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Offline well.attenuated

Stregths of bitshares market vs vulnerability of BTS
« on: July 01, 2015, 09:38:38 PM »

Maybe there's something simple here that I am missing, maybe some of the regulars here can fill in the gaps:

First, 3 things to keep in mind: Please do not try to turn this thread into a debate about these 3 realities.

A)  The BTS collateral system inspires confidence that if a real-world asset revalues significantly, the corresponding bitAsset should maintain its market peg by increasing or decreasing the balance of BTS that that asset corresponds to.  We all know this of course as it is what validates the bitshares platform as a worthwhile cryptocurency.

B) The key vulnerability in the bitShares/bitAssets ecosystem has always been a significant drop in the value of the underlying asset (BTS), this is a very real possibility in an ecosystem with such a relatively small market cap.

C) In the event that the BTS market cap drops bellow it's tipping point, bitAsset shorts would be called and bitAsset holders would realize a significant increase in their underlying BTS balance - unfortunately these BTS would be worth much less. The asset holders would be forced into a large net long position in a now collapsing BTS; furthermore, confidence in the system would be shattered by the rapid calling of shorts and users rebalancing their portfolios out of a newly created BTS long.  The flooding of BTS previously locked up in collateral into the market with no influx of external capital (real world assets) would cause significant further valuation drops in BTS and more and more market peg would be broken.  Again, this is a known limitation/vulnerability that we all accept for the opportunity of investment.

My question is:

Why is the additional layer of abstraction in a more vulnerable cryptocurrency necessary in the first place? As far as I can tell, it only adds an unnecessary level of risk.

Real-world asset=BTC=BTS=bitAsset. 
All of these must retain value to ensure a transition from bitAsset to real-world asset or a gateway will not be able to function.

1) We have a bitAsset, this is "guaranteed" to represent a value-equivalent basket of BTS via held collateral.  OK
2) BTS must retain its value for the reason stated above. ~ Vulnerability
3) For BTS to retain its value BTC must as well.  Without BTC there are no BTS - no one is dealing with banking restrictions to convert asses into BTS.  This is however, largely safe as the size of the BTC market-cap makes it tamper-resistant to all but the largest (ie sovereign) players.

While the BTS market is impressive, the underlying altcoin exposes users to much more valuation risk.
Is there no way to build the bitshares market with 3x collateral directly onto BTC? Maybe through a decentralized sidechain? 

The downside to BTC denominated user issed assets like colored coins is that as an asset holder you trade risk 2 above for risk 1 - ie the issuer can  fail to acknowledge the value of the asset.
I haven't looked into it but my basic understanding of NXT is that it combines both of these risks: faith in user issued  assets (risk 1) and faith in underlying currency (risk 2).  But I don't care to understand NXT at this time so I don't care.

I would think a platform could exist that tracks ownership of digital assets on its own chain (using DPOS - I forgot that is also an important innovation to bitshares) and interfaces with the BTC blockchain to provide collateral to those assets.  The interest generate by shorting those assets could provide incentive to the delegates maintaining the chain.

There's probably something basic I am missing, maybe someone more familiar with the code knows?

Just my 0.02 bitUSD
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Offline monsterer

Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #1 on: July 01, 2015, 09:48:18 PM »
Is there no way to build the bitshares market with 3x collateral directly onto BTC? Maybe through a decentralized sidechain? 

BTC backing has been suggested as an alternative before, but the problem is getting real BTC into the blockchain is impossible and you cannot link the two existing chains together using atomic ops, so you either have to accept counterparty risk of having IOU BTC on the bitshares blockchain, or you have re-cast bitshares as a BTC side chain.
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Offline well.attenuated

Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #2 on: July 01, 2015, 09:57:33 PM »
What about one client with keys to both chains that send BTC and received assets in a single transaction?  Or would you still need some kind of escrow to prevent someone from modifying the client to make withdrawals without deposits?
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Offline monsterer

Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #3 on: July 01, 2015, 10:02:58 PM »
What about one client with keys to both chains that send BTC and received assets in a single transaction?  Or would you still need some kind of escrow to prevent someone from modifying the client to make withdrawals without deposits?

There was some discussion about that idea a while back, but I remain unconvinced this can actually work in practice... Welcome to the forum by the way! Good set of first post questions, too! :)
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Offline starspirit

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Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #4 on: July 01, 2015, 10:45:52 PM »
Smartcoins will be able to use collateral assets other than BTS, including user-issued assets (UIAs). However, as its hard to see what confidence might be placed (initially) in UIAs as collateral, in effect collateral will still be BTS or another token (e.g. bitUSD) that uses BTS as collateral. BTS would still be the necessary foundation collateral for the hierarchy of assets, and thus all Smartcoins would share this vulnerability to different extents.

I think the only way around this is to have alternative assets represented on the bitShares block-chain, that could serve the function of collateral, and perhaps allow diversification across these. I personally think this is a direction we must go. Open up the platform for the universal trading of any digital or digitisable asset. We need the right tech to get there though.
« Last Edit: July 01, 2015, 11:08:58 PM by starspirit »

Offline Ander

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Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #5 on: July 01, 2015, 11:18:16 PM »
BTS decline 94% from peak to trough, between Sept 2014 and April 2015. 

Despite that decline, holders of bitAssets were still able to get the correct value back out of the system.  (Give or take a couple percent, and transaction fees).  In fact, They could even sell at times near the bottom for a 5-10% premium.


The conclusion I draw from this is that the use of BTS as a collateral does not add much risk at all to bitAsset holders.  The system already handled the nightmare scenario.  (Of course, shorts of bitAssets got wrecked, as required by the system, given the BTS price decline.  A bug caused them to be unable to cover for a period, which exacerbated the problem.  But bitAsset holders were perfectly fine).
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Offline Ben Mason

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Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #6 on: July 01, 2015, 11:27:05 PM »
This is really compelling starspirit. I know you brought it up before....I always thought BTS had to be the sole collateral...

If other assets are to act as collateral, surely BTS must be senior as it underpins the whole system?  Therefore, other form of collateral are UIA's backed by something tangible.

I could easily be way off base here.....

Offline Ander

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Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #7 on: July 01, 2015, 11:36:05 PM »
If other assets are to act as collateral, surely BTS must be senior as it underpins the whole system?  Therefore, other form of collateral are UIA's backed by something tangible.

That makes sense to me.  As long as BTS is the underlying collateral, UIAs backed by BTS could then be used to back something.  It kindof sounds like you are building a house of cards, but really you are just just using different denominations of BTS to back something. 
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Offline arhag

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Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #8 on: July 02, 2015, 12:37:53 AM »
BitAssets directly or indirectly using UIAs as collateral (actual UIAs not just privatized BitAssets) are not backed by BTS. All other BitAssets are ultimately backed by BTS though. An example of a BitAsset backed by a UIA could be a BitBTC backed by a SOMEBANK.USD UIA (which is an IOU for SOMEBANK's dollars). Another example could be a BitUSD backed by BTCIOU UIA where BTCIOU is redeemable for BTC by some multisig group that is holding the BTC reserves on the Bitcoin blockchain. A poor example would be BitBTC backed by BTCIOU or BitUSD backed by SOMEBANK.USD, because in those situations it makes absolutely no sense to hold the BitAsset when you could accomplish the same goal by just holding the collateral UIA with less overall risk.

The disadvantage of having a BitAsset backed by a UIA is that you are exposed to counterparty risk with respect to the entity that is backing the value of the UIA (the UIA issuer). On the other hand, despite the added counterparty risk, the value of that UIA might be less volatile relative to the asset to which the BitAsset is pegged compared to BTS, which might reduce black swan risk. So I guess in those situations you have to ask yourself which is more risky: the reserves of the UIA issuer being stolen/compromised/hacked/seized/mismanaged or the market price of BTS dropping significantly (like more than 50%) in a very short period of time.

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Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #9 on: July 02, 2015, 12:52:17 AM »
The point of a bitasset is to reduce counterparty risk. Using a UIA as collateral for a bitasset makes no sense.

When an asset is backed by the networks native currency I'm concerned that volatility might erode the value of the collateral, although this I can see in real time and should have ample time to get out if need be. When the asset is backed by a central issuer as with Mt. Gox, I'm concerned that the collateral might not be there at all. I'll pick the lesser of the two evils unless I'm absolutely sure that the issuer is trustworthy or will be bailed out by the government.

If you are going to back a bitasset with a UIA you might as well have the same issuer another UIA for the same underlying asset as the proposed bitasset.


Offline starspirit

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Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #10 on: July 02, 2015, 01:56:08 AM »
BTS decline 94% from peak to trough, between Sept 2014 and April 2015. 

Despite that decline, holders of bitAssets were still able to get the correct value back out of the system.  (Give or take a couple percent, and transaction fees).  In fact, They could even sell at times near the bottom for a 5-10% premium.

A deep bear market is a good test, but is not the nightmare scenario. The nightmare scenario is a price gap or discontinuity, such as when BTC collapsed from the $500-600 region to the $100 region in a matter of hours in February 2014, due to forced unwinding and insufficient market depth to meet the selling. Such flash crashes do happen from time to time in other markets too. These are rare (yet not inconceivable) events.

Offline emigalotti

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Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #11 on: July 14, 2015, 02:57:02 AM »
The point of a bitasset is to reduce counterparty risk. Using a UIA as collateral for a bitasset makes no sense.

When an asset is backed by the networks native currency I'm concerned that volatility might erode the value of the collateral, although this I can see in real time and should have ample time to get out if need be. When the asset is backed by a central issuer as with Mt. Gox, I'm concerned that the collateral might not be there at all. I'll pick the lesser of the two evils unless I'm absolutely sure that the issuer is trustworthy or will be bailed out by the government.

If you are going to back a bitasset with a UIA you might as well have the same issuer another UIA for the same underlying asset as the proposed bitasset.
Excelent answer, I think like you.

Offline starspirit

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Re: Stregths of bitshares market vs vulnerability of BTS
« Reply #12 on: July 19, 2015, 12:03:35 AM »
BTS decline 94% from peak to trough, between Sept 2014 and April 2015. 

Despite that decline, holders of bitAssets were still able to get the correct value back out of the system.  (Give or take a couple percent, and transaction fees).  In fact, They could even sell at times near the bottom for a 5-10% premium.

A deep bear market is a good test, but is not the nightmare scenario. The nightmare scenario is a price gap or discontinuity, such as when BTC collapsed from the $500-600 region to the $100 region in a matter of hours in February 2014, due to forced unwinding and insufficient market depth to meet the selling. Such flash crashes do happen from time to time in other markets too. These are rare (yet not inconceivable) events.
For further reason not to underestimate this risk, note that BTC experienced a 47% decline within 15 minutes on the btc-e exchange today. The fact that BTS has not suffered such a rapid decline to date is no evidence to think we are safe from it.

 

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