Author Topic: Discussing the problems with bitUSD (smart coins)  (Read 10013 times)

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Offline merivercap

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #75 on: November 27, 2015, 07:05:44 am »
You believe because one side gets margin-called and has to actively maintain collateral that that creates a premium.  I don't believe that. 

With respect, you're wrong. I can prove it:

Lets call the risk of getting margin called Rm and the risk of a black swan Rb. Now, each of these risks has a probability associated with it (call them Pm and Pb)... Even if they are very difficult to quantify, we can say with certainty that Pm > Pb at all times.

Equilibrium price in the bitUSD market is the feed price. When I borrow bitUSD from the market I take on Rm. When I buy bitUSD from the market I take on Rb. If I borrow bitUSD and then sell it at the feed price, I'm saying Rm == Rb, which is obviously a false assumption. If we know that Pm>Pb at all times, then as a rational trader I must sell by borrowed bitUSD greater than the feed price, to make sure I satisfy Pm>Pb.

That's not really a proof, but it's just your hypothesis about what creates the premium.   I don't agree that that causes the premium and if anything it would have a negligible effect.   The risk of margin-calls should not be a significant risk to a trader, especially those with sufficient collateral.  Price risk is the main concern for both long and short.  When each side enters a trade they will be mainly concerned if the market is up or down when they want to exit.   They should already take into consideration any other risk before entering a trade.

What premium are we talking about anyways?   Just want to make sure we are taking the same perspective.   I haven't been trading and have been speaking from a theoretical standpoint..  but currently I see ask for BTS below the settlement price/price feed on openledger.   I see an ask of 387,587 BTS at .0030 USD/BTS and the settlement price  at .0032 USD/BTS.  This  makes sense to me because the Margin Call price is .00291 USD/BTS when I want to open a short....so the SQP should be set to the price feed because buyers know there will be actual margin call settlement at .00291 USD/BTS instead of .0032 USD/BTS so there is no reason to bid anywhere near the higher 'Settlement Price' ...  That's the biggest issue right now.   

Note:  Furthermore, we are trying to analyze all this in an illiquid internal market of maybe 20-30 traders?  The price feed is just an estimate of prices on various exchanges.  The  pricing differences between exchanges can fluctuate 10+% so even trying to make a judgement about if there is a premium/discount between any two exchanges is questionable purely on volatility uncertainty.  You also have different levels of fees (transaction/gateway), liquidity, custodial risk, ease-of-use etc., centralized vs decentralized, leverage/no leverage...  so there should be a lot of factors in play.   Beyond that we have bear market and bull market pressure that will effect premiums/discounts esp in leveraged markets...as well as the potential of forced settlement hovering over shorts in the internal exchange.... those are all factors.

I do agree very lowly-collateralized traders may have more margin-call/volatility/optionality risk and hence would not enter a trade if their own risk preference is not met.  As collateral increases, the volatility risk should become negligible.  Those that argue for random walk theory would argue volatility risk would not matter anyways because the probability that an asset goes up should be equal to the probability it goes down, but that's for another discussion.  Either way these issues may effect liquidity and the price someone is willing to enter.  As stated above premiums/discounts are based on comparing trading on one exchange to another and there are a variety of other factors at play there....   

Bottomline:  I say fix the SQP to equal the price fee in this illiquid market and you'll see trading happen around the price feed....
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Offline monsterer

Re: Discussing the problems with bitUSD (smart coins)
« Reply #76 on: November 27, 2015, 11:29:48 am »
Even if you don't agree with my analysis for the cause of the premium, you must acknowledge that it was designed to trade at a premium. I think this is suboptimal.
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Offline merivercap

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #77 on: November 27, 2015, 09:34:32 pm »
Even if you don't agree with my analysis for the cause of the premium, you must acknowledge that it was designed to trade at a premium. I think this is suboptimal.

The only feature in the design that intentionally creates a premium is the forced settlement feature because that directly effects the price.  When you create any price floor or guarantee for one side of traders, you will create a premium.   Aside from that, premiums are relative to something.   In our case it's a premium compared to a weighted average of centralized exchanges that have a variety of differences compared to the internal exchange.   Trader preferences between a centralized exchange and the internal exchange may cause a premium, but the internal exchange is currently  too illiquid to make any determination. 

Overall the design may be suboptimal based on liquidity so there may be less participants than we could have, but nothing really is optimal.   Any amount of fees are suboptimal.. lack of leverage is suboptimal (but you have to balance with systemic risk).. confusing GUI's are suboptimal... lack of awareness is suboptimal.. centralized exchanges are suboptimal...  imbalances between long & short are suboptimal...we should improve all these areas as much as we can so if there is a better design I'm all for it.  Maybe somehow allowing someone to short BTS will create a balance you're looking for, but I haven't thought about if that would be easy to do or not.   

Anyways I see areas to improve the design, liquidity, and potentially even premiums, but I don't see any deal-breakers.

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #78 on: November 27, 2015, 10:14:16 pm »
Even if you don't agree with my analysis for the cause of the premium, you must acknowledge that it was designed to trade at a premium. I think this is suboptimal.

I agree completely.  Bitassets are uttterly useless at the moment. I am beginning to realize this more and more as I try and pitch them to exchanges that are interested in integrating them. I am not sure if the system worked better before the 2.0 launch, but I do know that BitCNY was well pegged and Transwiser did not have the issues that it is running into now.

The problems as I see them:
  • BTS price continues to fall. The declining value of BTS cannot support the creation and maintenance of bitassets
  • The market mechanics are not well documented and over complicated for even the most advanced traders
  • The market mechanics are skewed towards bitasset holders instead of shorts. This innevitably leads to less liquidity and inefficient markets
  • As a result of number 3, it is far less risky and more profitable to margin trade on centralized exchanges than on Bitshares. Why would you short BTC releative to BTS on Bitshares when you can do so on Poloniex while incurring less of a cost
  • Market making for bitasset markets is not profitable and far too risky


I'm sure there are more problems that I have not enumerated. I have some idea of how to solve them, but I don't see the BM/community taking the necessary actions to fix these problems. We are wasting time adding features like stealth transfers to the GUI instead of making our core product actually work. I'm at my wits end and I've been here since the beginning.

Offline tonyk

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #79 on: November 27, 2015, 10:36:20 pm »

I'm sure there are more problems that I have not enumerated. I have some idea of how to solve them, but I don't see the BM/community taking the necessary actions to fix these problems. We are wasting time adding features like stealth transfers to the GUI instead of making our core product actually work. I'm at my wits end and I've been here since the beginning.

Absolutely agree! Actually I almost gave up on BTS completely today, after seeing yet another (bug/feature???) in BTS screwing even more the shorts...fortunately it was wrong reporting on cryptofresh's part [*scpes no blame goes to you, actually I am truly amazed what you have done with the explorer, especially given what you have to work with]
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline Helikopterben

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #80 on: November 28, 2015, 05:12:35 am »
The biggest difference will most likely come with the bond/swap market, essentially transferring risk from the lender to the borrower.  With a bond/swap market, the bts holders should be able to create smartcoins and lend them out to earn a nearly risk-free return instead of selling the smartcoin and taking on the added exchange rate risk.  The smartcoin creator's debt/collateral ratio would not change during the course of the loan.  When the loan is paid back, the smartcoin creator could simply adjust the debt and collateral back to 0 and collect the interest owed.  All the smartcoin creator would have to do is maintain sufficient collateral over the course of the loan and he would be in no danger of losing bts, essentially giving him a nearly risk-free return on his bts.  This makes sense as bts is the reserve currency of the system.  This could also potentially put upward pressure on prices as users realize they can get a nearly risk-free, market-driven return on their bts. 

Forced settlement is necessary as there are no time constraints to force settlement like there are in futures and options markets, although the parameters of forced settlement could be tweaked.  Maybe require a 7-day waiting period before the transaction executes and maybe execute at 98% or 95% of feed.  I never really thought guaranteeing settlement on a 1:1 basis was a great idea.  Merchant adoption won't happen unless we have fairly liquid markets and if we have sufficiently liquid markets, then redeeming value near the feed shouldn't be a problem.  Markets need to be liquid first.  They will become liquid if incentives are aligned.  SQP could possibly be adjusted to within 10% of the price feed, but this parameter is only relevant in illiquid markets. 

Its important to remember that much progress has been made and the building blocks are in place:  DPOS, basic market infrastructure, a (mostly polished) user-friendly web interface, ect.  We have to remember that this is programmable finance.  What does not work now can always be changed.  Eventually we will find the right formula.  I think there is a good chance we will see some solid adoption with the implementation of a bond/swap market.  Also, I have stated before that Smartcoins for physical commodities may be the ticket to real user adoption.  No other project can compete with that at this point in time. 

Offline Samupaha

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #81 on: November 29, 2015, 01:37:54 pm »
The problems as I see them:
  • BTS price continues to fall. The declining value of BTS cannot support the creation and maintenance of bitassets
  • The market mechanics are not well documented and over complicated for even the most advanced traders
  • The market mechanics are skewed towards bitasset holders instead of shorts. This innevitably leads to less liquidity and inefficient markets
  • As a result of number 3, it is far less risky and more profitable to margin trade on centralized exchanges than on Bitshares. Why would you short BTC releative to BTS on Bitshares when you can do so on Poloniex while incurring less of a cost
  • Market making for bitasset markets is not profitable and far too risky

I'm sure there are more problems that I have not enumerated. I have some idea of how to solve them, but I don't see the BM/community taking the necessary actions to fix these problems. We are wasting time adding features like stealth transfers to the GUI instead of making our core product actually work. I'm at my wits end and I've been here since the beginning.

Good list, I agree with all points.

It seems that MPA is really difficult subject and nobody knows how we can tweak the parameters to work so that they will provide good incentives in all situations. Maybe it would be best if we just set them aside for a while? Maybe it would be best to focus on products that are easily made useful for users, like stealth transfers, and try to get more users with them?

Its important to remember that much progress has been made and the building blocks are in place:  DPOS, basic market infrastructure, a (mostly polished) user-friendly web interface, ect.  We have to remember that this is programmable finance.  What does not work now can always be changed.  Eventually we will find the right formula.  I think there is a good chance we will see some solid adoption with the implementation of a bond/swap market.  Also, I have stated before that Smartcoins for physical commodities may be the ticket to real user adoption.  No other project can compete with that at this point in time. 

Yeah, most important thing here is the DAC platform. If one thing doesn't work we can either tweak it better or try something else. This is trial and error. If we do it enough times, eventually we'll come up with products that work.

Offline maqifrnswa

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #82 on: December 01, 2015, 04:08:47 pm »
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  ;D ) 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.
« Last Edit: December 01, 2015, 04:12:49 pm by maqifrnswa »
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Offline monsterer

Re: Discussing the problems with bitUSD (smart coins)
« Reply #83 on: December 01, 2015, 04:34:08 pm »
General rules:
1) When in oversupply, destruction (settling) should be incentivized
2) When in undersupply, creation (shorting) should be incentivized


I agree with your definition of the requirements, but the conclusion is just the current description of how bitshares works...and I'm not sure this is the only possible way it *could* work.

For example, starspirit demonstrated another model whereby supply and demand is controlled based on yield, where yield can be negative, such that holding bitUSD under a negative yield would naturally cause rational participants to reduce the overall supply of bitUSD, and likewise with an undersupply of bitUSD, a positive yield would have the opposite effect.
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Offline tonyk

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #84 on: December 01, 2015, 05:58:44 pm »
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/

actually it is trading options with no expiration date on VIX...which makes the task...close to impossible.

otherwise great post + 1
« Last Edit: December 01, 2015, 06:09:07 pm by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #85 on: December 01, 2015, 06:13:42 pm »

I agree with your definition of the requirements, but the conclusion is just the current description of how bitshares works...and I'm not sure this is the only possible way it *could* work.

We only need to know this way *could* or *could not* work. If we already knew it could not work, of course we'll try other ways. We've already run on this way so far, it costs a lot to turn to another way.
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Re: Discussing the problems with bitUSD (smart coins)
« Reply #86 on: December 01, 2015, 06:16:07 pm »
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/

actually it is trading options with no expiration date on VIX...which makes the task...close to impossible.

otherwise great post + 1

No expiration?
Quote
7. Expiring In-the-Money VIX options give a cash payout.  The payout is determined by the difference between the strike price and the VRO quotation on the expiration day.  For example the payout would be $1.42 if the strike price of your call option was $15 and the VRO was $16.42.
8. The expiration or “print” amount when VIX options expire is given under the ^VRO symbol (Yahoo) or $VRO (Schwab).   This is the expiration value, not the opening cash VIX on the Wednesday morning of expiration.  VIX options expire at market open on expiration day, so they are not tradeable on that day.
9. VIX options do not expire on the same days as equity options. It is almost always on a Wednesday  See this post for upcoming expirations.  This odd timing is driven by the needs of a straightforward settlement process.  On the expiration Wednesday the only SPX options used in the VIX calculation are the ones that expire in exactly 30 days.  For more on this process see Calculating the VIX—the easy part.
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Offline tonyk

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #87 on: December 01, 2015, 06:40:26 pm »
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/

actually it is trading options with no expiration date on VIX...which makes the task...close to impossible.

otherwise great post + 1

No expiration?
Quote
7. Expiring In-the-Money VIX options give a cash payout.  The payout is determined by the difference between the strike price and the VRO quotation on the expiration day.  For example the payout would be $1.42 if the strike price of your call option was $15 and the VRO was $16.42.
8. The expiration or “print” amount when VIX options expire is given under the ^VRO symbol (Yahoo) or $VRO (Schwab).   This is the expiration value, not the opening cash VIX on the Wednesday morning of expiration.  VIX options expire at market open on expiration day, so they are not tradeable on that day.
9. VIX options do not expire on the same days as equity options. It is almost always on a Wednesday  See this post for upcoming expirations.  This odd timing is driven by the needs of a straightforward settlement process.  On the expiration Wednesday the only SPX options used in the VIX calculation are the ones that expire in exactly 30 days.  For more on this process see Calculating the VIX—the easy part.

no expiration in the BTS case. so the sentence should read:

However, markets do this all the time - it's basically pricing the derivative of a derivative. It's like trading options of VIX.  However in the BTS case those are options with no expiration date....which makes the task...close to impossible.

« Last Edit: December 01, 2015, 06:43:45 pm by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline bytemaster

Re: Discussing the problems with bitUSD (smart coins)
« Reply #88 on: December 01, 2015, 07:58:13 pm »
An option with a 10 year expiration is close enough to infinite. The further in the future you go the smaller the difference in price.

So do your estimation based upon the curve generated by 3 month, 6 month, and 12 month expirations.
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Offline tonyk

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Re: Discussing the problems with bitUSD (smart coins)
« Reply #89 on: December 01, 2015, 08:03:05 pm »
An option with a 10 year expiration is close enough to infinite. The further in the future you go the smaller the difference in price.

So do your estimation based upon the curve generated by 3 month, 6 month, and 12 month expirations.

Do you have any idea how much an option with 3 y expiration and the volatility of BTS will cost?

I bet it will be hitting 1usd per 1usd if not more.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.