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Offline bytemaster

FDIC for BitUSD
« on: August 11, 2014, 04:41:28 PM »

One of the nagging issues we have been facing is what happens when the collateral behind a short position is not enough.  Our options have been:

1) Freeze all markets until someone who holds BitUSD is willing to sell at a loss.
2) Debase BitUSD by allowing unbacked BitUSD to circulate
3) Debase XTS by issuing new XTS to cover the loss.

Test net 12 implemented Option #1... but this option depends upon someone being willing to "take one for the team" to restart the markets.  This is a principle I don't like.
Debasing BitUSD everytime this happens would gradually break the peg and BitUSD would become an asset that is correlated to USD by some constant factor that changes slightly every time a short is blown out.   This makes the system appear to be broken.

Option 3 was considered too risky because someone could manipulate the market to print up unbounded XTS.  Fortunately we have introduced price feed / rate-of-movement restrictions that prevent this particular attack from yielding unlimited XTS.    Without being able to attack in this manner Option 3 returns as the best overall approach. 

What this means is that all XTS holders stand behind the "market peg" and that those who hold USD have a stronger peg.
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 Riverhead

Re: FDIC for BitUSD
« Reply #1 on: August 11, 2014, 04:53:24 PM »
Fiduciary Dilution for Insufficient Collateral :-)

Offline donkeypong

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Re: FDIC for BitUSD
« Reply #2 on: August 11, 2014, 05:23:10 PM »
I hate to say it, but that's what XTS is there for. To keep BitUSD stable, XTS must suffer the whims of the market. From an economic perspective, there really is no choice but #3. And hopefully, the market is robust enough and the technology is strong enough that things will keep on moving without this sort of issue. It gives me more faith in BitShares every time I see a post like this, though. You are thinking through these issues, testing, and seeking community consensus. This is going to be a damn fine product.

Offline xeroc

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Re: FDIC for BitUSD
« Reply #3 on: August 11, 2014, 05:29:06 PM »
I hate to say it, but that's what XTS is there for. To keep BitUSD stable, XTS must suffer the whims of the market. From an economic perspective, there really is no choice but #3. And hopefully, the market is robust enough and the technology is strong enough that things will keep on moving without this sort of issue. It gives me more faith in BitShares every time I see a post like this, though. You are thinking through these issues, testing, and seeking community consensus. This is going to be a damn fine product.
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Offline bitmeat

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Re: FDIC for BitUSD
« Reply #4 on: August 11, 2014, 05:36:02 PM »
I was about to start a competitor to bitshares X doing 3) because I wasn't happy with 1)

I am glad you have taken this approach.

Offline bytemaster

Re: FDIC for BitUSD
« Reply #5 on: August 11, 2014, 05:39:15 PM »
Fiduciary Dilution for Insufficient Collateral :-)

Free DAC Insured Collateral .... though i like yours better.
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.

busygin

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Re: FDIC for BitUSD
« Reply #6 on: August 11, 2014, 05:54:18 PM »
I support option 3 too

Offline Riverhead

Re: FDIC for BitUSD
« Reply #7 on: August 11, 2014, 05:58:44 PM »
Would this mean price feeds would be permanent? I'm OK with that, just curious.

Offline bytemaster

Re: FDIC for BitUSD
« Reply #8 on: August 11, 2014, 06:00:20 PM »
Would this mean price feeds would be permanent? I'm OK with that, just curious.

No... eventually the price feeds will just become the 24 hour moving average.
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 MrJeans

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Re: FDIC for BitUSD
« Reply #9 on: August 11, 2014, 08:13:02 PM »
Option 3 makes the most sense to me.

Offline tonyk

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Re: FDIC for BitUSD
« Reply #10 on: August 11, 2014, 08:24:59 PM »
re: 3)

The rules on that, is something the community  can chime in ,if you have thought about them already.

Or the system just gonna buy them right away anytime the collateral is not enough?
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline bytemaster

Re: FDIC for BitUSD
« Reply #11 on: August 11, 2014, 08:25:48 PM »
re: 3)

The rules on that, is something the community  can chime in ,if you have thought about them already.

Or the system just gonna buy them right away anytime the collateral is not enough?

The system will buy right away at any price up to 33% below the median price feed.
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 Riverhead

Re: FDIC for BitUSD
« Reply #12 on: August 11, 2014, 08:29:46 PM »
re: 3)

The rules on that, is something the community  can chime in ,if you have thought about them already.

Or the system just gonna buy them right away anytime the collateral is not enough?

The system will buy right away at any price up to 33% below the median price feed.


And the pool of funds it draws from is increasing BTSX supply? So the delegates burn it (along with lost private wallets) and the market mints it? Will there be a hard cap on 2 billion supply or is it mathematically highly unlikely the mint rate will catch the burn rate?  Or is that something the delegates will need to control with their income? If the latter then we need to reconsider the policy of not raising fees once the "crisis" passes.
« Last Edit: August 11, 2014, 08:31:25 PM by Riverhead »

Offline tonyk

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Re: FDIC for BitUSD
« Reply #13 on: August 11, 2014, 08:34:37 PM »
I agree with your thoughts here:
https://bitsharestalk.org/index.php?topic=6793.msg91116#msg91116

re: 3)

The rules on that, is something the community  can chime in ,if you have thought about them already.

Or the system just gonna buy them right away anytime the collateral is not enough?

The system will buy right away at any price up to 33% below the median price feed.

Are you sure we can not find potentially better solutions?
1. As in giving some chance for the market to recover first?
2. Possibly other improvements?
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline bytemaster

Re: FDIC for BitUSD
« Reply #14 on: August 11, 2014, 08:35:27 PM »
Quote

The analogy is almost perfect... the US prints new dollars to keep depositors whole when banks run out of collateral backing their loans.   

US Bank creates USD backed by collateral of a house.  Housing market collapses and loan defaults so there is insufficient collateral to "buy back the USD" to take it out of circulation.    With FDIC they print new dollars to cover the loss... a bail out of the shareholders paid for by everyone.  This would be like allowing unbacked BitUSD to circulate.

What should happen is that the banks owners (shareholders) should make good on its loans (those that lent the bank USD, ie: depositors).  The only way for a real bank to do this is to sell shares in itself to raise the capital.  If it is unable to raise enough capital by selling shares then it should give the depositors the shares.   We are effectively building this bailout through share issuance into the system.

The shareholders are borrowing USD into circulation with a promise to pay 1 USD worth of shares in the future.   When we borrow them into existence, we lend them to the short which then sells them.  We lend to the short because the short has provided enough collateral that the shareholders consider it "low risk".   When viewed from this perspective it makes everything perfectly clear and natural.

Where the bank issues new shares in itself to cover the loss.   

In other words... there is no limit to how much can be printed because XTS holders implicitly back all BitUSD issuance.  If issuance starts to get too high (diluting the shareholders beyond 2B XTS) then that means delegates need to burn more and charge higher transaction fees to cover the risk.  The system can still earn a profit, the shareholders just have to choose to "save in advance" or "dilute as necessary". 
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.

 

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