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?

Mathematically, I believe it is a natural consequence. Here's the argument:

**From game theory, there are two possible moves:**1) Create smartcoin (short)

2) Destroy smartcoin (settle)

We need to make a game such that the rules of the game encourage creation and destruction such that value is maintained.

Now, like all currencies, you can choose how you want to maintain value. You can have a centralized bank/group of people controlling supply (Federal Reserve), or you can have a fix value as currencies that are on the "Gold Standard." For the sake of merchants and liquidity, BitShares has made the decision that 1 smartcoin should always be redeemable for 1 underlying asset of BTS. That is, BitShares is on the "

**Gold Standard**." (well, technically, bitGOLD is on the "gold standard," but you get what I mean

) This also means that a centralized group of people are NOT needed, and thus you can rely on decentralized data (feed) to maintain your gold standard (versus the federal reserve)

So now that BitShares is on the Gold Standard, what should the rules be such that creation and destruction incentivize the gold standard?

**General rules:**1) When in oversupply, destruction (settling) should be incentivized

2) When in undersupply, creation (shorting) should be incentivized

We need to come up with a system, on a blockchain, that does that. There are really one two rules that can possible be implemented. However, the optimum implementation parameters are unknown and are thus parametrized in BitShares. However, these specific rules MUST be followed, as there really is no other way to achieve our goal given the boundary conditions.

**Destruction rule:**1) At any time you are allowed to destroy a smartcoin by exchanging 1 smartcoin for its value in underlying asset

BitShares Implementation: Since underlying value asset is not determined within our system, we need to pull it from external sources that actually trade real versions of the underlying asset. Thus, settlement price should be a function of external price feed.

Arbitrage Profit for enforcing the rule: Finite and the difference between what you can buy the asset for now and what you can settle it for.

Long term profit: None if performed via arbitrage.

Risk to settler: None, besides change in feed between settlement request and execution (see below)

To reduce risk of manipulation via a "sneak attack" on the market: time delay between declaring a settle and settle

To reduce the risk of manipulation by "buying out" the entire market: settlement limits volume to a % of the total volume

**Creation rule:**1) You can create (short) at any time to yourself

Implementation: Shorting to yourself at any time is allowed as long as you maintain collateral so that the smartcoin you create is "backed" by something of value

Arbitrage Profit: None

Long term Profit: Infinite and based on the difference in growth rate between smartcoin and BTS.

Risk: uncertainty in the future value of smartcoin relative BTS.

**Outcome of rules:**Settlers (longs) have zero risk; shorts have non-zero risk.

**Therefore, shorts should sell to longs at a premium**. The price of this premium is a function of variance in the expected BTS growth rate relative to the underlying asset as well as the variance in the premium itself.

There is one issue I've been struggling with for months:

**Problem:**Mathematically, the value of the premium shorts sell to longs is a function of expected future variance in the value of that same premium - which makes it very difficult to calculate. However, markets do this all the time - it's basically pricing the derivative of a derivative. It's like trading options of VIX.

http://sixfigureinvesting.com/2010/01/trading-vix-options/**Conclusion:***Given the boundary condition of "BitShares wants to be on the Gold Standard," it directly follows that 1 smartcoin > underlying asset and forced settlement must exist.*