Author Topic: Discussing the problems with bitUSD (smart coins)  (Read 10014 times)

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Offline monsterer

Discussing the problems with bitUSD (smart coins)
« on: November 23, 2015, 11:46:47 am »
Q) Why is there a problem implementing pegged assets?

A) The primary answer is that there can be no redeemability to the real asset on chain, for obvious reasons (since fiat/gold/silver/oil are not digital in the first place).

Q) Why is bitshare's current solution inadequate?

A) Those who borrow bitUSD from the system are at much higher risk than those who buy it from the market because the borrower must actively maintain his collateral and can get margin called by the system if the feed price moves enough

Q) What effect does this have on the price?

A) The borrower is forced to price his risk into the sale price of the bitUSD he borrows from the system - this leads to a situation where the price of bitUSD will always trade at a premium compared to the feed price, this damages the viability of the product as a whole.

Q) Is there another design which doesn't have the same biased risk profile, or is this just a natural consequence of not having redeemability?

A) Discuss
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Offline xeroc

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #1 on: November 23, 2015, 12:33:44 pm »
Your statements are absolutely correct and have been communicated that way for quite some time .. it's called 'floor or parity' ...
It's not really a "flaw" in the system .. it is how it designed and supposed to be working ..

In order to be safe against falling prices you will always need to have more then 1x collateral ..
The only thing that you can do differently is .. also allow other kinds of assets to be used as collateral ... much like what MAKER is doing with the DAI on ethereum ..
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Offline bitcrab

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #2 on: November 23, 2015, 12:36:34 pm »
as there is no  redeemability, users regard bitUSD as an anti-vulnerability asset, not an currency that has equal value as USD, this lead to all the results.

 

Offline bitcrab

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #3 on: November 23, 2015, 12:45:59 pm »
Your statements are absolutely correct and have been communicated that way for quite some time .. it's called 'floor or parity' ...
It's not really a "flaw" in the system .. it is how it designed and supposed to be working ..

In order to be safe against falling prices you will always need to have more then 1x collateral ..
The only thing that you can do differently is .. also allow other kinds of assets to be used as collateral ... much like what MAKER is doing with the DAI on ethereum ..

I always considered whether Bitshares can introduce BTC as mgwBTC in NXT and use it as collateral to generate other bitassets such as BitUSD, BitCNY.

Offline Empirical1.2

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #4 on: November 23, 2015, 01:00:18 pm »
NuBits have been relatively successful even though there is no redeemability onchain.

The fact that their market makers have provided liquidity for over a year through all of BTC's fluctuations give the market confidence that they are worth the short term risk especially during BTC downturns/high volatility.

Uphold (formerly BitReserve) has it's assets in a traditional bank but it too has been successful and is supposedly the fastest growing money platform in the world.

They've demonstrated that providing BitAsset backing is secondary to providing liquidity.

Ergo BitAssets have failed primarily due to not having a mechanism for providing reasonable liquidity around the peg.


« Last Edit: November 23, 2015, 01:09:41 pm by Empirical1.2 »
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Offline abit

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #5 on: November 23, 2015, 01:25:15 pm »
Your statements are absolutely correct and have been communicated that way for quite some time .. it's called 'floor or parity' ...
It's not really a "flaw" in the system .. it is how it designed and supposed to be working ..

In order to be safe against falling prices you will always need to have more then 1x collateral ..
The only thing that you can do differently is .. also allow other kinds of assets to be used as collateral ... much like what MAKER is doing with the DAI on ethereum ..
In regards to "other kinds of assets", if you mean UIA/IOU, it's difficult to determine the value of collateral as well as to lock/force-sell the collateral, if you mean MPA, it will need even more liquidity -- a chicken-and-egg issue.
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Offline JonnyB

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #6 on: November 23, 2015, 01:33:42 pm »
Q) Why is there a problem implementing pegged assets?

A) The primary answer is that there can be no redeemability to the real asset on chain, for obvious reasons (since fiat/gold/silver/oil are not digital in the first place).

But bitcoin is on a chain and BItBTC is still illiquid , there is no reason anyone would hold bitbtc as its more expensive, less secure, not widely used, iliquid, subject to margin calls/ forced settlement





Q) Is there another design which doesn't have the same biased risk profile, or is this just a natural consequence of not having redeemability?

A) Discuss


Yes as someone else in this thread has already said other assets should be able to be held as collateral.
The Ultimate design in my opinion would be real bitcoin being locked into the bitshares blockchain as a sidechain and then this could be used for collateral instead of BTS.
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Offline Empirical1.2

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #7 on: November 23, 2015, 01:37:00 pm »
"BitUSD would have as much liquidity as Nubits if it was as easy to use for the past year."

Wrong. NuBits liquidity has almost nothing to do with its ease of use.

It is artificially provided by liquidity pools set up for that purpose which I believe were/are subsidized/receive additional compensation from NuShares holders to provide that service.

http://nulagoon.com
« Last Edit: November 23, 2015, 01:41:16 pm by Empirical1.2 »
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Offline cube

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #8 on: November 23, 2015, 01:43:17 pm »
Q) Why is there a problem implementing pegged assets?

A) The primary answer is that there can be no redeemability to the real asset on chain, for obvious reasons (since fiat/gold/silver/oil are not digital in the first place).


Although the 'redeemability' is not in the form of real physical asset, the peg could work if the underlying backing asset - a digital asset called 'bts', is strong enough.  Unfortuantely bts price has been going down and at times fast decline. This lead to sudden margin calls for the under collaterised.  There is a general lack of confidence in bts.

I think a weak bts is part of the reason for the peg not working.
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Offline cube

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #9 on: November 23, 2015, 02:03:55 pm »

In fact, I don't even know how to create a paper wallet, and until I do, I'm cash (BTS) on the sidelines, waiting for the next wiz kid who is smarter than me delete his cash cache


You can copy out the three private keys ('owner', 'active' and 'memo') and print them on paper.  The private keys are displayed in the 'Account->Permission' page.
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Offline Empirical1.2

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #10 on: November 23, 2015, 02:07:43 pm »
"BitUSD would have as much liquidity as Nubits if it was as easy to use for the past year."

Wrong. NuBits liquidity has almost nothing to do with its ease of use.

of course, but I did not imply such causation

I'm not saying that Nubits is easy to use, I'm saying that BitShares is not

and of course, something difficult and complex is capable of having much liquidity as well as something easy to use

correlation does not cause hangovers:

Fact is, that if our wallet was easier to use (back up, documented, etc), then I'd be providing $15k liquidity in the bitUSD and CNY markets myself right now.

Fair enough. Without the added explanation that independent market makers would most likely provide comparable liquidity if BTS was easier to use, I thought you were implying ease of use was responsible for NuBits liquidity.

I still disagree though. Most people are looking to hedge into dollar stable product when BTC is clearly declining. I think Monsterer explained it recently, but that makes it very hard to maintain a tight peg in a profitable way, hence why those dollar products that are subsidized to provide that liquidity but as a result aren't fully backed are likely to have more success.

The problem with market making is its only profitable in mean reverting markets (sometimes referred to as ranging), as soon as you get a strong trend the market maker will lose money because it will end up with an unbalanced inventory of assets. That risk makes designing a good one very very complicated.
« Last Edit: November 23, 2015, 02:10:58 pm by Empirical1.2 »
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Offline giant middle finger

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #11 on: November 23, 2015, 02:11:40 pm »
dollar stable product

that's what it is

but is stability more important than security here?

maybe, until MtGox...maybe not, and Nubits is proving this.

Nubits seems to be monetizing stability, while we have mad security

I guess we are truly different, and the only way to be "better" is to provide equal "stability" while advertizing our "unique counterparty-risk free security"
« Last Edit: November 23, 2015, 02:15:37 pm by giant middle finger »

Offline Empirical1.2

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #12 on: November 23, 2015, 02:17:15 pm »
dollar stable product

that's what it is

but does stability = security?

maybe, until MtGox

Yup. But the MtGox moment can take a while...
Also there's no guarantee they won't just move to the next Mt. Gox. Right now the nearly finished DEX is waiting for that kind of catalyst. Cryptsy is clearly having problems atm, it will be interesting to see if that can be leveraged to the benefit of open ledger or if business just moves to another equally risky Centralized exchange but with the good liquidity.

Edit: We could consider adding both types of products, with a warning attached to the much less secure but more liquid one. I believe it was BM who originally suggested that but many including myself were against it at the the time, (because when the risky one invariably fails it will reflect badly on BTS as a whole. But perhaps if there are clear warnings.)
« Last Edit: November 23, 2015, 02:25:06 pm by Empirical1.2 »
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Offline monsterer

Re: Discussing the problems with bitUSD (smart coins)
« Reply #13 on: November 23, 2015, 02:28:08 pm »
It's not really a "flaw" in the system .. it is how it designed and supposed to be working ..

How can a pegged currency be designed to trade above parity? This seems like a logical fallacy.
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Offline xeroc

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #14 on: November 23, 2015, 02:33:35 pm »
How can a pegged currency be designed to trade above parity? This seems like a logical fallacy.
Please define "stable"!
Please define "peg"!

If the peg means that the price of a token highly correlates with the underlay .. then nubits is as good as bitUSD .. nubits trades AROUND parity and bitusd trades ABOVE parity .. both correlated with USD
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