Author Topic: [BSIP#16]Optimization to Force Settlement Parameters of BitCNY  (Read 17279 times)

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Offline pc

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Thanks for the analysis! I take back my statements implying that bitcrab is acting out of self-interest. (Edited my earlier post.)

My other points remain.
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Offline abit

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To @pc:

From the blockchain, we can see that @bitcrab is now only have a short position of 60K bitCNY (see https://cryptofresh.com/u/btareserve which is his main shorter account), which is about 10% of total bitCNY supply. His collateral level is the 3rd high among all shorters, most likely won't match any forced settlements any time soon. There are a few other shorters who have bigger position than him ( https://cryptofresh.com/u/aboy, https://cryptofresh.com/u/code). In the mean while bitcrab is holding more than 60K bitCNY (see https://cryptofresh.com/u/bitcrab, https://cryptofresh.com/u/btareserve and https://cryptofresh.com/u/transwiser-wallet). When I'm writing this post, there is around 37k bitCNY in btc38's account (https://cryptofresh.com/u/btc38-cny-kuos-72722), which will be sold to bitcrab when btc38 needs fiat. So it seems bitcrab is currently a bitCNY holder rather than a shorter.
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Offline abit

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I am voting for the "no changes" worker:
http://cryptofresh.com/workers

thanks for the link. this is a cool way to see what's being worked on, but can you explain the different columns, especially the "supporting stake" column? And why is the bitCNY forced settlement split into two workers, one YES and one NO instead of one worker that gets voting on for yes or no? sorry for the newb governance questions...
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.

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Offline Chris4210

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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
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Offline cylonmaker2053

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I am voting for the "no changes" worker:
http://cryptofresh.com/workers

thanks for the link. this is a cool way to see what's being worked on, but can you explain the different columns, especially the "supporting stake" column? And why is the bitCNY forced settlement split into two workers, one YES and one NO instead of one worker that gets voting on for yes or no? sorry for the newb governance questions...




Offline xeroc

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Offline cylonmaker2053

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I was hoping for a more neutral approach for getting shareholders approval so I published a quick article on Steem:
https://steemit.com/bitshares/@xeroc/vote-please-cast-your-vote-for-the-bitcny-settlement-offset-worker

how do you plan on voting, @xeroc?

you guys have my take below. on this specific proposal, i'm for keeping the status quo, even as a major short position holder, which would be on the benefit side of the change.

Short initiators already have two big incentives: leverage on the upside and selling their shorts at premium to begin with. Yes, it sucks in a bear market to be caught on the short side, i just don't see that as reason for changing the rules of the game.

if there really is compelling need to further incentivize short positions, then some yield from fees might be a better approach.

final point, i do not like the idea of changing contract rules for one smartcoin and not all of them. that can set a bad precedent for plenty of discontinuities, complications keeping users away, and potentially non-value-added arb opportunities akin to regulatory capture just bc the rules of different, not all users may understand differences, and so will get swindled.

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I was hoping for a more neutral approach for getting shareholders approval so I published a quick article on Steem:
https://steemit.com/bitshares/@xeroc/vote-please-cast-your-vote-for-the-bitcny-settlement-offset-worker

Offline xeroc

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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.
Very good point!!

Offline bitsharesbrazil

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I like your view ylon. Thanks for sharing
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Offline cylonmaker2053

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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.

Offline bitsharesbrazil

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God this not easy.....
Im not tech or economics.....but we have to make smartcoins happen.....trully dex
« Last Edit: May 25, 2016, 04:54:22 am by bitsharesbrazil »
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Offline Empirical1.2

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1.  When you guarantee liquidity at the expense of shorts and at 1-1, this adds a significant burden to shorts that they will price in via an additional premium. By lowering the forced settlement number as well as the amount that can be forced settled you reduce this burden and therefore not only bring the price close to the peg (which is favourable) but also reduce the risk premium shorts need to charge & thus create a tighter peg overall.

Your wording implies that forced settlement is in some form damaging to shorters. That is wrong. Settlement happens at the fair price and does not change the NAV of either involved party. The shorter can take the remaining collateral and the proceeds from selling the originally shorted smartcoins and immediate extend his short position, should he want to stay short. The only "damage" here is the required fee, which is negligible (less than 1 US-cent I believe).

In addition to lowering forced settlement, I am personally also in favour of other measures that reduce the burden on shorts so that their risk premium is reduced thus creating a tighter peg overall.

The "burden" on shorts is an inherent factor in *every* short position. The reward for that position is the leverage effect, which works for the shorter in a BTS bull market. Actually, in BitShares the shorts are relatively well protected. In real-world shorts you can literally lose everything, not just your collateral.

Increasing the settlement offset to 1% would reduce the risk premium by 1%, right? How far above the feed are smartcoins trading currently? Would 1% really make a significant difference wrt the tightness of the peg?

Forced settlement forces the short to make a trade when they don't want to. (I would hate if my shorts on Poloniex could be closed out at any time by longs forced settling.) 

Lets say the trade was just between you and me.

I short BitBTC because I believe this is a good time to short. Yay, turns out I was right and the general trend is clearly moving in my favour due to news/other!  If you wanted to me to cover you'd have to sell your BitBTC at a discount but instead you force settle me at 1-1. 

- It's statistically more likely you'll force settle when the market is moving in my favour and against you.
- It puts me in a position where I have to actively manage my short position more because I may be force settled unexpectedly.
- I'll  lose any potential gains for the period I'm out of the market
- I have to repay fees again
- I possibly have to pay a higher premium to re-enter my position if the market is clearly trending against the longs. (Which might be why they chose to force settle.) 

By reducing forced settlement or even charging a reasonable forced settlement fee, traders who are long can't used forced settlement as a trading tool/advantage and will have to find a willing buyer as opposed to a forced buyer. This levelling of the playing field removes/reduces the negative factors the short would have to price in thereby hopefully lowering the spread by far more than the 1% offset.

Being guaranteed 98/99% is still very attractive for genuine longs. especially if the premium/spread to enter the position has lowered as a result. 

Also how I 'think' potential manipulation could work...

I go long X BitBTC/SmartCoin. I request force settlement for 3 am the following morning.  The spread on BTS on exchanges is usually 0.4-1.5%. In 24 hours at the thinly traded force settlement time I make tiny BTS sells just so that the traded price referenced is in my favour by 0.5-1.5% at the shorts expense. (Annualized that's a significant edge that would have to be priced in) Depending on depth and size of settlement it may be in my interest to push the BTS price at settlement time in my favour more. (Reducing forced settlement or charging a hefty fee reduces the potential for for forced settlement trading/manipulation too.)
« Last Edit: May 15, 2016, 07:29:40 pm by Empirical1.2 »
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Offline pc

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1.  When you guarantee liquidity at the expense of shorts and at 1-1, this adds a significant burden to shorts that they will price in via an additional premium. By lowering the forced settlement number as well as the amount that can be forced settled you reduce this burden and therefore not only bring the price close to the peg (which is favourable) but also reduce the risk premium shorts need to charge & thus create a tighter peg overall.

Your wording implies that forced settlement is in some form damaging to shorters. That is wrong. Settlement happens at the fair price and does not change the NAV of either involved party. The shorter can take the remaining collateral and the proceeds from selling the originally shorted smartcoins and immediate extend his short position, should he want to stay short. The only "damage" here is the required fee, which is negligible (less than 1 US-cent I believe).


Without a tightly pegged, liquid SmartCoin there will be no users and no attraction for merchants to serve that market.

Maybe. My point is, the settlement offset does not make the peg more tight. The premium will remain, because the reason for the premium is BTS price volatility.


3. SmartCoins are not working well imo. They have gained low/no traction with the current parameters since being introduced 7 months ago. They have a tiny 2-4% of existing market share (never mind potential market share.)  and no/low merchant adoption and clearly need some improvements.

With "working well" I meant the mechanics that are supposed to keep the price stable. You are right that the market acceptance is lousy, and finding ways to improve that would be desirable. The proposal would have the opposite effect though, because unilaterally declaring a guarantee void will destroy all trust in the system, and nobody is going to touch our "smart" coins every again.


In addition to lowering forced settlement, I am personally also in favour of other measures that reduce the burden on shorts so that their risk premium is reduced thus creating a tighter peg overall.

The "burden" on shorts is an inherent factor in *every* short position. The reward for that position is the leverage effect, which works for the shorter in a BTS bull market. Actually, in BitShares the shorts are relatively well protected. In real-world shorts you can literally lose everything, not just your collateral.

Increasing the settlement offset to 1% would reduce the risk premium by 1%, right? How far above the feed are smartcoins trading currently? Would 1% really make a significant difference wrt the tightness of the peg?
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Offline Empirical1.2

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I suggest we all take a step back and take 15 minutes to (re-)read https://bitshares.org/technology/price-stable-cryptocurrencies/ .

What I take from that
  • The settlement price guarantees price stability to holders of BitAssets. This guarantee defines the peg.
  • Shorters are supposed to sell their shorted BitAssets at a premium to cover their risk.
  • BitAssets are expected to trade at a premium, due to the inherent risk of shorters. The premium is expected to be higher in a BTS bear market.
  • The premium is supposed to encourage merchants to accept BitAssets.
  • The premium does not play a significant role to traders or other users of BitAssets.

My conclusions
  • BitAssets are working right now exactly in the way they are supposed to be working.
  • The premium we are seeing in BitAsset markets is due to the BTS bear market. The settlement price is not the cause of this. (Coincidentally, BitCrab's attacks on forced settlement always seem to happen in a bear market.)
  • When (if) the BTS price is rising again, the premium will automatically reduce to something close to zero. (IIRC, two months ago there was actually a negative premium on the markets, where some people bought below the feed and used forced settlement to make a profit.)
  • The premium is good to have, for shorters, merchants and customers. It is the natural market mechanism to keep everyone's interests balanced.
  • We want bitCNY to be pegged to CNY. By changing the settlement offset to 1% we are moving the "guarantee", which in turn means that bitCNY will be pegged to .99 CNY. This is an undesired side effect.

Furthermore, every piece of documentation I have seen tells BitAsset buyers that they can always exchange their BitAssets for an equivalent amount of BTS. The word "guarantee" is used in several places in that context. Do we really want to unilaterally declare that guarantee void, thereby destroying all credibility of the very concept of BitAssets?

From all of this follows that
  • the proposed change is not necessary - it is the function of the premium to encourage shorters, not the function of the settlement offset
  • the proposed change does not have the desired effect - the reason for the premium and the risks of the shorters is the BTS bear market, not the settlement offset
  • the proposed change is extremely harmful to our ecosystem, due to its side effects - it redefines 1 bitCNY to be worth 0.99 CNY and destroys our credibility, because we will be breaking our own guarantees.

@pc you make some good points and are clearly passionate about your position.

Your first argument is that adjusting BitCNY parameters would represent the breaking of an implied guarantee. I & I think most would disagree, SmartCoins are still in the nascent stages of design/adoption/parameter tweaking and are subject to change if agreed by shareholders. (They have already undergone major and controversial changes such as the removal of yield and the introduction of forced settlement itself.)

Your second argument is that SmartCoins are functioning well and the change is not desirable anyway.

While I believe you are correct that part of the premium at any time is related to the BTS market, bear/bull the 100% forced settlement feature also plays a role.

1.  When you guarantee liquidity at the expense of shorts and at 1-1, this adds a significant burden to shorts that they will price in via an additional premium. By lowering the forced settlement number as well as the amount that can be forced settled you reduce this burden and therefore not only bring the price close to the peg (which is favourable) but also reduce the risk premium shorts need to charge & thus create a tighter peg overall.

1. What about lowering the request settlement to 99%?
It should lower the premium and it's fair that there should be a cost associated with accessing liquidity at the expense of shorters.
Hopefully market makers will step in the majority of the time but the ability to get $0.99 on the dollar in 24 hours regardless of market conditions would still be very appealing to longs and merchants imo.


2. The closer forced settlement is to 1-1 the higher the potential for forced settlement manipulation which has already been an issue in the past and creates an additional risk premium too.

Does the BitShares price feed reference last traded prices at weighted exchanges or does it average last traded prices over a certain amount of time?

What I mean is there is that there is usually a 1-2% spread between buy and sell prices for BTS on BTC38 and Polo.

If you are force settling and you know it will reference last traded prices at a specific time then it would be in your interest to make tiny sell trades so that the last traded price is in your favour by 1-2%. It your force settle is going through at a thinly traded time it may also be in your interest & very cheap to move the price by another 1-2%.
That would assume that you know when witnesses publish a price and how many witnesses publish it ..
This could be fixed by tracking trades over time or running a weighted average over time but that involves alot of work to upgrade the feed script into a time-sensitive feed script.
Fortunately, this time-sensivity is also achieved by different witnesses running their scripts at different time instants.

We may consider replacing the last price with the "(highest bid + lowest ask)/ 2" that would make it a little more "fair"

Cool, yeah I'm just wondering if the forced settlement at 100% can currently be exploited.

I think your other suggestion of introducing a 1-2% forced settlement fee could also help address that if it was a potential issue...

- Settlement can be discouraged by asking for a percentage fee (1-2%) (this will move the peg AROUND parity. Flat fee for settlement can also be increase which has some negative effects on pred. markets

3. Merchants - I believe merchants are most interested in the size of the potential market of users as well as the speed, simplicity and cost of fiat conversion via something similar to BitPay.

Without a tightly pegged, liquid SmartCoin there will be no users and no attraction for merchants to serve that market. (So it's not chicken and egg, users come first)  Second is middlemen who can convert from SmartCoins to fiat. Transwiser provides this service for BitCNY and they believe they can do it better with a lower forced settlement so it should actually improve merchant adoption from that perspective too.

3. SmartCoins are not working well imo. They have gained low/no traction with the current parameters since being introduced 7 months ago. They have a tiny 2-4% of existing market share (never mind potential market share.)  and no/low merchant adoption and clearly need some improvements.

In addition to lowering forced settlement, I am personally also in favour of other measures that reduce the burden on shorts so that their risk premium is reduced thus creating a tighter peg overall.

I am also in favour of subsidizing liquidity & I am also in favour of subsidizing SmartCoin yield. https://bitsharestalk.org/index.php/topic,21597.msg286581.html#msg286581

While clearly not optimally designed yet, SmartCoins have the potential to be absolutely huge and when you get the formula right & I believe they will really take off.
« Last Edit: May 15, 2016, 05:25:06 pm by Empirical1.2 »
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