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Offline Legarcon

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The Argument Against Bitshares
« on: January 20, 2014, 04:16:01 PM »

Someone posted a read on bitcointalka bout the arguement against bitshares-- and how the prediction market outcome is flawed because there is no output of future rewards. Without control of which better (long/short) gets the future rewards the price will move in sideways, unanalogus to the actual price of the asset.  They also cite the paper of Market for Lemons, where because information is assymetrical, the sellers will always have an advantage, since they are more informed than the buyers.  This will cause an obstruction in price pegging to the real asset (Bitgold to GLD).  Take a read.  What do you think.  I'm trying to wrap my head around this.  Its a sound arguement again bitshares. 

https://bitcointalk.org/index.php?topic=423000.new#new

BitShares is not a prediction market, nor could it support one, as it has numerous practical and theoretical problems.

BitShares is a possible future cryptocurrency which allows users to create collateralized debt- instruments called BitAssets. These BitAssets are automatically re-priced (and even liquidated via margin call) based on their mark-to-market value, as determined solely by the price implied by the most-recent BitAsset-creation. The author claims that arbitrageurs will take advantage of differences between the BitPrice and the True Price and therefore price the asset correctly, and supports this claim by arguing that users are trading in a prediction market, and prediction markets are accurate sources of prices.
The claim that users are trading in a prediction market is false, as is the claim that there are ‘arbitrageurs’ at all. In an ‘index prediction market’, shares are repurchased at the price of an index, for example one share of “Hillary2016ElectoralCollege” may be ultimately repurchased for $255/share, if Hillary Clinton managed 255 Electoral College votes in the 2016 election. The magic of prediction markets is that the Future Payout = Future Repurchase – Today’s Market Price, meaning that traders who perceive a positive expected future payout (ie an incorrect price) can profit by trading on and revealing that information (changing the price). In contrast, on November 9th, 2016, after the votes are counted, the world of BitShares will experience no change in state, no payout at all (!) and the “Hillary2016ElectoralCollege” shares will lack even speculative value. They may go up, down, or sideways without bound.
In fact, although the author claims to be a “self-taught Austrian Economist”, the entire microeconomic foundation of BitShares is incorrect. Fundamentally, BitShares assumes that prices are driven by arbitrageurs, when in fact they are driven by users. Arbitrageurs merely perform the simple service of aggregating and cancelling different price offerings, which prevents users from being ripped off. Speculators absorb and transfer risk, brokers call in the order, and janitors cleans the trading floor to prevent slippage. It is not the employees, but the users, who set prices by expressing supply and demand preferences (While short episodes of speculator-control exist, they are defined by their terminal insanity and a subsequent correction to the user-controlled price level). If the market offers a price which is “too low”, such as a car for $5, people will
buy them to use: to drive, to enjoy the latest car tech, to avoid breakdowns, for their children, or simply because $5 is less than gasoline or oil changes. The homeless could even live in a $5 car. If the market set the price of cars to $5,000,000, people would sell them to use that money to buy other things to use. In BitShares, there is no use, only speculation, and so prices can move without bound.
Even if the BitShares idea were partially valid, the scourge of risk, and well-known effects of Asymmetric Information would iteratively drag the price of all BitAssets to zero, in a phenomenon called ‘The Market for Lemons’. The margin call system only increases the fragility of this mysterious experiment, such that the richest or craziest agents could create and profit from immensely volatile price swings.

Offline bytemaster

Re: The Argument Against Bitshares
« Reply #1 on: January 20, 2014, 05:11:25 PM »
Aside from attacking a straw man interpretation of my explanation this critique sounds very familiar to ones which I have debunked many times before.

Lets assume for a second that the prediction market was for an event 5 days in the future most people agree the price would track.  Make it 5 months and the price during that 5 month period would track clear up until the day it closes.   Make it 5 years and the price will track until the day it closes.  Make it 50 years?   Forever?    At what point does the LENGTH of maturity of a prediction market affect present day pricing?  The fact remains that you can only enter or exit positions through voluntary trades and all voluntary trades are based upon a prediction on what future trades are likely to be possible.  In effect, you buy or sell based upon your future prediction of what the market for a particular BitAsset will be.   If his theory that BitUSD will go to 0 is in fact correct then he should short BitUSD.   Unfortunately for him he will have to unwind his position in the future which means buying BitUSD which means a non-0 price.  In fact, the holders of BitUSD would demand as much as they can get away with because they are earning 5% for holding the note.  This reality means BitUSD cannot head toward 0. 

The asymmetric information argument is entirely bogus in this case.  How does someone who holds BTS or BitUSD have more information about what the exchange rate will be in the future than anyone else?    BitAssets cannot move toward 0 because they are all collateralized by 2x their initial value and the short position is paying 5% to avoid covering.   This means that the long position can hold out until the short position agrees to a reasonable valuation. 

At the risk of making an appeal to authority I will point out that BitShares X has been reviewed by Dr. Charles Evans  (http://www.pecuniology.com/who.php) who maintains that my economic model is solid.  I only make this appeal to authority to counter the claims that I have no 'authority' because I am "self-taught".   So lets ignore the appeal to authority or lack of. 

Lets assume we were to create a prediction market for an event that is 100% certain.   Would the price ever deviate?  Any attempts of pushing the price away would be seen as a profit opportunity by all participants. This is the case with prediction markets based upon HISTORICAL outcomes.   You don't need a judge to make the payout, players will voluntarily settle even when the lose because they have 2x collateral that is tied up.   So they will accept their losses (50%) to avoid 100% loss of their collateral.

Lastly his straw man argument that I see a difference between "users" and "arbitrageurs" is entirely off base.  All individuals are motivated by profit opportunities and thus perform the arbitrage function when profitable to do so. 

So based upon the number of factual errors and misrepresentations I cannot take his economic analysis seriously.
« Last Edit: January 20, 2014, 05:18:36 PM by bytemaster »
For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline luckybit

Re: The Argument Against Bitshares
« Reply #2 on: January 20, 2014, 08:12:40 PM »
It is possible that some people will have more information than others but that is true in any prediction market. I don't see why the information asymmetry argument would only be applied to Bitshares and not the entire stock market. There are people with inside information in all stock markets.

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Offline onceuponatime

Re: The Argument Against Bitshares
« Reply #3 on: January 21, 2014, 07:04:04 PM »
The OP registered on January 20th, has exactly one post, but has been able to take up Bytemaster's extremely valuable time just prior to the major Miami initiative.

The spurious argument needed to be refuted because it appeared here. But we need to find a way to prevent further wastage of valuable resources, perhaps by keeping newly registered posters in the Newbie section for a period of time and a number of posts.

Offline rysgc

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Re: The Argument Against Bitshares
« Reply #4 on: January 21, 2014, 07:10:28 PM »
The OP registered on January 20th, has exactly one post, but has been able to take up Bytemaster's extremely valuable time just prior to the major Miami initiative.

The spurious argument needed to be refuted because it appeared here. But we need to find a way to prevent further wastage of valuable resources, perhaps by keeping newly registered posters in the Newbie section for a period of time and a number of posts.

Good idea, happens more often these type of things. Or maybe disable posting abilities for a few days , or disable new registrations and continue with the people who're on it now and re-open when things are rolling. Maybe a bit harsh but sometimes it seems like people getting paid to write crap :p
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Offline bitcoinba

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Re: The Argument Against Bitshares
« Reply #5 on: January 21, 2014, 07:17:07 PM »
The OP registered on January 20th, has exactly one post, but has been able to take up Bytemaster's extremely valuable time just prior to the major Miami initiative.

The spurious argument needed to be refuted because it appeared here. But we need to find a way to prevent further wastage of valuable resources, perhaps by keeping newly registered posters in the Newbie section for a period of time and a number of posts.

Good idea, happens more often these type of things. Or maybe disable posting abilities for a few days , or disable new registrations and continue with the people who're on it now and re-open when things are rolling. Maybe a bit harsh but sometimes it seems like people getting paid to write crap :p

For what it is worth, I agree. I am enjoying learning through the various criticisms and arguments, but it obvious that there is a negative element from either miners who are unhappy that they could flip PTS as profitably short-term or a random poster with a point to prove. Unfortunately, the only way is to moderate more tightly. Perhaps the development of Keyhotee will give us more options to solve this in the future.

Offline Markus

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Re: The Argument Against Bitshares
« Reply #6 on: January 21, 2014, 10:43:25 PM »
The OP registered on January 20th, has exactly one post, but has been able to take up Bytemaster's extremely valuable time just prior to the major Miami initiative.

The spurious argument needed to be refuted because it appeared here. But we need to find a way to prevent further wastage of valuable resources, perhaps by keeping newly registered posters in the Newbie section for a period of time and a number of posts.

Ignoring criticism is not the right thing. That would only confirm the critics in their belief.
The discussion is important and if it delays the BitShares launch by an hour because Bytemaster got distracted - well I'd rather wait a bit longer for a quality product.

Offline santaclause102

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Re: The Argument Against Bitshares
« Reply #7 on: January 22, 2014, 12:17:36 AM »
The OP registered on January 20th, has exactly one post, but has been able to take up Bytemaster's extremely valuable time just prior to the major Miami initiative.

The spurious argument needed to be refuted because it appeared here. But we need to find a way to prevent further wastage of valuable resources, perhaps by keeping newly registered posters in the Newbie section for a period of time and a number of posts.

Ignoring criticism is not the right thing. That would only confirm the critics in their belief.
The discussion is important and if it delays the BitShares launch by an hour because Bytemaster got distracted - well I'd rather wait a bit longer for a quality product.

+1

Every newbie is a potential adopter. And we could not afford such an arrogance. This would be bad PR. All questions have to be answered with kindness. This was also posted on BTT so is not unimportant...  But in general it would be ideal if someone who understands the product to the degree bytemaster does and gets paid for answering all questions...
« Last Edit: January 22, 2014, 12:19:39 AM by delulo »

Offline rysgc

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Re: The Argument Against Bitshares
« Reply #8 on: January 22, 2014, 01:05:33 AM »
Yeah you're all right, what I meant was people in general who sign up, post nonsense and then never show up again leaving a bad impression for others who might just stumble on that particular post. Of course criticism is good but for a first post it's kinda odd.
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Offline santaclause102

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Re: The Argument Against Bitshares
« Reply #9 on: January 22, 2014, 01:40:48 AM »
Yeah you're all right, what I meant was people in general who sign up, post nonsense and then never show up again leaving a bad impression for others who might just stumble on that particular post. Of course criticism is good but for a first post it's kinda odd.

You are right in that respect. I dont see a practical way to solve this... You cant close the community. This would be against any open source / decentralization imperative...
A paid moderator / PR guy would make sense in my opinion.

Offline bytemaster

Re: The Argument Against Bitshares
« Reply #10 on: January 22, 2014, 02:48:03 AM »
Yeah you're all right, what I meant was people in general who sign up, post nonsense and then never show up again leaving a bad impression for others who might just stumble on that particular post. Of course criticism is good but for a first post it's kinda odd.

You are right in that respect. I dont see a practical way to solve this... You cant close the community. This would be against any open source / decentralization imperative...
A paid moderator / PR guy would make sense in my opinion.

The challenge I face is that while many people understand or have faith in the designs of BitShares X, even my closest partners have a hard time defending and teaching it.  A paid PR person would have to learn a lot to address these types of posts.

I find these posts to be good practice as they force me to refine my explanation.  In the end people reading this thread will learn something, even long-time supporters.  So this is not waisted effort on my part.  As the community grows more and more volunteers will be able to step up and support the design and in a few short months these arguments will be as empty as those saying "Bitcoin is Impossible" or "Bitcoin is Worthless".   Then everyone will be frantically attempting to explain why it is working when their own misunderstanding of economics says it shouldn't. 

Either that or I will learn a lot and have an opportunity to improve. 
For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline santaclause102

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Re: The Argument Against Bitshares
« Reply #11 on: January 22, 2014, 03:06:39 AM »
Yeah you're all right, what I meant was people in general who sign up, post nonsense and then never show up again leaving a bad impression for others who might just stumble on that particular post. Of course criticism is good but for a first post it's kinda odd.

You are right in that respect. I dont see a practical way to solve this... You cant close the community. This would be against any open source / decentralization imperative...
A paid moderator / PR guy would make sense in my opinion.

The challenge I face is that while many people understand or have faith in the designs of BitShares X, even my closest partners have a hard time defending and teaching it.  A paid PR person would have to learn a lot to address these types of posts.

I find these posts to be good practice as they force me to refine my explanation.  In the end people reading this thread will learn something, even long-time supporters.  So this is not waisted effort on my part.  As the community grows more and more volunteers will be able to step up and support the design and in a few short months these arguments will be as empty as those saying "Bitcoin is Impossible" or "Bitcoin is Worthless".   Then everyone will be frantically attempting to explain why it is working when their own misunderstanding of economics says it shouldn't. 

Either that or I will learn a lot and have an opportunity to improve.

That's a good attitude to have.

I was more aiming for someone on the forum who has a decent understanding. A paid PR person would not have the acceptance in the crypto community and not the passion needed...

I will post my current understanding on bitshares and ask questions in the next days... :)

Offline CWEvans

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The Argument Against "The Argument Against Bitshares"
« Reply #12 on: February 12, 2014, 11:58:47 PM »
One of the reasons that I switched from economics to finance was to avoid pointless bickering.  In finance the only correct response to an 'analysis' like that found at the end of the OP is to challenge the one making the claims to a public wager. If BitShares does not collapse as predicted, then Legarcon should donate USD 10,000 to a charity that he or she despises.

If one has nothing to lose, should one's powers of prophesy fail, then it is just economics.

To wit:

In fact, although the author claims to be a “self-taught Austrian Economist”, the entire microeconomic foundation of BitShares is incorrect.

The foundation of Austrian School microeconomics consists of methodological individualism (All human action is individual action.), subjective value (inter-personal, intra-personal, and inter-temporal), time preference, and viewing the market as a process (rather than as a dimensionless and instantaneous equilibration)... none of which the author addresses, notwithstanding that for BitShares—or any market—to function, all of these apply.

Fundamentally, BitShares assumes that prices are driven by arbitrageurs, when in fact they are driven by users.

BitShares, being inanimate strings of 1s and 0s, assume nothing. Anthropomorphisms make for engaging fables, but have no place in scientific analysis.

As the author never defines 'arbitrageur' or 'user', it is difficult to know what distinction is being drawn here. As understood by financial economists, arbitrage is the simultaneous buying and selling of an asset on different markets, in order to take advantage of price discrepancies. By selling on markets with relatively high prices, and simultaneously buying the same asset on markets with relatively low prices, arbitrageurs bid the high price down and the low price up, earning zero-cost profits until the arbitrage opportunity vanishes.

In this way, arbitrageurs do drive prices, as do information traders and noise traders.

I am unfamiliar with a market 'user', so I must leave the assertion that prices are driven by users unchallenged.

Arbitrageurs merely perform the simple service of aggregating and cancelling different price offerings, which prevents users from being ripped off.

The phrase 'ripped off' suggests that some 'fair price' exists. However, this is an opinion, as opposed to a fact, and thus irrelevant in this context.

Speculators absorb and transfer risk, brokers call in the order, and janitors cleans the trading floor to prevent slippage. It is not the employees, but the users, who set prices by expressing supply and demand preferences

It is unclear where the janitors and employees fit into this analysis. Again, the author makes no attempt to explain who market 'users' are.

(While short episodes of speculator-control exist, they are defined by their terminal insanity and a subsequent correction to the user-controlled price level).

As the future is unknowable, all transactions are speculative. To assert that one category of trader is  'investors' ('users'?) and another is 'speculators' is to assert that the one group can divine the future, and the other is comprised of mere gamblers who lack the power of prophesy.

If the market offers a price which is “too low”, such as a car for $5, people will buy them to use: to drive, to enjoy the latest car tech, to avoid breakdowns, for their children, or simply because $5 is less than gasoline or oil changes. The homeless could even live in a $5 car.

If the price is 'too low', then why would the sellers sell? Price ceilings that are below the market-clearing price most commonly are mandated by government agents, and not by market participants, and they invariable result in shortages.

If the market set the price of cars to $5,000,000, people would sell them to use that money to buy other things to use.

Who would buy the cars, assuming that the $5 million had approximately the same purchasing power that it would have today? Price floors that are above the market-clearing price most commonly are mandated by government agents, and not by market participants, and they invariable result in unsold surplus goods.


In BitShares, there is no use, only speculation, and so prices can move without bound.

Prices are limited by the resources of the market participants.  For a price to move without bound, one would need at least one participant who had infinite wealth. Even the universe is not infinite.

Even if the BitShares idea were partially valid, the scourge of risk, and well-known effects of Asymmetric Information would iteratively drag the price of all BitAssets to zero, in a phenomenon called ‘The Market for Lemons’.

The phrase 'The Market for Lemons' refers to an economic paper from 1970. Nowhere in that paper does the price fall to zero.

Cars are not fungible, thus some are 'cherries' and others are 'lemons'. For a given BitAsset issue, the opposite is the case. Among BitAssets issues, it might be the case that market participants might hoard 'cherry' BitAssets (as we see today with Bitcoin), but it is a bit of a stretch to predict that no one would circulate them (as we see with Bitcoin, when people use it as money).

The margin call system only increases the fragility of this mysterious experiment, such that the richest or craziest agents could create and profit from immensely volatile price swings.

This is a hypothesis, and not a foregone conclusion. The only way to know is to run the experiment.

 

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