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Offline starspirit

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A Generalised Approach to Yield on BitAssets
« on: May 16, 2015, 11:27:04 PM »

[Edit 18 May: After I wrote this OP, I have continued to work on it toward an improved approach. I hope to write that up also in the next few days.]

Here is a yield approach that could be applied to just about any type of bitAsset, so is largely independent of the exact form bitAssets ultimately take. This yield mechanism could also be added at any time, if it were desired to test with a no-yield option first. However despite the added complexity, I would prefer to incorporate yield from the outset to better manage supply and demand.

Basic Approach

- all shorts must specify and maintain a maximum interest rate they are willing to pay to longs (the "max rates")
- at any time, there is a single floating rate paid from all shorts to all longs ("the market rate")
- by construction the market rate is always equal to (or lower - see below) than the lowest of the max rates
- forced short covers other than margin calls, aimed at mitigating bitAsset discounts, are prioritised from lowest max rate to highest max rate
- shorts are able to change their max rates at any time, and new shorts created, subject to not being less than a rate determined by the market rate

The result of this is that bitAsset discounts are always removed through a combination of reduced supply and higher rates. This moderates supply changes compared to relying on the supply adjustment alone.

Managing yield fluctuation

Ultimately, if markets were very liquid, and bond market yields were available to provide a comparison to the (zero-term) market rate, then yield fluctuation would be fairly smooth. In immature markets however, the rate that perfectly calibrates supply and demand is likely to gap up or down and add to yield uncertainty. It may be best initially to find a happy medium even if it takes longer to reach parity, as long as that parity is still assured. These restrictions could be gradually loosened over time as markets get more liquid:

- set a daily lower bound and upper bound on the market rate, being the prior days' rate +/- X% (for example 0.25%, or higher rate to be determined)
- when forced short covers occur, the market rate would effectively rise X% per day until reaching the lowest max rate
- changes to max rates, and max rates on new shorts, cannot be less than the lower bound
- its also possible to lower the market rate X% per day while there is a bitAsset premium (though this may not be necessary if shorts follow down the lower bound)
- the X% limit could be expanded if the bitAsset is a long way from the peg

Dealing with Negative Yields (Payments Longs to Shorts)


In situations where external interest rates in the underlying currency are very low, and supply falls short of demand (both of which we have currently for USD), the natural market rate is likely to be negative. A negative rate would then be necessary to remove bitAsset premiums and guarantee a return to parity. Assuming we wished to incorporate negative yields (an open question), below are a couple of possible ways to deal with this, though developer input would be required on what's feasible:

1. Use a variable transaction fee on bitAsset movements that reflects accrued negative interest paid to the shorts

2. Establish a DEPOSIT token that represents a varying number of bitAsset units as interest accrues in either direction, and create a checking facility denominated in bitAssets that settles as a transfer of DEPOSIT tokens between the parties

Integration with the Bond Market

BitAssets with a yield can be thought of as units being held on deposit. When they are switched to the bond market, they give up the at-call yield in return for the yield offered on the bonds.
« Last Edit: May 18, 2015, 12:18:45 PM by starspirit »

Offline starspirit

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Re: A Generalised Approach to Yield on BitAssets
« Reply #1 on: May 17, 2015, 12:46:07 AM »
A middle-ground option: Cash + At-Call Interest Bearing Deposits

For completeness there is a third option which could be worth exploring.

Traditional money markets have 3 options working in unison - cash, deposit accounts, and term investments.

The Yield Option on bitAssets explored above is like a substitute for a deposit account. It could effectively do away with the need for a cash option, which arguably may no longer be required in a digital economy. On the other hand, there may be a good use for a separate cash option (e.g. improved anonymity or other features?) that perhaps has not been fully explored or implemented yet, and perhaps we want to keep this option open.

Having a cash and at-call deposit option working together could still offer at-call yield potential through the deposit market, and so still achieve the same benefits of a yield-based bit-Currency. The main difficulty is dealing with the situation where natural market rates are negative. There would have to be an enforceable way to charge interest on cash to return to shorts (probably method 1 in the OP). An open question is how important negative interest rates really are.

I think it is important to discuss how we see these different components working together.

Offline xiahui135

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Re: A Generalised Approach to Yield on BitAssets
« Reply #2 on: May 17, 2015, 01:52:22 AM »
When the market is broken, yield is too slow to maintain the price.
We should mainly do the peg from market make. Maybe we can control the supply, but it seems your yield solution will not work effectively.
« Last Edit: May 17, 2015, 02:20:23 AM by xiahui135 »

Offline starspirit

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Re: A Generalised Approach to Yield on BitAssets
« Reply #3 on: May 17, 2015, 02:30:50 AM »
When the market is broken, yield is too slow to maintain the price.
We should mainly do the peg from market make. Maybe we can control the supply, but it seems your yield solution will not work effectively.
What's an example of "broken"?

Offline xiahui135

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Re: A Generalised Approach to Yield on BitAssets
« Reply #4 on: May 17, 2015, 02:42:26 AM »
I am against the yield to the long and short holders. But maybe yield to the short traders will work.

Why?

What I mean "traders", are the people who are placing orders.
Placing orders will affect the price instantly, and this affect the peg directly.

  • if the bitUSD price is lower than realUSD,  new short orders pay instant interest. (to the system fund, not to the bitUSD seller. bitUSD can be sold to both short and buyer with BTS)
    if the bitUSD price is premium than realUSD, new short orders get instant interest. (from the system fund. not from the bitUSD holder.)


What I mean "holders" are people already hold bitasset or short orders.
We should not do the yield thing to the longs and shorts.  This will not help the instant price, but make the two sides much complex.

« Last Edit: May 17, 2015, 02:53:54 AM by xiahui135 »

Offline starspirit

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Re: A Generalised Approach to Yield on BitAssets
« Reply #5 on: May 17, 2015, 05:42:23 AM »
xiahui,

Yield flexibility would allow restoration of the peg to be guaranteed when either discounts or premiums arise. If we did not limit yield adjustments, and left it completely to the market, this could theoretically accommodate very large shifts in supply or demand instantly as you desire. Appropriately limiting the yield adjustment (0.25% was just an example, not a suggestion) should still accomplish this in a reasonable period of time. As a result of this known outcome, on both sides of the peg, I expect market makers would anticipate that by providing liquidity walls around the peg in the market, absorbing most of the initial price deviation.

I think your suggestion could help incentivise supply adjustments but there is no way to guarantee that the system fund will ever be adequate to provide the incentive required. And the supply adjustments might need to be very large if there is no change in incentive on the demand side.

(Edit May 20: another problem with your system is that once a short is paid to take the incentivised action, they can just reverse it, pocketing the incentive with no change in supply.)



« Last Edit: May 20, 2015, 04:48:15 AM by starspirit »

Offline vid

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Re: A Generalised Approach to Yield on BitAssets
« Reply #6 on: May 17, 2015, 01:20:00 PM »
A middle-ground option: Cash + At-Call Interest Bearing Deposits

For completeness there is a third option which could be worth exploring.

Traditional money markets have 3 options working in unison - cash, deposit accounts, and term investments.

The Yield Option on bitAssets explored above is like a substitute for a deposit account. It could effectively do away with the need for a cash option, which arguably may no longer be required in a digital economy. On the other hand, there may be a good use for a separate cash option (e.g. improved anonymity or other features?) that perhaps has not been fully explored or implemented yet, and perhaps we want to keep this option open.

Having a cash and at-call deposit option working together could still offer at-call yield potential through the deposit market, and so still achieve the same benefits of a yield-based bit-Currency. The main difficulty is dealing with the situation where natural market rates are negative. There would have to be an enforceable way to charge interest on cash to return to shorts (probably method 1 in the OP). An open question is how important negative interest rates really are.

I think it is important to discuss how we see these different components working together.

>BitAssets are create using deposit accounts

The blockchain can collect BTS, for those want to save and investing in bitAssets creation, example Alice want to create bitSILVER to create btiAssets is Alice need to use the current price 100BTS to 1silver Alice need to give 100BTS to the blockchain pool of BTS the blockchain pool automatic give 100BTS to secure this contract the bitAssets is been create, and the bitAssets can't exchange form the blockchain pool, the bitAssets can only exchange BTS form the market exchange. The blockchain pool of (BTS 100%) 50% of the pool use to secure contract and cover the lost 30% cover the lost 20% can be take out only the pool BTS back bitAssets never over 70% if the BTS price drop over 70%, 70% or 80% no more bitAssets can be create using deposit accounts and give warning and 4 thing can be done.


1)increase the BTS price.

2)increase the BTS supply in the pool.

3)increase the bitAssets transaction fee the  additional fee exchange to BTS and give to the blockchain pool. ( blockchain pool BTS use 90%< automatically activate)( blockchain pool BTS use 90%> normal rate)

4)decrease the total number of bitAssets using gateway.

How the people save BTS at the blockchain earn example total BTS in the blockchain pool is one million Bob save ten thousand, Bob earn 1% of the transaction fee, now the transaction fee give 30% for all those people save BTS at the blockchain.

bitAssets

1)first back by long and short

2)if no people want to short deposit accounts can back the bitAssets

3)bitAssets over the deposit accounts max limit the blockchain back the deposit accounts by increase the transaction fee

 

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