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Offline starspirit

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Thought for the Day: The BitAsset Paradigm needs to shift
« on: May 19, 2015, 11:21:43 PM »

Its time we lost a lot of our old thinking and look differently at what our offering can provide to the world. Its time we stopped talking about bitAssets as CFDs (of which its only a mutated version anyway). There is no need to invoke the requirement that currency is created by speculative shorts. There is no need for all currencies and assets to be based on a one-size-fits-all bitAsset structure. They had a place once, but the external world does not care for and may even fear these technical curiosities. It wants familiar and better services offering greater freedom and flexibility. BitAssets are so much more than these things, and thinking of them in this way is heavily constraining their required evolution, and our path to self-funding profitability.

What is a bitUSD? Its a transferable token that represents a collateralised USD loan to a set of borrowers. Anybody can borrow in bitUSD, for any purpose, by providing acceptable digital collateral (*i). Anybody can use their borrowing as a margin loan if they choose to buy other digital assets, including BTS (*ii). Anybody can use the funds for market-making income by switching between bitUSD and real USD(*iii). Anybody can use the transferable token as a substitute USD.

The bond market (to come) is a way to lend and borrow USD at different terms. Again these USD funds can be used for any purpose as long as collateral is provided (*iv).

Combined, these services provide competition against Bitfinex, Poloniex, and others, with the advantages of eliminating exchange risk, allowing general purpose loans, and allowing loan receipts to be used as a substitute stable currency.

The trading exchange (to come) is a way to take margined positions on speculative assets. These can either be done in derivative form (expiry of instruments) or traditional CFD form (with an intermediary taking a spread). But the current BitAsset structure is not ideal for these instruments and needs to be discarded (*v). For a start, bitUSD should be the currency of denomination, not BTS. This service would compete against every asset exchange in the world with the advantage of eliminating exchange risk and lowering costs.

Unshackle the existing bitAsset paradigm, and suddenly we may see whole new ways to compete and earn profit. I see the potential for a more rewarding roadmap. It's not constant and evolves. But I think a roadmap on the services we are striving to offer is critical to making the right choices about our product design.

(*i Self-create a bitUSD by depositing the required collateral, sell the bitUSD for real USD funds)
(*ii Want leverage to BTS? Use the real USD funds to buy more BTS. Or why not BTC or LTC or DASH....)
(*iii Self-create bitUSD, sell bitUSD for real USD at premium, buy back at discount, etc)
(*iv Self-create a bond by depositing the required collateral, sell the bond for bitUSD or real USD funds).
(*v Require bitUSD deposit/margin accounts, leverage and long/short symmetry.)
« Last Edit: May 20, 2015, 04:03:48 AM by starspirit »

Offline Thom

Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #1 on: May 20, 2015, 12:46:41 AM »
You lost me at CFDs.
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Offline starspirit

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Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #2 on: May 20, 2015, 02:05:20 AM »
It has always been assumed that since bitUSD (for example) is created by a long giving up BTS, the natural counterparty is a bull that wants leverage to BTS, and that as a result the natural description is a CFD. But there is another way to create bitUSD. That is for a BTS owner to deposit their BTS as collateral to self-create bitUSD, then to sell the bitUSD for real USD to fund any purpose they desire. In this case the best description of the counterparties is that the bitUSD buyer is a lender of USD, and the bitUSD seller is a borrower. This is the most relevant description to the users in the external market that are entering or exiting bitUSD from USD, possibly not ever touching BTS.

The scope of the market for borrowers depends on what collateral they are allowed to post to self-create their loan. Ultimately that would not need to be limited to BTS, if other forms of digital collateral become available on the Bitshares block-chain.

It's not that any description is necessarily any more "correct" than any other. It's just that sometimes seeing things from a new perspective can help us look around the mirror rather than always seeing what is behind us.

Does that help, Thom?

Offline fuzzy

Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #3 on: May 20, 2015, 05:56:35 AM »
You lost me at CFDs.

Contracts for Difference (CFD's).  Maybe that helps :)
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Offline Ben Mason

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Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #4 on: May 20, 2015, 06:47:45 AM »
I really like your idea starspirit.....as long as there is collateral, we can bring as much bitgold or bitsilver into existence as we like without the limitation of needing two parties that have a different view of the future price of bts. So if my Bts was worth 2 bitgold, I could bring 1 bitgold into existence, loan it to myself and use it to buy something else or keep it? If bitgold went up in price relative to bts, could I buy more bts, close the position and keep the difference in bitgold? If I bought BItSilver with the bitgold, I need to buy back enough bitgold at some future point to cover the loan and release the bts collateral?

Sorry, I find the web of consequences with this stuff and the implications of changing relative values so hard to get my head around!

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Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #5 on: May 20, 2015, 06:53:58 AM »
Isn't this no more different than shorting bitGOLD for bitUSD collateral?

Should we ask BM to allow shorting of bitAssets by any other bitAsset?
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Offline fuzzy

Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #6 on: May 20, 2015, 07:10:11 AM »
I really like your idea starspirit.....as long as there is collateral, we can bring as much bitgold or bitsilver into existence as we like without the limitation of needing two parties that have a different view of the future price of bts. So if my Bts was worth 2 bitgold, I could bring 1 bitgold into existence, loan it to myself and use it to buy something else or keep it? If bitgold went up in price relative to bts, could I buy more bts, close the position and keep the difference in bitgold? If I bought BItSilver with the bitgold, I need to buy back enough bitgold at some future point to cover the loan and release the bts collateral?

Sorry, I find the web of consequences with this stuff and the implications of changing relative values so hard to get my head around!

Yeh...it becomes pretty complex.
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Offline starspirit

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Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #7 on: May 20, 2015, 08:19:39 AM »
I really like your idea starspirit.....as long as there is collateral, we can bring as much bitgold or bitsilver into existence as we like without the limitation of needing two parties that have a different view of the future price of bts. So if my Bts was worth 2 bitgold, I could bring 1 bitgold into existence, loan it to myself and use it to buy something else or keep it? If bitgold went up in price relative to bts, could I buy more bts, close the position and keep the difference in bitgold? If I bought BItSilver with the bitgold, I need to buy back enough bitgold at some future point to cover the loan and release the bts collateral?

Sorry, I find the web of consequences with this stuff and the implications of changing relative values so hard to get my head around!

You are simply borrowing in the bitAsset, with BTS as collateral. You would self-create your loan in bitGold if you thought bitGold was going to be the cheapest source of funding for your loan (i.e. decline in price). Your financial exposure depends only on where you invest those funds, and how that performs relative to bitGold, because eventually you have to buy back the bitGold to cancel the loan and release your BTS (*). You are never exposed to profit or loss from the price movement of bitGold relative to BTS. The BTS just sits there as collateral waiting for you to reclaim, and you just need to make sure you keep it topped up as necessary if it falls in value relative to the size of your bitGold loan, so that your loan doesn't get margin called.

To help understand this, when you self-create the bitAsset loan, you are at that point equally long and short, which is a neutral position. You are not exposed to price movement one way or the other, and you can cancel the two positions at any time. Its only when you exchange the bitGold funds for something else, that you are exposed to movements in bitGold because eventually you have to buy it back to cancel your loan. You have not taken any position at all between bitGold and BTS.

To xeroc's point, if you decided to specifically sell the bitGold for bitUSD, yes it would be similar to shorting bitGold with bitUSD collateral. But this is much more general than that -  instead you could decide to invest or spend the bitGold wherever you like, as long as you maintain collateral.

This is all possible with BitAssets today, we've just not promoted it this way. And if we think about it in these terms, it suggests new ways to think about the product design.

(* Technically, AFAIK, in the current system it is not possible to self-cancel a long position against your short position, and release the BTS, although I would propose this feature to allow exactly what is discussed above. Instead at the moment there is a more convoluted way to achieve the same end result - you need to cover by buying bitAsset in the market from the BTS collateral, returning the residual BTS, and then you would need to sell your long bitAsset separately for BTS to get your original BTS holding back.)

Offline Helikopterben

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Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #8 on: May 20, 2015, 12:40:30 PM »
How do you know what price to use to create the bitasset without a counterparty?  Price feed I suppose?

To help understand this, when you self-create the bitAsset loan, you are at that point equally long and short, which is a neutral position. You are not exposed to price movement one way or the other, and you can cancel the two positions at any time.

Would it not be possible to still get margin called if the amount of collateral falls below the amount needed to redeem the bitasset?

Offline bytemaster

Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #9 on: May 20, 2015, 01:32:40 PM »
You can always "self short" which is what he is saying.

BitUSD backed by BTS  is not fungible with BitUSD backed by BitGLD.      In a BTS black swan you need to settle BitUSD backed by BTS but not BitUSD backed by BitGLD. 

In other words, the quality and risks of the collateral impact the nature of BitUSD.   Having a "basket of different types of collateral" means there is no natural way to settle the market in a Black Swan.

Given a bond market that allows individuals to lend BitUSD backed by BitGLD the problem goes away. 

So far the only thing "different" I see is removing the ability of BitUSD holders to call the loan on demand.   Removing this ability to call the loan creates a power struggle that pushes BitUSD below the peg and potentially to 0.

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Offline merivercap

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Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #10 on: May 20, 2015, 04:10:11 PM »
Its time we lost a lot of our old thinking and look differently at what our offering can provide to the world. Its time we stopped talking about bitAssets as CFDs (of which its only a mutated version anyway). There is no need to invoke the requirement that currency is created by speculative shorts. There is no need for all currencies and assets to be based on a one-size-fits-all bitAsset structure. They had a place once, but the external world does not care for and may even fear these technical curiosities. It wants familiar and better services offering greater freedom and flexibility. BitAssets are so much more than these things, and thinking of them in this way is heavily constraining their required evolution, and our path to self-funding profitability.

What is a bitUSD? Its a transferable token that represents a collateralised USD loan to a set of borrowers. Anybody can borrow in bitUSD, for any purpose, by providing acceptable digital collateral (*i). Anybody can use their borrowing as a margin loan if they choose to buy other digital assets, including BTS (*ii). Anybody can use the funds for market-making income by switching between bitUSD and real USD(*iii). Anybody can use the transferable token as a substitute USD.

The bond market (to come) is a way to lend and borrow USD at different terms. Again these USD funds can be used for any purpose as long as collateral is provided (*iv).

Combined, these services provide competition against Bitfinex, Poloniex, and others, with the advantages of eliminating exchange risk, allowing general purpose loans, and allowing loan receipts to be used as a substitute stable currency.

The trading exchange (to come) is a way to take margined positions on speculative assets. These can either be done in derivative form (expiry of instruments) or traditional CFD form (with an intermediary taking a spread). But the current BitAsset structure is not ideal for these instruments and needs to be discarded (*v). For a start, bitUSD should be the currency of denomination, not BTS. This service would compete against every asset exchange in the world with the advantage of eliminating exchange risk and lowering costs.

Unshackle the existing bitAsset paradigm, and suddenly we may see whole new ways to compete and earn profit. I see the potential for a more rewarding roadmap. It's not constant and evolves. But I think a roadmap on the services we are striving to offer is critical to making the right choices about our product design.

(*i Self-create a bitUSD by depositing the required collateral, sell the bitUSD for real USD funds)
(*ii Want leverage to BTS? Use the real USD funds to buy more BTS. Or why not BTC or LTC or DASH....)
(*iii Self-create bitUSD, sell bitUSD for real USD at premium, buy back at discount, etc)
(*iv Self-create a bond by depositing the required collateral, sell the bond for bitUSD or real USD funds).
(*v Require bitUSD deposit/margin accounts, leverage and long/short symmetry.)

I was thinking about what exactly bitUSD is when explaining the idea of contract for difference & BitAssets, and came to a similar notion without the idea of 'loans'.  I would describe a bitUSD as a token representing the value of USD, collateralized by digital assets. 

BitUSD does not have to be borrowed or lent.  Loans are an additional mechanism that can be implemented on top of any digital asset and was planned for the future with the Bond market.  I think part of the confusion in the earlier designs was to mix this idea of loans & yield into the design rather than think of BitUSD as just a token representing a real world value tracked by an appropriate amount of collateral for redemption.

I think the contract for difference design is fine when you have self-shorting because you essentially create bitAsset without having to be a speculative short.    I think it's great to think about a more simple design and I'll put more thought into it, but the current contract for difference design should work fine granted there are some tweaks. 

One simple way to create BitUSD is to specify an amount of BitUSD and post collateral against it.  Remember collateral will fluctuate against it so the same considerations of pricing as in the contract for difference model apply.   If the collateral amount falls below the amount of BitUSD, you can someone how force the destruction of the BitUSD so the token is always backed by the appropriate amount.   (I was thinking about the contract for difference model the same way and proposed forcing settlement when the 'shorts'/BitUSD creators fall below the 100% collateral amount.  It's a softer settlement feature, but the effect is the same.  Because of volatile BTS pricing and the low collateral amounts speculators will often post, settlement via undercollateralized positions will have a consistent flow.)  Anyways I'll think about this more later when I have more focus time...
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Offline merivercap

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Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #11 on: May 20, 2015, 04:38:59 PM »
Oh BTW... re: self-short... you still have the issue of shrinking collateral so it's not risk-less.  I was going to discuss that when expanding on the contract for difference explanation the other day.   Anyways.....both designs probably become very similar in the end...
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Offline starspirit

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Re: Thought for the Day: The BitAsset Paradigm needs to shift
« Reply #12 on: May 20, 2015, 10:49:29 PM »
You can always "self short" which is what he is saying.

BitUSD backed by BTS  is not fungible with BitUSD backed by BitGLD.      In a BTS black swan you need to settle BitUSD backed by BTS but not BitUSD backed by BitGLD. 

In other words, the quality and risks of the collateral impact the nature of BitUSD.   Having a "basket of different types of collateral" means there is no natural way to settle the market in a Black Swan.

Given a bond market that allows individuals to lend BitUSD backed by BitGLD the problem goes away. 

So far the only thing "different" I see is removing the ability of BitUSD holders to call the loan on demand.   Removing this ability to call the loan creates a power struggle that pushes BitUSD below the peg and potentially to 0.
Dan, this misunderstands the intent of the post.

The purpose of this post is a thought-piece to offer a wider perspective of bitAssets and how they could be used. In turn, that could guide the way we describe bitAssets in our marketing as well as their future design. This OP was never structured as a design proposal. Discussion of settlements, black swans etc is not relevant to the message, so their absence does not imply anything about proposed design.

The main (but not only) message is that bitAssets can be issued in a way that satisfies a more compelling and broader market need than simply offering leverage to BTS bulls. It can be issued to create loans for margin lending or any other purpose, or to earn market making spreads between bitUSD and real USD. The first is a borrowing motive, and the second is an income motive. We have a new way of describing bitAssets to the public and for marketing the short side without having to rely on the motive of BTS bulls. And we may wish to evolve the design to better suit those ends.

The question of what design implications this has for bitAssets is a secondary question which I will raise (in detail!) separately.

Oh BTW... re: self-short... you still have the issue of shrinking collateral so it's not risk-less.  I was going to discuss that when expanding on the contract for difference explanation the other day.   Anyways.....both designs probably become very similar in the end...
Agree, and as you can see I raised that you still need to manage the collateral. However the borrower does not profit or lose from this, as they would have held this collateral in their own hands anyway.

You lost me at CFDs.

Contracts for Difference (CFD's).  Maybe that helps :)
Ahh, yeah...sorry about that...merivercap recently gave a really good run-down of CFDs here...
https://bitsharestalk.org/index.php/topic,16391.0.html
« Last Edit: May 20, 2015, 10:51:45 PM by starspirit »

 

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