Author Topic: [BSIP#16]Optimization to Force Settlement Parameters of BitCNY  (Read 18834 times)

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Offline cylonmaker2053

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this process of capitalizing fees ex ante comes at the cost of losing 100% asset backing for our smartcoins, which then hurts the PoS marketing message of being able to get at least the full pegged value at any time. It's a much easier story to sell that 1 bitUSD can be settled at any point for 1 USD worth of BTS. It's unnecessarily damaging to sell merchants on getting 0.95 on the dollar or whatever.

This is one of the main arguments against, but liquidity subsidies would solve this imo and probably make BitUSD even more appealing than 1-1 forced settlement.

Anyway we obviously disagree on a few issues so it will be interesting if the BitCNY change does go through whether we're able to gleam anything one way or the other.

yeah i guess we'll see how it goes. i don't see any reason to think anything would change wrt forced settlement. spreads will just be skewed left and buyers will further discount CNY and continue force settlement for whatever fee or discount to par that gets build into the system. that's at least how i'll adjust my own behavior in that market. the end result isn't limiting forced settlement, just breaking the 100% collateralization, which kills PoS for the Chinese market. my guess is that the few active traders in that market don't care about PoS, nor do they understand the financial economics for how the change will be capitalized ex ante and market behavior unchanged.

Offline Empirical1.2

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this process of capitalizing fees ex ante comes at the cost of losing 100% asset backing for our smartcoins, which then hurts the PoS marketing message of being able to get at least the full pegged value at any time. It's a much easier story to sell that 1 bitUSD can be settled at any point for 1 USD worth of BTS. It's unnecessarily damaging to sell merchants on getting 0.95 on the dollar or whatever.

This is one of the main arguments against, but liquidity subsidies would solve this imo and probably make BitUSD even more appealing than 1-1 forced settlement.

Anyway we obviously disagree on a few issues so it will be interesting if the BitCNY change does go through whether we're able to gleam anything one way or the other.
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Offline cylonmaker2053

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Also, as a practical matter from trading...

I've invoked forced settlement many times in both bitCNY and bitUSD ...actually, today has been a weird bitUSD trading experience in that people have been dumping at about 6%-7% below peg all afternoon and i've been the highest bidder soaking up the supply. Since I can't find anyone else to buy anywhere near peg, i've been invoking forced settlement. If there were some penalty for doing this, or if assets were only 95% collateralized, i'd be doing the same stuff but at 15%+ below feed. What's the point of that?

The way i've seen forced settlement is that it acts as a natural supply reduction mechanism when we have imbalances and not enough buyers. It brings supply down to what the market is actually willing to support.

I'd speculate the reasons BitUSD holders are willing to offer a 6/7% discount today rather than waiting for 1-1 in 24 hours is because they think BTC is surging so fast that they can make up the difference. If forced settlement was 1-1 with a 4% fee they still would be unlikely to sell much lower than a 7% loss because they're unlikely to make up a 7% loss. So in a way 1-1 might be of limited value other than to traders like yourself who are able to make good daily gains in these scenarios.

While from the shorts perspective a lot of them are going to wake up tomorrow having been unexpectedly force settled and then have to compete with each other if they want to rapidly re-short but then find there are not a lot of willing BitUSD longs because they all want to be in BTC atm so this will disrupt the market, discourage shorts and ultimately raise premiums. A 4% fee would have forced longs to wait 24 hours because it wouldn't make sense to sell at a 9-10% loss today and shorts would have received some compensation for having provided liquidity.

If liquidity close to 1-1 was something we wanted to provide to SmartCoin customers then liquidity subsidies would be the way to do it rather than disrupting the market, negatively impacting shorts & raising the premium the way the current system does imo.

i guess my main point is that i don't see changing collateralization or charging fees to force settlement as materially changing premature forced settlement; traders will rationally price all of this in from the start. They'll offer less for smartcoins to account for either a discount to par collateralization or to capitalize the fee ex ante. Then they'll still force settle and induce unplanned early settlement on short positions.

this process of capitalizing fees ex ante comes at the cost of losing 100% asset backing for our smartcoins, which then hurts the PoS marketing message of being able to get at least the full pegged value at any time. It's a much easier story to sell that 1 bitUSD can be settled at any point for 1 USD worth of BTS. It's unnecessarily damaging to sell merchants on getting 0.95 on the dollar or whatever.

Shorting is for professionals, or those at least willing to keep an eye on positions, up margin when needed if they want to keep positions from being called. If being force settled is something a prospective shorter is concerned with, they should set collateral sufficiently high to make it a non-issue. This will still be an issue with charging fees to force settle, or eroding collateral requirements.

Offline Empirical1.2

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Also, as a practical matter from trading...

I've invoked forced settlement many times in both bitCNY and bitUSD ...actually, today has been a weird bitUSD trading experience in that people have been dumping at about 6%-7% below peg all afternoon and i've been the highest bidder soaking up the supply. Since I can't find anyone else to buy anywhere near peg, i've been invoking forced settlement. If there were some penalty for doing this, or if assets were only 95% collateralized, i'd be doing the same stuff but at 15%+ below feed. What's the point of that?

The way i've seen forced settlement is that it acts as a natural supply reduction mechanism when we have imbalances and not enough buyers. It brings supply down to what the market is actually willing to support.

I'd speculate the reasons BitUSD holders are willing to offer a 6/7% discount today rather than waiting for 1-1 in 24 hours is because they think BTC is surging so fast that they can make up the difference. If forced settlement was 1-1 with a 4% fee they still would be unlikely to sell much lower than a 7% loss because they're unlikely to make up a 7% loss. So in a way 1-1 might be of limited value other than to traders like yourself who are able to make good daily gains in these scenarios.

While from the shorts perspective a lot of them are going to wake up tomorrow having been unexpectedly force settled and then have to compete with each other if they want to rapidly re-short but then find there are not a lot of willing BitUSD longs because they all want to be in BTC atm so this will disrupt the market, discourage shorts and ultimately raise premiums. A 4% fee would have forced longs to wait 24 hours because it wouldn't make sense to sell at a 9-10% loss today and shorts would have received some compensation for having provided liquidity.

If liquidity close to 1-1 was something we wanted to provide to SmartCoin customers then liquidity subsidies would be the way to do it rather than disrupting the market, negatively impacting shorts & raising the premium the way the current system does imo.   
« Last Edit: May 29, 2016, 09:32:41 pm by Empirical1.2 »
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Offline cylonmaker2053

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We have a good enough system the way it is, we just need to get more traders into it. Traders are just one group, btw. It'd be great to get actual end users for our smartcoins, like people using PoS apps for bitUSD, bitCNY, bitEUR, etc. like @kenCode is doing. 100% collateralized assets are a big selling point for that application.

I'm all for subsidizing collateral used to maintain shorts, but just prefer doing it directly via some yield. I'm also fine without subsidies bc of the indirect benefits of shorting mentioned earlier.

Also keep in mind, this proposal is to change one of the markets on the DEX, bitCNY. Doing so would unnecessarily complicate the DEX with markets trading with arbitrarily different rules.

Competitors like NBT have no guaranteed redeem-ability at all (& I think they're struggling in this BTC surge) I think merivercap's BitCash has zero as well. I disagree with both those strategies but I do believe 95% is more than sufficient for the market to trade at 1-1 and will significantly reduce the spread without the need for subsidies & given that we haven't even subsidized SmartCoin liquidity yet I'm not sure how realistic it is.

Given the stagnation of the 2.0 SmartCoin markets which have been operating with the current rules for over 7 months, I think trying a rule change at this stage is warranted.

I think it's good that it's just one of the markets as we'll be able to see if it's a positive change before applying it elsewhere. Personally I'd prefer to make the change bigger so the differences would be more easily observable & actionable.

i like that idea of testing changes in one market before applying to all, so i agree with that point. However, unless we have more control other than pure mob rule for forcing changes in a particular market, then we'll likely end up with fragmented rule sets across markets.

yes, we've been operating with these rules for 7 months, but i still argue that things haven't taken off bc of the rules, but bc we haven't done a good job attracting traders to the DEX.

Offline cylonmaker2053

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Also, as a practical matter from trading...

I've invoked forced settlement many times in both bitCNY and bitUSD ...actually, today has been a weird bitUSD trading experience in that people have been dumping at about 6%-7% below peg all afternoon and i've been the highest bidder soaking up the supply. Since I can't find anyone else to buy anywhere near peg, i've been invoking forced settlement. If there were some penalty for doing this, or if assets were only 95% collateralized, i'd be doing the same stuff but at 15%+ below feed. What's the point of that?

The way i've seen forced settlement is that it acts as a natural supply reduction mechanism when we have imbalances and not enough buyers. It brings supply down to what the market is actually willing to support.

Offline Empirical1.2

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We have a good enough system the way it is, we just need to get more traders into it. Traders are just one group, btw. It'd be great to get actual end users for our smartcoins, like people using PoS apps for bitUSD, bitCNY, bitEUR, etc. like @kenCode is doing. 100% collateralized assets are a big selling point for that application.

I'm all for subsidizing collateral used to maintain shorts, but just prefer doing it directly via some yield. I'm also fine without subsidies bc of the indirect benefits of shorting mentioned earlier.

Also keep in mind, this proposal is to change one of the markets on the DEX, bitCNY. Doing so would unnecessarily complicate the DEX with markets trading with arbitrarily different rules.

Competitors like NBT have no guaranteed redeem-ability at all (& I think they're struggling in this BTC surge) I think merivercap's BitCash has zero as well. I disagree with both those strategies but I do believe 95% is more than sufficient for the market to trade at 1-1 and will significantly reduce the spread without the need for subsidies & given that we haven't even subsidized SmartCoin liquidity yet I'm not sure how realistic it is.

Given the stagnation of the 2.0 SmartCoin markets which have been operating with the current rules for over 7 months, I think trying a rule change at this stage is warranted.

I think it's good that it's just one of the markets as we'll be able to see if it's a positive change before applying it elsewhere. Personally I'd prefer to make the change bigger so the differences would be more easily observable & actionable.


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Offline cylonmaker2053

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@Empirical1.2 i agree that 100% collateral isn't required, i just prefer it and think it's an excellent long term selling point. It's premature to say we've killed the smartcoin markets; i'd argue they haven't yet been discovered. We have an excellent trading technology as is and whatever rules we set will be internalized by traders ex ante. Whether we set 100% collateral assets or 95% or whatever, those values just get capitalized into expectations.

We have a good enough system the way it is, we just need to get more traders into it. Traders are just one group, btw. It'd be great to get actual end users for our smartcoins, like people using PoS apps for bitUSD, bitCNY, bitEUR, etc. like @kenCode is doing. 100% collateralized assets are a big selling point for that application.

I'm all for subsidizing collateral used to maintain shorts, but just prefer doing it directly via some yield. I'm also fine without subsidies bc of the indirect benefits of shorting mentioned earlier.

Also keep in mind, this proposal is to change one of the markets on the DEX, bitCNY. Doing so would unnecessarily complicate the DEX with markets trading with arbitrarily different rules.

Offline bitsharesbrazil

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As I am new here I glad that you guys discuss this in a open way so I can learn n improve my knowledge n judgment. Thanks again
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Offline Empirical1.2

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The purpose of forced settlement is really to give market participants confidence SmartCoins are backed by actual collateral that can be redeemed for most of their value in an emergency. So even forced settlement at 0.95 would be very attractive.

Absolutely, the purpose of settlement is to give market participants confidence that our assets are backed by collateral. The 100% settlement at the peg means our assets are 100% collateralized, which i certainly prefer. Any discount from that, like 0.95, just means we'd be advertising smartcoins with 95% collateral banking. I don't see that as beneficial.

All market participants go into trades knowing the rules of the game ahead of time. i like 100% collateralilzation over any arbitrary fractional value, but if the system changed (which it changes too often IMO), then i'd just rationally discount the value on the long side and price my bids at 95% or whatever the collateral value. All we'd do is skew the bid-ask window in the other direction.

Like i've repeated many times on this forum, i do see value in providing incentive to traders willing to short assets into existence. Right now that compensation is implicit with high spreads  and shorts get leveraged upside. That's been enough for me to trade frequently on both sides of the market. However, if there is a big desire in this community to further compensate short traders, then i suggest directly subsidizing shorts with some yield on BTS locked in collateral; penalizing buy-side traders who want to settle assets at peg is not the best way to provide this subsidy.

The reason longs don't need guaranteed liquidity from shorts at $1.00 to buy at $1.01 is the same reason shorts don't need guaranteed liquidity from longs at $1.10 to short at $1.09.

Everyday people trade billions in CMX gold contracts even though they are hardly backed at all. If the shorts were forced to guarantee liquidity at the gold price for the longs, the increased cost burden would make the spread too wide and effectively kill the market which is what we've done to SmartCoins.

Having forced settlement at say 0.96 or say 1-1 with a 4% fee would be similar to a service like bullionvault.

Traders agree they are buying and selling vaulted gold using the current gold price as a reference but to actually redeem it from the underlying its collateralised with in the event you couldn't find a buyer/other would cost you about 4-5% but it still trades at 1-1 with the actual gold price.

The point is if you know there is actual collateral backing the token even if you'd have to pay 4-5% to get it, you can comfortably buy and sell it round 1-1 and make a market. If you place a burden on either buyer/seller/shorter that they have to pay 1-1 whenever someone else wants to settle, the premium they will price for being a forced market maker/liquidity provider at 1-1 will effectively kill the market.
« Last Edit: May 29, 2016, 07:55:28 pm by Empirical1.2 »
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Offline cylonmaker2053

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The purpose of forced settlement is really to give market participants confidence SmartCoins are backed by actual collateral that can be redeemed for most of their value in an emergency. So even forced settlement at 0.95 would be very attractive.

Absolutely, the purpose of settlement is to give market participants confidence that our assets are backed by collateral. The 100% settlement at the peg means our assets are 100% collateralized, which i certainly prefer. Any discount from that, like 0.95, just means we'd be advertising smartcoins with 95% collateral banking. I don't see that as beneficial.

All market participants go into trades knowing the rules of the game ahead of time. i like 100% collateralilzation over any arbitrary fractional value, but if the system changed (which it changes too often IMO), then i'd just rationally discount the value on the long side and price my bids at 95% or whatever the collateral value. All we'd do is skew the bid-ask window in the other direction.

Like i've repeated many times on this forum, i do see value in providing incentive to traders willing to short assets into existence. Right now that compensation is implicit with high spreads  and shorts get leveraged upside. That's been enough for me to trade frequently on both sides of the market. However, if there is a big desire in this community to further compensate short traders, then i suggest directly subsidizing shorts with some yield on BTS locked in collateral; penalizing buy-side traders who want to settle assets at peg is not the best way to provide this subsidy.

Offline Empirical1.2

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I'm not seeing the big issue with forced settlement. You aren't losing anything you haven' already lost when forced to settle, the system is just closing out your position earlier than you might have liked, but you're welcome to re-open another position with the returned collateral. This simple mechanism keeps the entire system stable by cutting imbalanced positions early.

The idea of modifying system rules market by market instead of having a coherent system doesn't at all seem worth it in this case.

You're forcing shorts to play the role of market makers for longs providing liquidity on demand at 1-1.

A trader doesn't have to charge you a significant premium but a market maker who is guaranteeing you liquidity at 1-1 whenever you want to sell will charge you a very big premium for that privilege. 

So a large part of the huge premium you're seeing on the SmartCoin markets, are market maker premiums charged by shorts for the risk and opportunity cost of providing liquidity to longs.

Imagine if your BitUSD long position (or any other crypto position you hold) could be converted at any time to BTS/BTC, would you be willing to pay close to 1-1 for it?

Rather let the free market bring buyers and sellers together and don't force either side to play market maker in a tight range around the peg. The purpose of forced settlement is really to give market participants confidence SmartCoins are backed by actual collateral that can be redeemed for most of their value in an emergency. So even forced settlement at 0.95 would be very attractive.

Then you could let market participants buy/sell/short without being forced to play market maker and if you did want some market making or guaranteed liquidity near 1-1 because the value to BTS of SmartCoin adoption is high, then you could subsidize it and pay market makers so that the cost isn't built into a wider peg that makes smartcoins unappealing.   

« Last Edit: May 29, 2016, 04:59:43 pm by Empirical1.2 »
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Offline cylonmaker2053

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I'm not seeing the big issue with forced settlement. You aren't losing anything you haven' already lost when forced to settle, the system is just closing out your position earlier than you might have liked, but you're welcome to re-open another position with the returned collateral. This simple mechanism keeps the entire system stable by cutting imbalanced positions early.

The idea of modifying system rules market by market instead of having a coherent system doesn't at all seem worth it in this case.

Offline cylonmaker2053

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The "supporting stake" column means how much stake has chosen to vote for the specified worker. Just ignore the colors and other workers, focus on these 2 workers.

Because there is no longer a way to vote "no" on a worker. So here comes 2 workers,
* if you agree to change, vote for the "yes" worker;
* if you don't agree to change, vote for the "no" worker;
* if you want to stay neutral, or you're not aware of this voting, don't vote.

So the way to read the contest here is that a 266M BTS stake is voting YES and 144M voting NO?

Offline bitcrab

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As one of the community's most active traders and from a financial market theory perspective, i support @pc perspective on this. I also share @Empirical1.2 frustrations in having many short positions force settled on me; however, I've been on the settlement initiation side of trades many times and it is a very valuable feature.

@pc is correct that this is mainly an issue in bear markets. From personal experience, it has SUCKED pouring more and more collateral into my shorts just to keep them open, but that's a reasonable price to pay for the leverage on the upside when market conditions reverse, and for the fact that I've sold all of my short assets at premiums to begin with.

#1 priority is to guarantee parity with the underlying asset. Forced settlement seems the best way to do this. We cannot compromise on this priority or we lose one of our biggest value propositions in the smartcoin market.

#2 there are times when asset holders, mainly Chinese CNY from my experience, value immediate liquidation and so put their assets up for sale at discounts to the feed price; this is where market makers like myself and @JonnyBitcoin come in, buy at a discount, and settle for some risky profit (risky in that the feed can fluctuation in the next 24 hours).

#3 we all know the rules of the game going into any trade, these are built into our expectations ex ante, and so the prices we choose to initiate ought to compensate for the risk of forced settlement.

What could be improved is the old idea we've punted in this community about compensating short positions with some sort of yield on collateral. This would further incentivize short initiations, especially in bear markets. Once we're back to a bull market, it'll be irrelevant.


I was reading all comments and opinions about this proposal.

After considering the case I decided to vote against the BSIP 16 and to not support a change of the CNY settlement parameters.

PC made his point clear enough that we should not break the trust in the guarantee of getting at least 1 CNY back. This could have another negative impact on the BitShares ecosystem and further harm our reputation in the crypto community. I think the current settlement parameters are fine and the spread will get tighter when volume picks up. Please don't forget we are at the beginning of this payment platform and we see many anomalies due to low volumes.

I also think that market makers like cylonmaker2053 and JonnyBitcoin know the trading risks and can evaluate the associated risks and potential profits. Shorting and providing liquidity is not for everyone and should be handled by experts who know how to create a derivate. I am looking forward to adding bankers to the BitShares platform so that they can add their market expertise and help us with the market creation. Creating a derivate is banking 101. Just replace BTS with USD and every banker knows what you are talking about.

cheers Chris4210

I haven't expected that it's so difficult to push such a change.

China community is the main bitCNY ecosystem,  here users can deposit/withdraw bitCNY with fiat,  most of the users support this change,  but seems their opinion is less important than some outside speculators'?

Bitshares is a decentralized platform, anyone can short if he like, this is simple trading, no need to suppose only seldom experts can/should do that.

if shorters are forced to sell his collateral without any compensation when the collateral price is above the margin call price, there is no reputation on this system. you guys always mention "guarantee" to holders, but who has thought in the place of shorters?

we cannot expect a financial system where everyone like to hold but seldom like to short can grow big enough. 

if we do not change, shorters will always worry of being force settled and we can not expect enough supply of bitCNY.

20+ days left for the committee proposal, let's see what will happen.
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