Do BitShares need an interest rate?

[bitcrab]

If the interest rate goes too high then the value of BitUSD would rise... as USD holders seek to buy BitUSD for a solid return... too low and it will fall as USD holders move elsewhere.   Thus it could be said that BitUSD with an interest rate of 0 will be pegged to the value of CASH.   BitUSD with an interest rate of 5% will be pegged to the value of a 5% treasury note.

So what does this mean for a blockchain?  To maximize the value of the chain you want to maximize the number of people storing value IN the chain.  Most people don't keep CASH on hand because they can at least earn SOME interest in the bank.   

My conclusion is that 0% interest will approximate cash and if you want to hedge against inflation having a separate BitAsset pegged to the inflation rate with 0% return would solve the problem. 

If the prediction market is always working to bring the current value of BitUSD to be equal to the dollar then the only premium or discount you will see based upon whether money is flowing into or out of BitUSD / USD.

Conclusion... any interest rate placed on BitUSD and/or shorting in this system may be irrelevant and an unnecessary added complexity that merely biases the market and breaks the peg with a premium in one direction or another.   If the interest rate merely prevents shorts from entering the market until the price is 5% too high given their time horizon why implement it.

Not implementing interest at all would be simpler and if the economic consequences are the same then perhaps it would be best to forgo interest in the initial chain?

Simplicity seems to be the best option
 

agree 0% interest.

actually I don't think "Bank" is a good metaphor here, bank pay interest to savers because they save money in bank and then others can borrow these money from bank and pay return, however, blockchain is rather just a wallet for users.

surely some other BitAssets can be created to track coupon bond, but I think it's best for BitUSD to track USD cash, in my view, two important roles BitUSD need to play is payment method and value reference, if people can pay BitUSD instead of USD in many e-Commerce scenarios and take BitUSD as a reference to measure the value of other digital Assets, we do not need to worry there will not be enough BitUSDs in the Bitshares systems.

[Markus]

What do you mean by "BTS becomes saturated?", like why would that cause there to stop being shorts coming out when BitAsset price goes too high?

With saturated I mean BTS has reached a price level where a majority of market participants believes it will not rise by more than 5% per year. People will only short BitXYZ against BTS if they believe XYZ will lose more than 5% p.a. relative to BTS. The minority that believes BTS will rise and therefore short BitXYZ will be outdone by the majority happily sucking up those few fresh BitXYZ.

BitAssets do not have infinite redemption date, they have *arbitrary* redemption date. You can redeem BitAsset <-> Asset any time, in the form of trades like (BitAsset <-btsx-> BTS <-bter-> BTC <-coinbase-> USD <-> Asset). This transaction cost will be reflected in the price of BitAsset. Eventually though you will have transactions like (BitAsset <-merchant-> Asset) which will hopefully be cheaper than (BoAUSD <-merchant-> Asset)!

Selling an asset to somebody who is willing to buy it is not the same as redeeming. Many zero coupon bonds are being traded on an open market but still change hands at a large discount to their face value. Redeeming probably translates best to covering in BitShares lingo. For covering there is no face value you can insist on but just the consensus of a fair price. Hopefully.

[toast]

I think it would work, as long as a majority believes BTS will appreciate by at least 5% p.a. against the relevant BitAsset. This will most likely be true at the beginning, rewarding all early adopters. Once the value of BTS becomes saturated any drop in price of the BitAsset below the perceived fair value of the infinite bond (far above parity) will be taken advantage of by new longs. Because this fair price is difficult to agree on this will mean high volatility (bad tracking) and possibly drying up BitAsset supply (leading to the BitAsset price floating up and up and up - totally losing tracking).
Just my thoughts, it is very difficult to predict the behaviour of such a novel concept. Definitely too many variables.

What do you mean by "BTS becomes saturated?", like why would that cause there to stop being shorts coming out when BitAsset price goes too high?

The new question is, will 0% interest rate cause a drop below parity?
Yes: Zero coupon bonds trade at a discount because they earn an interest (0% p.a.) below market rate and they are not redeemable until a point in time far in the future. Because BitAssets are only redeemable after ∞ years they should even be trading at 0 value.
No: Cash does not really trade at a discount to the dollars in my savings account. There are not really any assets around you can earn interest on while holding them yourself. You always have to lend your money to somebody else. Somebody might offer a BitUSD savings account and offer interest on it. If a BitAsset trades below parity shorts would start covering because there is a short-term opportunity to make a profit. And opposed to the case with 5% interest it is now clear where the fair value is.

For now I am tending to "No" but I can't "prove" it yet.

BitAssets do not have infinite redemption date, they have *arbitrary* redemption date. You can redeem BitAsset <-> Asset any time, in the form of trades like (BitAsset <-btsx-> BTS <-bter-> BTC <-coinbase-> USD <-> Asset). This transaction cost will be reflected in the price of BitAsset. Eventually though you will have transactions like (BitAsset <-merchant-> Asset) which will hopefully be cheaper than (BoAUSD <-merchant-> Asset)!

[Markus]

I interpreted the as allowing for some wiggle room between spot and market. If it is 0%, you should have a tighter correlation. Although lots of people are saying "oh boy, we get !" I don't think they realize it is meaningless since assets will be priced taking that into account, so in reality they will get some market interest rate (bit assets will be priced assuming a 5% growth). It's like buying a one year 5% coupon bond at a 4% premium, you're really getting something like 1%, even though it says .

Well, I guess what I'm saying is it almost doesn't matter what % you choose, the market in the long run will correct itself (if is too high, asset value decreases over time, if it is too low, asset value increases over time). The bigger the %, the less correlated to spot in the short term. The bigger the %, the more people "feel" like it is a bank.

It is a tad tricker than just a premium because there is no expiration date where it comes to 'maturity' so I think it really could be 5% gains funded from those who expect BTS to go up by more than 5% and thus short it.   The market peg might even keep it parity with USD even with 5% interest because I think the peg may be mostly independent of the 5%.    To be honest we will just have to experiment because there are too many variables for me to model in my head.

I think it would work, as long as a majority believes BTS will appreciate by at least 5% p.a. against the relevant BitAsset. This will most likely be true at the beginning, rewarding all early adopters. Once the value of BTS becomes saturated any drop in price of the BitAsset below the perceived fair value of the infinite bond (far above parity) will be taken advantage of by new longs. Because this fair price is difficult to agree on this will mean high volatility (bad tracking) and possibly drying up BitAsset supply (leading to the BitAsset price floating up and up and up - totally losing tracking).
Just my thoughts, it is very difficult to predict the behaviour of such a novel concept. Definitely too many variables.

This is very similar to the original Ponzi scheme which works fine as long as there is an influx of new capital which is used to pay the high interest promised to the early adopters. Once the supply of new capital stops the bubble pops.

The new question is, will 0% interest rate cause a drop below parity?
Yes: Zero coupon bonds trade at a discount because they earn an interest (0% p.a.) below market rate and they are not redeemable until a point in time far in the future. Because BitAssets are only redeemable after ∞ years they should even be trading at 0 value.
No: Cash does not really trade at a discount to the dollars in my savings account. There are not really any assets around you can earn interest on while holding them yourself. You always have to lend your money to somebody else. Somebody might offer a BitUSD savings account and offer interest on it. If a BitAsset trades below parity shorts would start covering because there is a short-term opportunity to make a profit. And opposed to the case with 5% interest it is now clear where the fair value is.

For now I am tending to "No" but I can't "prove" it yet.

[bytemaster]

I interpreted the as allowing for some wiggle room between spot and market. If it is 0%, you should have a tighter correlation. Although lots of people are saying "oh boy, we get !" I don't think they realize it is meaningless since assets will be priced taking that into account, so in reality they will get some market interest rate (bit assets will be priced assuming a 5% growth). It's like buying a one year 5% coupon bond at a 4% premium, you're really getting something like 1%, even though it says .

Well, I guess what I'm saying is it almost doesn't matter what % you choose, the market in the long run will correct itself (if is too high, asset value decreases over time, if it is too low, asset value increases over time). The bigger the %, the less correlated to spot in the short term. The bigger the %, the more people "feel" like it is a bank.

It is a tad tricker than just a premium because there is no expiration date where it comes to 'maturity' so I think it really could be 5% gains funded from those who expect BTS to go up by more than 5% and thus short it.   The market peg might even keep it parity with USD even with 5% interest because I think the peg may be mostly independent of the 5%.    To be honest we will just have to experiment because there are too many variables for me to model in my head.

[maqifrnswa]

I interpreted the as allowing for some wiggle room between spot and market. If it is 0%, you should have a tighter correlation. Although lots of people are saying "oh boy, we get !" I don't think they realize it is meaningless since assets will be priced taking that into account, so in reality they will get some market interest rate (bit assets will be priced assuming a 5% growth). It's like buying a one year 5% coupon bond at a 4% premium, you're really getting something like 1%, even though it says .

Well, I guess what I'm saying is it almost doesn't matter what % you choose, the market in the long run will correct itself (if is too high, asset value decreases over time, if it is too low, asset value increases over time). The bigger the %, the less correlated to spot in the short term. The bigger the %, the more people "feel" like it is a bank.

[Markus]

If the interest rate goes too high then the value of BitUSD would rise... as USD holders seek to buy BitUSD for a solid return... too low and it will fall as USD holders move elsewhere.   Thus it could be said that BitUSD with an interest rate of 0 will be pegged to the value of CASH.   BitUSD with an interest rate of 5% will be pegged to the value of a 5% treasury note.

So what does this mean for a blockchain?  To maximize the value of the chain you want to maximize the number of people storing value IN the chain.  Most people don't keep CASH on hand because they can at least earn SOME interest in the bank.   

My conclusion is that 0% interest will approximate cash and if you want to hedge against inflation having a separate BitAsset pegged to the inflation rate with 0% return would solve the problem. 

If the prediction market is always working to bring the current value of BitUSD to be equal to the dollar then the only premium or discount you will see based upon whether money is flowing into or out of BitUSD / USD.

Conclusion... any interest rate placed on BitUSD and/or shorting in this system may be irrelevant and an unnecessary added complexity that merely biases the market and breaks the peg with a premium in one direction or another.   If the interest rate merely prevents shorts from entering the market until the price is 5% too high given their time horizon why implement it.

Not implementing interest at all would be simpler and if the economic consequences are the same then perhaps it would be best to forgo interest in the initial chain?

Simplicity seems to be the best option
 

+0%

[bytemaster]

Wait no hold on, without the  all the fees are paid by destroying BTS right? Then BitAssets get no returns anymore

You are correct, without interest BitUSD would not pay a return except holding it as a speculative bet that other assets will fall vs USD. 

[toast]

Wait no hold on, without the  all the fees are paid by destroying BTS right? Then BitAssets get no returns anymore

[toast]

I thought that was one Bitshares' most innovative features. If you remove interest entirely, it then becomes harder to argue that it is a bank at all.

While its true that a large interest rate will add a premium to BitUSD, Bit assets are already reduced in value because of the fact that I need to convert them to Bank USD or cash before I can spend them, with all the exchange fees that entails. I personally would only offer 90 Bank USD for 100 BitUSD.

In other words, if Bitshares wont give me any interest on my deposits, I now have no reason to store my USD in a crypto bank - I am much better off storing it in my regular bank where I can spend it on goods without paying fees. The only purpose of deposits is then like you said - to protect against a drop in the value of Bitshares itself.

I would be really disappointed if you dropped the interest feature entirely - Bitshares just wont be as appealing without it. We need to compensate for going in & out of crypto, or at least some interest rate.

You'd still get dividends from various fees, which is guaranteed return unlike BTC

[bytemaster]

I thought that was one Bitshares' most innovative features. If you remove interest entirely, it then becomes harder to argue that it is a bank at all.

While its true that a large interest rate will add a premium to BitUSD, Bit assets are already reduced in value because of the fact that I need to convert them to Bank USD or cash before I can spend them, with all the exchange fees that entails. I personally would only offer 90 Bank USD for 100 BitUSD.

In other words, if Bitshares wont give me any interest on my deposits, I now have no reason to store my USD in a crypto bank - I am much better off storing it in my regular bank where I can spend it on goods without paying fees. The only purpose of deposits is then like you said - to protect against a drop in the value of Bitshares itself.

I would be really disappointed if you dropped the interest feature entirely - Bitshares just wont be as appealing without it. We need to compensate for going in & out of crypto, or at least some interest rate.

We will probably experiment with interest to see how it does in the market, but I think we have enough other things to play with that the first version should be simple.   

[speedy]

I thought that was one Bitshares' most innovative features. If you remove interest entirely, it then becomes harder to argue that it is a bank at all.

While its true that a large interest rate will add a premium to BitUSD, Bit assets are already reduced in value because of the fact that I need to convert them to Bank USD or cash before I can spend them, with all the exchange fees that entails. I personally would only offer 90 Bank USD for 100 BitUSD.

In other words, if Bitshares wont give me any interest on my deposits, I now have no reason to store my USD in a crypto bank - I am much better off storing it in my regular bank where I can spend it on goods without paying fees. The only purpose of deposits is then like you said - to protect against a drop in the value of Bitshares itself.

I would be really disappointed if you dropped the interest feature entirely - Bitshares just wont be as appealing without it. We need to compensate for going in & out of crypto, or at least some interest rate.

[bytemaster]

If the interest rate goes too high then the value of BitUSD would rise... as USD holders seek to buy BitUSD for a solid return... too low and it will fall as USD holders move elsewhere.   Thus it could be said that BitUSD with an interest rate of 0 will be pegged to the value of CASH.   BitUSD with an interest rate of 5% will be pegged to the value of a 5% treasury note.

So what does this mean for a blockchain?  To maximize the value of the chain you want to maximize the number of people storing value IN the chain.  Most people don't keep CASH on hand because they can at least earn SOME interest in the bank.   

My conclusion is that 0% interest will approximate cash and if you want to hedge against inflation having a separate BitAsset pegged to the inflation rate with 0% return would solve the problem. 

If the prediction market is always working to bring the current value of BitUSD to be equal to the dollar then the only premium or discount you will see based upon whether money is flowing into or out of BitUSD / USD.

Conclusion... any interest rate placed on BitUSD and/or shorting in this system may be irrelevant and an unnecessary added complexity that merely biases the market and breaks the peg with a premium in one direction or another.   If the interest rate merely prevents shorts from entering the market until the price is 5% too high given their time horizon why implement it.

Not implementing interest at all would be simpler and if the economic consequences are the same then perhaps it would be best to forgo interest in the initial chain?

Simplicity seems to be the best option
 

[vikram]

Not to get too 'meta' but how should the interest rate on the interest rate BitAsset be set?   I am thinking it could be fixed at 0% because it isn't actually trying to maintain a peg against anything else.

Even with a 0% interest rate, people should still have an incentive to go long or short depending on their predictions right?

Correct


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Could there be any danger of a positive feedback loop from many people wanting to short assets, then bidding down the interest rate, causing more people to want to short, etc. Or should it all balance out assuming the prediction markets work properly?

[stuartcharles]

Not to get too 'meta' but how should the interest rate on the interest rate BitAsset be set?   I am thinking it could be fixed at 0% because it isn't actually trying to maintain a peg against anything else.

I agree, the reason you would hold bitgold would be because you think its price is going to go up against your local currency and maybe as a hedge against cripto currencies being used as a store of wealth. Not for the 5% earning.

Its very difficult to predict the response to something that hasn't been done before. I know you were thinking about releasing a group of bitassets or/and currencies to start. Would it be better to start with one and see how the market reacts? Since bitusd is the most important i would make the first an asset not a currency? I know you have the test version but until people are sweating about losing real dollars their actions will be different .