discourages the destruction of BTS when there is already an under supply. Also, as the price moves tighter to the feed, liquidity increases, which is another side of this which needs to be considered

[Helikopterben]

Forced settlement will ALMOST NEVER HAPPEN because market participants will have financial incentive to trade at prices that make it very unlikely.

If this is indeed what actually happens when implemented, then that would be the best case scenario and likely work long term.  Perhaps forced settlement could be turned off by default and hidden behind an 'advanced' tab to discourage users from exercising this option.

[monsterer]

Attempting to maintain 1:1 perfect peg at all times requires MASIVE and continual manual intervention and will always be playing catch up.   The more you attempt to "close loop" the market the greater opportunity there is for people to profit from manipulation.

I'm not sure if that is provable. It seems to me the blockchain itself should have an provably optimal response to trading action, and that response should be to include instantly adjusting the feed as a function of trading volume.

[bytemaster]

The feed producers should simply move this floor until the BitUSD:USD market is trading at $1.00.

IMO you can't rely on this to work quickly enough; the price feed mechanism is too slow. To allow for price discovery, the feed price needs to adjust after every trade, and should probably adjust more quickly depending on the traded volume.

Hence my point regarding BitUSD that it should FLOAT above $1.00 and have the market set the premium.   

Attempting to maintain 1:1 perfect peg at all times requires MASIVE and continual manual intervention and will always be playing catch up.   The more you attempt to "close loop" the market the greater opportunity there is for people to profit from manipulation.

Having forced settlement always be at the price feed will simply cause it to trade at a offset and the market will set the premium with every trade.    Forced settlement will ALMOST NEVER HAPPEN because market participants will have financial incentive to trade at prices that make it very unlikely.   

From a traders perspective you only need to know 1 thing:   the price of BitUSD is 99.9% correlated to the price of USD.   

[monsterer]

The feed producers should simply move this floor until the BitUSD:USD market is trading at $1.00.

IMO you can't rely on this to work quickly enough; the price feed mechanism is too slow. To allow for price discovery, the feed price needs to adjust after every trade, and should probably adjust more quickly depending on the traded volume.

[wuyanren]

Bitusd is not required, this is difficult to achieve anchor

[bytemaster]

It is really quite simple, the BitUSD:USD price needs to be factored into the price feed, the feed should adjust in what ever way is necessary to maintain the BitUSD:USD price and otherwise ignore the USD:BTS price.     The USD:BTS price is volatile and will have a high spread at any reasonable volume.   

There is no need for the BitUSD:USD price to have a large spread and the difference in price between $1 and $100,000 of volume on the BitUSD:USD market can be much less than the same difference on the USD:BTS market.   

Therefore, forced-settlement doesn't matter so long as it exists it serves as a backdrop of liquidity that sets the floor on BitUSD : BTS.    The feed producers should simply move this floor until the BitUSD:USD market is trading at $1.00.

[starspirit]

To handle case (2), people have been offering the idea of yield for holding BTA - either positive or negative. However, I've been contesting that you can't peg a floating asset to itself...,

I don't understand what you mean by this.

Proposed, KISS, rules:
1) If a BTA is created (shorted) when there is an under supply, then the buyer would pay a fee in BTS based on how much the price was from the peg. That fee goes to a yield account. All shorts will be paid a fraction of that yield whenever they cover, and the yield is proportional to the fraction of the total BTA supply they are covering and how long they held the collateral (like the current system).
2) If a BTA is created when there is an over supply, the shorter pays a fee in BTA to a yield account which is paid out to longs similar to the current system.

maqifrnswa, a market can shift its value appraisal at any time even in the absence of volume. Imagine there is a change in the market's view on the value of a bitUSD compared to a USD. This could be driven by a change in interest rates on real USD, regulation risk around bitUSD, or any other point of comparison - it does not matter for our illustration.

Under a yield approach, in principle there is always some level of yield at which longs and shorts would balance out their average evaluation at $1 again. If the movement to premiums drove down yields, and the movement to discounts drove up yields, the appropriate yield can be reached where the market would reset at $1. Granted this is harder than it sounds, but that's the idea.

Under your approach a tax gets paid by one side, which opens up a spread in the market, reducing trading activity. Since there is nothing to force trades that incur the tax, there is also no easy way for the opposite side to price in any yield expectation. So the result is a disincentive on one party to stop negative action that might make the peg deviation worse, no incentive for them to positively act to make it better, and little incentive for the other party to act in a way to make it better either.

The idea that it is as simple as this:

The forced settlement price has a fee equal to the average delta between the trading price and the price feed.    As shorts "back away" from the feed, the forced settlement backs away in the opposite direction.   As shorts get closer to the fee the forced settlement creeps up.  This allows the market to control the feed and keeps things centered on the price feed.

Is there somewhere I can read more on this, because I don't really get it right now.

[bytemaster]

I think this is fascinating how everyone approaches this from different points of view (and models) since this is really a multifaceted problem. There is demand side and supply side economics to think about here. Most are thinking of the demand side (how to set up a system that people want to use). I don't want to derail that, but here's my latest on the supply side thoughts. In theory, a simple system which properly manages supply will provide all the necessary features for a healthy and attractive investment.

Summary
Ideal system:
1) The system rewards market players for destroying BTA when there is an oversupply
2) The system rewards market players for creating BTA when there is an under supply

BTA2.0 Implementation of above:
Case (1) is handled by forced calls at 99% of the price feed.
Case (2) is unhandled, but the assumption is market players will do it with no explicit incentive because 1 BTA is supposed to equal the underlying asset.

New thoughts
To handle case (2), people have been offering the idea of yield for holding BTA - either positive or negative. However, I've been contesting that you can't peg a floating asset to itself, that is you need a mechanism by which there is market incentive to push towards the feed.
To do that how about the following:
A variable fee is charged on new shorts which is valued at X% of the difference between the feed and the short. This is a progressive "tax" paid by the parties (longs or shorts) pushing away from the feed and paid to the party that is pushing towards to feed. This fee is either in BTS or BTA depending on oversupply or undersupply and goes to a yield account paid out to all BTA shorts or for longs just like the current yield. It is market driven and leaves us with simple rules that are easy to explain.

The the market says that shorts need to be rewarded, there will be an auction for the size of the reward. The current market would be paying a yield to BTS shorters at one rate and longs at another. BOTH longs and shorts get a yield, and it is based on the fees that were collected when the asset was created.

Proposed, KISS, rules:
1) If a BTA is created (shorted) when there is an under supply, then the buyer would pay a fee in BTS based on how much the price was from the peg. That fee goes to a yield account. All shorts will be paid a fraction of that yield whenever they cover, and the yield is proportional to the fraction of the total BTA supply they are covering and how long they held the collateral (like the current system).
2) If a BTA is created when there is an over supply, the shorter pays a fee in BTA to a yield account which is paid out to longs similar to the current system.

Example:
Feed is 1 BTS per 1 Asset. I want to short at 1.10 BTS per 1 BTA, which means there is an under supply. Someone buys 1 BTA from me for 1.10 BTS. I put 1.10 in collateral so there is 2.20 in collateral, I owe 1 BTA, and the long is long 1 BTA. The buyer also pays a fee of some percentage of the 0.10 BTS they are from the peg, paid in BTS, to the short yield. Whenever any short covers, they are paid a yield proportional to the length of their short (capped at one year) and the percentage of their short. The is the contapositive of the current system.

If I want to short at .90 BTS per 1 BTA, that means there is an over supply of BTS. Someone buys 1 BTA from me for 0.9. I put 0.9 in collateral so there is now 1.90 BTS in collateral, I owe 1 BTA, and the long is long 1 BTA. I also pay a fee based on some percentage of the 0.1 BTS I am away from the peg, in BTA, to the long yield. It is paid out just like the long yield is paid out now. This is very similar to the current system.

Thoughts?

The idea that it is as simple as this:

The forced settlement price has a fee equal to the average delta between the trading price and the price feed.    As shorts "back away" from the feed, the forced settlement backs away in the opposite direction.   As shorts get closer to the fee the forced settlement creeps up.  This allows the market to control the feed and keeps things centered on the price feed.