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Offline starspirit

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bytemaster and others interested,

*** The Short Version ***

I'm proposing an approach to bitAssets, for assets not intended as currencies, that is more like a traditional exchange-traded fund (ETF). This would be like holding the real asset, but where the underlying number of units changes gradually over time according to a market-determined funding rate, that could be positive or negative. Due to 2-way arbitrage, the tracking token would tend to centre around fair value, while still having some spread for liquidity.

I'm looking for interest in the concept, as a possible alternative to BTA 2.0 for these types of assets, with a view to writing up a full design concept for further review.

**** Longer Version ***

It seems to me that there are different goals for tokens to be used as currency in goods and services transactions (bitUSD, bitCNY etc) versus tokens that are intended to simply behave like holding and storing an asset (e.g. oil or other commodities, stocks and stock indices, etc). This suggests that the optimal structure for each class may also be different.

bytemaster, you seem to be taking the bitAsset 2.0 design along the path of having a continuous premium to parity to accommodate a cut to payment facilitators when currencies are used with merchants. As you know, I am not sold on this yet, but we can take this up in the other thread. In any case, I believe this line of reasoning has no relevance to the second class of tokens above, which will never be used for goods and services.

I believe that the most useful design in these cases is something similar to the way that exchange-traded funds (ETFs) behave. An ETF allows investors to receive the performance of the underlying assets held in the fund. That includes any earnings or costs associated with the holding of those assets. To the extent those earnings are reinvested, or expenses paid from the assets of the fund, the effective number of units of the underlying asset per share in the ETF varies over time. But that does not matter to the investor. What matters to them is that the returns on the fund are a near perfect proxy for having held the assets themselves.

I've designed a concept that constructs a bitAsset to behave in this manner, although of course its construction is by necessity different to an ETF, representing decentralised trades between parties rather than a security on a fund. The structure could even be used for currencies, as long as investors are buying as an investment exposure rather than for use in transactions. That's because there is a market-determined funding rate that adjusts the number of notional asset units of exposure per token over time, whether positive or negative. That is, its not a fixed exposure to the asset. The funding rate is determined by supply and demand, but these in turn will have at least some regard to external funding rates (or interest rates on currencies), providing an external linkage.

For non-transactional holdings, I think this structure is favourable to bitAsset 2.0 because it centres around the fair value of the underlying asset instead of at a premium, and arbitrage mechanisms act as a compressing force around the peg. This will give investors and traders exactly what they are looking for. [Edit: It also may pay a reinvested yield, just like the underlying asset, where net yields are positive in the external market].

I would like to know whether you would like to collaborate further on this concept if you see it fitting into the core BitShares protocols, and how to take forward. It still requires peer review, and no doubt some refinement. Interested in your view and that of anybody else interested in this approach.
« Last Edit: June 04, 2015, 12:24:30 AM by starspirit »

Offline maqifrnswa

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Re: An alternative to BitAsset 2.0 for tracking asset performance
« Reply #1 on: June 03, 2015, 12:50:28 AM »
Could you give a description of your idea?

ETFs track the underlying asset because the issuer guarantees that ETFs can be exchanged for the underlying asset. That is actually what BTA2.0 is promising; owning a bitasset means that I can trade it in any time for the underlying value of that bit asset.
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Offline starspirit

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Re: An alternative to BitAsset 2.0 for tracking asset performance
« Reply #2 on: June 03, 2015, 01:34:17 AM »
Could you give a description of your idea?

ETFs track the underlying asset because the issuer guarantees that ETFs can be exchanged for the underlying asset. That is actually what BTA2.0 is promising; owning a bitasset means that I can trade it in any time for the underlying value of that bit asset.
There are two key features that differ to BTA 2.0.

One is this design allows 2-way arbitrage like an ETF, forcing price near parity. BTA 2.0 only allows 1-way, thus the floating premium.

The funding rate also acts as a moderator of supply and demand, creating less severe movements in total issuance, because the token is able to more easily replicate the holding of the real asset. For example, BTA 2.0 on an asset where external yield rose to 5% would lose demand quickly because it has no way to adjust with the external environment (no yield). Users would choose to hold the real asset instead.

I will be happy to submit the design for criticism and peer review. But as it takes time to write up, refine and discuss, I would like to get an idea what support would such a design receive given the plans for BTA 2.0.

The key features of the construction are as follows:

- The funding rate is determined as the maximum that is acceptable to all open shorts
- Two way arbitrage is allowed between the collateral token (e.g. BTS) and the tracker tokens, subject to size-based fees
- Shorts can self-create above the funding rate, and self-cancel, to facilitate income generation from market-making


Offline maqifrnswa

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Re: An alternative to BitAsset 2.0 for tracking asset performance
« Reply #3 on: June 03, 2015, 06:56:39 PM »
I think that BM is listening, but probably won't do anything that requires a lot of time to explain. It should be something that can be explained in a few sentences.

I think we're both concerned about the same thing: Two way arbitrage.
BTA2.0 is only one way. My fear is BTA bubbles that will have to periodically grow and pop without a built-in feedback mechanism.


This article really summarizes how an ETF works, and is a good model for how BTA could work:
http://www.investopedia.com/articles/mutualfund/05/062705.asp

Quote
   Here's how arbitrage sets the ETF back into equilibrium. The ETF's trading price is established at the close of business each day, just like any other mutual fund. ETF sponsors also announce the value of the underlying shares daily. When the ETF's price deviates from the underlying shares' value, the arbitragers spring into action. If the underlying securities are trading at a lower price than the ETF shares, arbitragers buy the underlying securities, redeem them for creation units and then sell the ETF shares on the open market for a profit. If underlying securities are trading at higher values than the ETF shares, arbitragers buy ETF shares on the open market, form creation units, redeem them to get the underlying securities, and then sell the securities on the open market for a profit. The arbitragers' actions set the supply and demand of the ETFs back into equilibrium to match the value of the underlying shares.

Because ETFs were used by institutional investors long before they were discovered by the investing public, active arbitrage among institutional investors has served to keep ETF shares trading at a range close to the underlying securities' value.

Read more: http://www.investopedia.com/articles/mutualfund/05/062705.asp#ixzz3c1kHecJg
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« Last Edit: June 03, 2015, 06:59:28 PM by maqifrnswa »
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Offline Helikopterben

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Re: An alternative to BitAsset 2.0 for tracking asset performance
« Reply #4 on: June 03, 2015, 10:03:18 PM »
How would the 2 way arbitrage work without compromising decentralization?  From what I understand, you would need to be able to transfer an external asset into the internal exchange for the arb channel to be completed both ways.
« Last Edit: June 03, 2015, 10:05:05 PM by Helikopterben »

Offline maqifrnswa

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Re: An alternative to BitAsset 2.0 for tracking asset performance
« Reply #5 on: June 03, 2015, 11:06:23 PM »
How would the 2 way arbitrage work without compromising decentralization?  From what I understand, you would need to be able to transfer an external asset into the internal exchange for the arb channel to be completed both ways.

that's the problem :-( you can force close but you can't force short... i haven't been able to figure out a way to solve it unless holding BTS is seen as a profitable investment (BTS, as a DAC, generates more values than it spends on infrastructure and development), so people will short to gain leverage.
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Offline starspirit

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Re: An alternative to BitAsset 2.0 for tracking asset performance
« Reply #6 on: June 03, 2015, 11:47:55 PM »
How would the 2 way arbitrage work without compromising decentralization?  From what I understand, you would need to be able to transfer an external asset into the internal exchange for the arb channel to be completed both ways.
As for existing bitAssets, the collateral pool never holds the real asset, just obligations linked to the real asset and backed by collateral tokens. So the arbitrage is facilitated by conversions, at a "fair price", between collateral tokens (BTS) and the tracker tokens (e.g. bitOIL), in a similar (though not equal) manner to how 1-way settlement is intended to operate under BTA 2.0.

This article really summarizes how an ETF works, and is a good model for how BTA could work:
http://www.investopedia.com/articles/mutualfund/05/062705.asp
Thanks maqifrnswa. I have already built such mechanisms into the basic design concept, its just a matter of getting some interest in this style of product. What I'd really like to do is find a small team of people willing to work together to peer review, test feasibility, and help refine the processes. But I was looking for some show of support first.

How would the 2 way arbitrage work without compromising decentralization?  From what I understand, you would need to be able to transfer an external asset into the internal exchange for the arb channel to be completed both ways.

that's the problem :-( you can force close but you can't force short... i haven't been able to figure out a way to solve it unless holding BTS is seen as a profitable investment (BTS, as a DAC, generates more values than it spends on infrastructure and development), so people will short to gain leverage.

I believe this is possible as long as you have short orders in a queue, and you should always have short orders in a queue at some level of funding rate, because unlike bitAsset 1.0, it can be as low as they desire.

The key is to consider the wider motives of shorts, which as I've raised before (see https://bitsharestalk.org/index.php/topic,16427.msg210020.html#msg210020), should not be restricted to leveraging BTS to take advantage of bull markets. For example, a BTS holder can self-create a short in order to earn income from making a market in the tracker token, by switching between long the token and long the real asset, at discounts and premiums. If the funding rate is a lot lower than they would need to obtain this capital from external sources, their preference will be to obtain the funds by internal self-creation, and possibly even get paid for it. Other users may self-create shorts, sell the long token, and invest the proceeds in whatever manner they see fit. This is equivalent to a borrowing in the asset against their existing BTS collateral. There will always be some level at which they will want to do this if the funds can be obtained more cheaply than by borrowing externally by other means. Or other users may want to take a short in the asset against USD, by self-creating, selling the long token, and keeping the proceeds in USD. Again they will weigh up the cost of doing so against the cost of other types of shorts available in external markets. Note that in each of these examples, the shorts are not motivated to take additional exposure to BTS, and they do not do so.

Its possible short orders do not exist if there is a shortage of collateral units available to create more shorts, but I have a mechanism to restore parity in that rare circumstance also (or any circumstance where there happens to be an absence of short orders), that does not rely on arbitrage.

I'm happy to answer some more questions, but I'm really still looking for people to say they want this. Personally, I think its a no-brainer if we can do it.
« Last Edit: June 04, 2015, 12:14:38 AM by starspirit »

Offline starspirit

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Re: An alternative to BitAsset 2.0 for tracking asset performance
« Reply #7 on: June 04, 2015, 12:28:02 AM »
Added *** The Short Version *** to the OP:

I'm proposing an approach to bitAssets, for assets not intended as currencies, that is more like a traditional exchange-traded fund (ETF). This would be like holding the real asset, but where the underlying number of units changes gradually over time according to a market-determined funding rate, that could be positive or negative. Due to 2-way arbitrage, the tracking token would tend to centre around fair value, while still having some spread for liquidity.

I'm looking for interest in the concept, as a possible alternative to BTA 2.0 for these types of assets, with a view to writing up a full design concept for further review.

Offline monsterer

Re: An alternative to BitAsset 2.0 for tracking asset performance
« Reply #8 on: June 04, 2015, 08:46:06 AM »
I am interested in this design, for sure. I'm not sure I agree with bytemaster's 2.0 plan to have a lopsided class of assets, it just doesn't 'feel' right to me.
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