1 PTS Analogy Bounty for How BitShares X works to peg BitUSD to USD

[bytemaster]

I disagree with your economic assessment about the fundamental price of BitUSD.   USD in your privileged financial entity pays 0% in BitUSD pays 5% which should more than make up for regulatory issues.   

This says that it is redeemable but that implies it is a debt instrument, instead I would say that it always has the purchasing power of about 1 USD

Well, the answer to the OP question is trivial - you peg the price to USD by convincing market participants that bitUSD is a 1:1 substitute for USD.
... 

Which customer will leave your store with physical silver?

Well it depends.  If the store owner needs more Fiat USD for spending or more BitUSD for saving.   So lets just stipulate something fundamental:  there is no such thing as USD.    There are FRN and Bank Deposits and Credit Cards... all denominated in USD.

BitUSD has the property of being 99% correlated to USD price movements such that if USD doubles in value BitUSD will also double in value.  While maintaining this correlation the FRN USD vs BitUSD price will fluctuate based upon where you live and the GoxUSD vs BitUSD price will fluctuate based upon Mt. Gox's withdraw policies. 

So which customer will leave the store depends entirely upon the current preference of the store owner for 'savings' vs 'checking' and how hard it would be for said store owner to convert USD to BitUSD if they want more BitUSD or BitUSD to USD if they need more spending.   Thus the price ratio varies based upon relative 'deposit vs withdraw' demand.

[bytemaster]

Below is an adaption of something I wrote earlier https://bitsharestalk.org/index.php?topic=13.15

bitUSD will track the price of USD due to the suggestive pricing nature of the asset (ie. it is called bitUSD).
Akin to Litecoin which is said to be the silver to Bitcoin (being gold), as a result the relationship between bitcoin and litecoin is highly similar to that of gold and silver.

This was achieved through mere suggestion by the Litecoin developers that Litecoin is the silver to Bitcoins gold.
In a system such as BitShares BEX, where a bitasset is brought into existence with the tangible asset price in mind (it is called bitUSD), the tracking of the tangible asset price will be much more precise.

References for LTC tracking BTC price in silver to gold manner.
http://thegenesisblock.com/understanding-the-gold-silver-ratio-and-how-it-may-apply-to-bitcoin-and-litecoin/
http://thegenesisblock.com/bitcoin-litecoin-ratio-returns-historic-norm-peercoin-climbs-200/

This is not why litecoin is valued where it is and is and is more of a coincidence.

[Markus]

Inspired by this criticism (https://bitsharestalk.org/index.php?topic=2467.0) I had some new thoughts regarding BitAssets:

People say that BitAssets are worthless because there will be no payout. What they forget is that the total market cap of any BitAsset is already zero. There are always the same amount of short and long positions which makes the number of net outstanding shares zero. There might be 5 million BitUSD long and -5 million BitUSD short. The sum is always zero.

   Market cap
= Outstanding shares • Price per share
= 0 • p
= 0

The critics are right that all BitAssets are worthless, but that is not because of the price of one of them. The price can have any finite value.

BTW: I claim half a PTS for any analogy using the term "antimatter"

[MaxPWR]

I disagree with your economic assessment about the fundamental price of BitUSD.   USD in your privileged financial entity pays 0% in BitUSD pays 5% which should more than make up for regulatory issues.   

This says that it is redeemable but that implies it is a debt instrument, instead I would say that it always has the purchasing power of about 1 USD

Well, the answer to the OP question is trivial - you peg the price to USD by convincing market participants that bitUSD is a 1:1 substitute for USD.

I am not saying it is redeemable or has the legal power of a debt instrument - only that it should be fundamentally valued as such.  "Fundamental" value is nowhere the same as "market" value, which makes most of this a moot point similar to "academic" vs. "engineering" discussions. 

In practice, we can overcome these issues for market participants, e.g., through widespread adoption to make costs negligible, or a 5% dividend, or a good PR campaign.  Even a dividend paid in crypto would suffer the same conversion / tax losses to fiat, and each individual would subjectively value it differently due to future uncertainties, but I doubt most market participants would consider or price that in to the equation.

Although the intent is to get them as close as possible, bitUSD value cannot be fundamentally equal to USD value.  One is a unit of measure in a wealth system, the other is a unit of measure in a debt system. A person cannot expect wealth systems to completely replace debt systems.  You cannot completely eliminate either, and you need to consider system interfaces. 

For cryptocurrency systems in general, fundamental value is based on cashing out to legal tender - i.e., exiting the system.  This is evident in current differences in btc prices across exchanges / currencies, which can be fundamentally attributed to the cost / time / ease to market participants of cashing out if market effects such as liquidity and information imbalances are neglected.

I hope that bitshares and crypto markets in general will not have to consider this - either crypto will become so widely used between individuals that you do not need legal tender in day-to-day activities, or so widely accepted that cost of converting to legal tender can be ignored in day-to-day activities.  But currently, we have no financial institutions that will even convert btc to legal tender - exchanges convert and only act as approved payment processors divisions of banks to impose KYC regulations.  Fiat exchanges must absorb the cost of maintaining fiat reserves / debt funding to cover any runs on cashing out, e.g. if price rises suddenly.  Crypto-only exchanges ignore this wealth-debt system interface, and pass this issue on to others to address.
 
Ideally, crypto and bitshares would result in people using USD only when it has to be used - whenever governments say it has to be used, which from legal tender laws would be for payments to governments - taxes.  Right now, this is not how USD is valued - it is considered a substitute for wealth as well as debt, but the growth of crypto systems will only clarify these value distinctions. 

A bitUSD will only have the purchasing power of 1 USD if someone else accepts it as a substitute.  If someone accepts bitUSD as a 1:1 substitute, that is only saying they will have no obligations to convert any of it to USD legal tender for taxes / government payments.  If they do have obligations to convert any, they would add a premium to cover the cost necessary to do so.  This cost will ultimately depend on regulations and fees from fiat exchanges to cover operating costs and reserve risks.

I like to build castles in the air but, without a solid foundation in the real world, I will never be able to move in.  I have to consider that some portion of cryptocurrencies will need to be converted to real-world fiat, and I need to conservatively assume that is the limiting factor for an assessment of fundamental, objective, ex-crypto-system value of a bitUSD.

I would propose the two questions below as thought experiments:

1) How does I3 expect a person to be able to pay taxes using bitUSD?

2) Assume you own a store that sells physical silver.  As the store owner, you are ultimately responsible for meeting any regulatory, reporting, sales tax, etc requirements.

Customer A walks in with 1,000 bitUSD in his account.  Customer B walks in with 1,000 USD in his account.  Both can swipe a card, push a button, etc and transfer their account balance to yours with the same ease and cost.  Both expect to receive more silver than the other, and will not buy if they are not offered more than the other. 

Which customer will leave your store with physical silver?

[MrJeans]

Below is an adaption of something I wrote earlier https://bitsharestalk.org/index.php?topic=13.15

bitUSD will track the price of USD due to the suggestive pricing nature of the asset (ie. it is called bitUSD).
Akin to Litecoin which is said to be the silver to Bitcoin (being gold), as a result the relationship between bitcoin and litecoin is highly similar to that of gold and silver.

This was achieved through mere suggestion by the Litecoin developers that Litecoin is the silver to Bitcoins gold.
In a system such as BitShares BEX, where a bitasset is brought into existence with the tangible asset price in mind (it is called bitUSD), the tracking of the tangible asset price will be much more precise.

References for LTC tracking BTC price in silver to gold manner.
http://thegenesisblock.com/understanding-the-gold-silver-ratio-and-how-it-may-apply-to-bitcoin-and-litecoin/
http://thegenesisblock.com/bitcoin-litecoin-ratio-returns-historic-norm-peercoin-climbs-200/

[Yui Xie]

BitShares X removes the price discovery and volatility from the exchange process which leaves only an 'escrow' function which is much easier to resolve than a full up bid/ask market.

OK, I see that escrow is discussed at various points in the white paper.  Getting a crypto-currency like BTC in and out of the system (BTC <-> BitBTC) is clean and easy by its very nature, ie. for the same reason the Bitcoin transfer works.

Converting other assets like gold, dollars, or Apple stock to an equivalent bit entity is more complicated, eg. how would I arrange the sale of my fiat $USD for BitUSD?  One way is a face-to-face meeting in the same way as localbitcoins.  Since that won't work well in a global market, the white paper describes anonymous escrow agents, who register into the block chain.  The two interested parties (buyer and seller of the asset) perform wire transfers, presumably using a service like Western Union.  This means the buyer and seller are not anonymous to each other and would also incur wire transfer fees, which are a function of geographic location.  Note that some people have little to no access to such services. 

The BitShare escrow agent has no legal obligation to deliver.  Instead, the agent is incentivized to earn the trust of the network to earn future fees.  The assumption here is that the agent would be smarter to perform the service, maintain a reputation, and collect ongoing fees rather than doing a one-time asset ripoff in collusion with one of the parties.  This is the same incentive that MtGox has, but still brings third-party trust into the BitShare-X system.  Buyer and seller must also trust the decision of the agent to divide funds in the event of a dispute, with no legal recourse (by design).  The agent is the judge and jury in this situation.

Do I understand this correctly?

[bytemaster]

It's a 'currency basket' situation.

The exchange rate  between BitUSD and USD is not only affected by the exchange activity of this two elements.

In fact,there will be hundreds of BitAssets like BitEuro or BitBTC or BitLTC or even BitPTS.

These BitAssets can be trade on a real USD related market,plus the fact that BitAsset can trade with each other,then the exchange rate
between real USD and BitAssets will create a powerful interaction and correction
course to adjust the rate between the two element in question---BitUSD and USD.

As more BitAssets are being created and traded with each other,the exchange rates between every single BitAsset will have more
restrain on each other.Because you can manipulate one pair of BitAssets for so long before the correction of the market take it's course.

So,the BitUSD  becomes a 'de facto dollar peg',BitUSD will not be only pegging the USD,but also pegging every BitAssets that peg with USD.

It creates both room for  flotation and solid ground for stability.

==================================
Hint: de facto is latin for "acctually"
===============================
My PTS address:      PZ5HY1MWutWhnNemrG5DCAti8AmMvDBmnE

Aside from not liking the 'currency basket' description... everything other than the first sentence is spot on.  1 PTS for you

[bytemaster]

i) It seems to me that for this concept to work well, there has to be a reliable, efficient, and trustworthy mechanism to convert fiat to BTS and back.  That means the system is going to be fundamentally reliant on 3rd party exchanges like MtGox, btc-e, bitstamp, etc.  We all know the risks these present due to the history of cyber attacks, server failures, and governmental pressure.  Lack of liquidity on MtGox is keeping BTC prices higher there.  Yes, you've removed the need to trust the central bank, but you're still exposed to the exchanges.  Is that the weak link?

ii) A futures contract with no expiration is simply equity like a stock, an ETF, or an ETN.

BitShares X removes the price discovery and volatility from the exchange process which leaves only an 'escrow' function which is much easier to resolve than a full up bid/ask market. 

[Yui Xie]

i) It seems to me that for this concept to work well, there has to be a reliable, efficient, and trustworthy mechanism to convert fiat to BTS and back.  That means the system is going to be fundamentally reliant on 3rd party exchanges like MtGox, btc-e, bitstamp, etc.  We all know the risks these present due to the history of cyber attacks, server failures, and governmental pressure.  Lack of liquidity on MtGox is keeping BTC prices higher there.  Yes, you've removed the need to trust the central bank, but you're still exposed to the exchanges.  Is that the weak link?

ii) A futures contract with no expiration is simply equity like a stock, an ETF, or an ETN.

[bytemaster]

A bitUSD is simply a futures contract for redemption to actual USD (physical or electronic) by a regulated financial entity that has been granted the privilege of doing so by its sovereign nation.

Markets should reach a consensus equilibrium value that represents the additional costs of exchange, transmission, regulatory compliance, licensing, and other operating costs necessary for convertibility to actual USD.  Consensus discounts for future value between crypto and fiat markets may also appear if processing or clearing times are significant.

These costs may be negligible, but will never be non-zero. The theoretical fundamental price of bitUSD shall always be lower than USD already present in an account at a privileged financial entity.

I disagree with your economic assessment about the fundamental price of BitUSD.   USD in your privileged financial entity pays 0% in BitUSD pays 5% which should more than make up for regulatory issues.   

This says that it is redeemable but that implies it is a debt instrument, instead I would say that it always has the purchasing power of about 1 USD

[MaxPWR]

A bitUSD is simply a futures contract for redemption to actual USD (physical or electronic) by a regulated financial entity that has been granted the privilege of doing so by its sovereign nation.

Markets should reach a consensus equilibrium value that represents the additional costs of exchange, transmission, regulatory compliance, licensing, and other operating costs necessary for convertibility to actual USD.  Consensus discounts for future value between crypto and fiat markets may also appear if processing or clearing times are significant.

These costs may be negligible, but will never be non-zero. The theoretical fundamental price of bitUSD shall always be lower than USD already present in an account at a privileged financial entity.

[slacking]

My analogy will not use fewer words. Perhaps someone else will feel inspired to reduce it to compete for the bounty.

Chuck E. Cheese's (http://www.chuckecheese.com/) uses tokens for the sale of entertainment and food. I'll use hypothetical changes to their business model to show how BitUSD tokens have a natural incentive to stay close to the value of a dollar. I'll call this hypothetical 'Mr.Cheeze'.

Is it just me or does Mr. Cheeze become more and more megalomaniacal as the analogy progresses.

[slacking]

Lengthy analogy that didn't seem to connect with me or how BitAssets work.

But it sure made me hungry for pizza!

[bytemaster]

Lengthy analogy that didn't seem to connect with me or how BitAssets work. 

[Liberty]

My analogy will not use fewer words. Perhaps someone else will feel inspired to reduce it to compete for the bounty.

Chuck E. Cheese's (http://www.chuckecheese.com/) uses tokens for the sale of entertainment and food. I'll use hypothetical changes to their business model to show how BitUSD tokens have a natural incentive to stay close to the value of a dollar. I'll call this hypothetical 'Mr.Cheeze'.

Mr.Cheeze's video game tokens can be purchased for a quarter and are given generously as participation incentives. You can exchange the tokens or hold them, but there is no incentive to hold them since the value will never increase to be more than a quarter and they have limited utility value elsewhere. There are fewer video game tokens than quarters, but that doesn't affect token value because there is a high recirculation rate that causes tokens to re-enter the market at what is perceived as an unlimited supply. Tokens circulate quickly because they only have value for specific games that consume the tokens entirely; they are treated as consumables because the game options only allow consumption. If the token supply were to become limited then people would still not pay more than a quarter because a quarter will buy the same amount of entertainment elsewhere.

Suppose Mr.Cheeze were to replace games with betting machines that divide tokens between game participants rather than consume them. Participants discover it is now entertaining to defer consumption and also to exchange tokens. If there is demand for a limited supply of tokens then that is an incentive for the price of a token to exceed a quarter; however, holders of tokens come to realize that few really offer more for a token than what a quarter will buy of similar entertainment elsewhere. Potential buyers go elsewhere. Holders eventually sell for a quarter to purchase other things as there still isn't much incentive to hold tokens.

The market price for a token is inelastic because there is a maximum price for demand. Small quantities of tokens will sell for close to a quarter and larger quantities could be purchased at a premium for inelastic demands like a large birthday party for kids like Johnny who only likes Mr.Cheeze stores. If tokens are hard to acquire then fewer kids like Johnny would ever come to know of Mr.Cheeze to desire it. The limited supply of tokens for sale would over time prevent even large quantities of tokens from being sold for more than a quarter; in fact, there is now risk that tokens will sell for less than a quarter each due to decreased market participation and greater profit incentives elsewhere. Liquidity would come at a large premium, and therefore there would be low liquidity and sudden price fluctuations. The value of a token would be defined by other ways to spend a quarter. The market value for a token would naturally approach a quarter, but low liquidity discourages participation. Mr.Cheeze would sell less pizza and entertainment, and profits would go elsewhere. Mr.Cheeze would need to do something quickly to say in business.

Mr.Cheeze caused tokens to be treated as assets, so why not allow lending and borrowing like other assets? If a person lends their tokens then they can earn interest. If a person has an interest in holding tokens then they'll pay interest. The interest rate is an incentive to put tokens into circulation. Loan instruments make it easier for people to acquire tokens to spend on entertainment. People could then consume a large supply of tokens at close to a quarter. They could purchase tokens for a quarter and then loan them out for interest. The value of a token would only drop below a quarter if greater returns are offered elsewhere. The value of holding a token is the interest that it can return for lending it into circulation.

Loans aren't the only opportunity, Mr.Cheeze also introduces futures contracts on the price of tokens. These games are now built around the trading of tokens themselves. The futures contracts are a leveraged financial incentive for avoiding price fluctuation. A vibrant economy has grown around the exchange of tokens. Everyone is talking about the tokens, the industry had changed. Competitors give up or are pushed out by taxes and regulations that Mr.Cheeze drafted to regulate his token exchange industry. Any "failure" becomes a need for more regulation. Mr.Cheeze is happy again for a while.

Mr.Cheeze soon realizes that pizzas are still not selling as quickly as they once had. He begins to lament that he can no longer easily give tokens as participation incentives. It is harder to increase entertainment value for some customers while maintaining value for those who are willing to pay more. Mr.Cheeze dislikes that others are getting the profits that he once had for himself, and that he has lost control over his tokens. Because he can, he decides to change more rules for his benefit.

Mr.Cheeze decides to mint more tokens and keep the profits. But calling it "profit" would be unpopular so he says that he is doing it to maintain sound monetary policy (much like the Federal Reserve) and that he will not personally benefit (except for the generous salary he pays himself and staff). The idea is sold as "necessary and prudent" to encourage token liquidity and price stability. The idea sells well. It is suddenly much easier to acquire tokens and more people are consuming tokens and pizza again. The tokens are now closer to currency than asset. There is less incentive to hold tokens, and people hold them until better forms of money are available. Mr.Cheeze actually likes it if people sell their tokens because it just means more for him to control. He learns to maximize his profits by adjusting the token supply, and over time he naturally acquires most of the token supply again. All is good for Mr.Cheeze, he inspired others to work to build an economy that became his gain over time. Through exclusive control over the idea of token exchanges, Mr.Cheeze decides to expand into more markets.

Mr.Cheeze redefined the industry in a way that removes competition through excitement of a new token use. The token value still needs to compete with other entertainment uses for quarters, but few dare to compete in the same markets. The only thing Mr.Cheeze has to fear now is competition from a token use that avoids his regulatory monopoly and provides a better return on investment. Mr.Cheeze still likes to convince himself that he cares for open markets and competition though. He'd probably pause for a moment or two before cracking heads when new technology threatens his monopoly. Come to think of it, none of these ideas really are new.