FDIC for BitUSD

[bytemaster]

You mean #2, right?

Yes

[bytemaster]

We opted for #2... USD becomes partially backed until fees can consume it.   We save up fees from all trades. 

[theoretical]

We want to assure USD holders that they'll all eventually be able to sell if the price reaches some level and remains steady, but we also want to assure XTS holders that they won't be subjected to unbounded dilution over any finite time-frame.  Here are my thoughts on how to accomplish that.

Back in March I proposed a compromise between options (1) and (3).  Basically my idea was to use the amount of recently paid fees to create an upper bound on XTS dilution [1].

Thinking on the problem some more, I'm not sure if fees alone would provide adequate capitalization for the reserve.  I suggest making the reserve increase each block, up to some capitalization limit.  Then the reserve uses that money to close out undercapitalized shorts (using some deterministic algorithm based on the state of the market and ledger, subject to circuit-breaker type restrictions).  Basically XTS holders will be charged interest (through dilution) in the beginning when the reserve is being funded, then the interest goes away when the reserve's capitalization limit is reached, then the interest is charged again to recapitalize the reserve after a black swan.

The cap limit could be a simple fraction of the reserve, but I like the idea of having it based on the maximum amount of XTS that would be needed to cover (say) a 2.5x rise in price.

If you want to charge a fixed rate of interest, you could just have the reserve capitalization increase each block by some fixed fraction of the total XTS supply.  Or you could have the reserve decay exponentially to the capitalization limit to charge a higher interest rate to XTS holders when the reserve is badly undercapitalized, gradually decreasing the interest rate as the reserve nears its capitalization limit.

[1] https://github.com/drltc/xts-proposal#insured-shorts

[Overthetop]

BTSX description from detractor, NXT/Bitcoin supporters etc.

Unlike other digital currencies or DAC's that have either no inflation like NXT or defined limited inflation like Bitcoin. BTSX has the ability to print new money when required just like the Federal Reserve & the other central banks we all know and love! But unlike central banks which only create a little bit of inflation, BTSX can create a lot all at once! So in a 50% flash crash for example, where you've already lost 50% of the value of your BTSX, we could devalue you by up to a further 25%! Won't that be a fun few hours to remember! But don't worry about the smart money & professional traders because a minority can hedge themselves and the rest will just sell very early on in a crash leaving the regular guys like you holding the bag when there's a problem. It's just like a real economy! Welcome to BTSX - The future of money!

I could see this being posted against nearly every positive sentiment for Bitshares on other forums, very bad for PR reasons along with the ideology.

Yes, I agree.

If we got the possibility to dilute the BTSX, the competitors would bite BTS all around to hurt the reputation of BTS.

[Riverhead]

That would be a first for an exchange. Maybe not bad though. Would force people to think rather than just throwing something out there too see if it flies one day.

[bitmeat]

I will strongly advise against any rules preventing people from cancel-ling their orders.

0.02 BTSX

Partially agree. I think in order to prevent blockchain bloat we should have high fees for canceling an order. Not preventing but discouraging.

[Empirical1]

BTSX description from detractor, NXT/Bitcoin supporters etc.

Unlike other digital currencies or DAC's that have either no inflation like NXT or defined limited inflation like Bitcoin. BTSX has the ability to print new money when required just like the Federal Reserve & the other central banks we all know and love! But unlike central banks which only create a little bit of inflation, BTSX can create a lot all at once! So in a 50% flash crash for example, where you've already lost 50% of the value of your BTSX, we could devalue you by up to a further 25%! Won't that be a fun few hours to remember! But don't worry about the smart money & professional traders because a minority can hedge themselves and the rest will just sell very early on in a crash leaving the regular guys like you holding the bag when there's a problem. It's just like a real economy! Welcome to BTSX - The future of money!

I could see this being posted against nearly every positive sentiment for Bitshares on other forums, very bad for PR reasons along with the ideology.

On second thought BitUSD must be stable to be widely used for payment by customers, shops etc. Today payment in BTC is exchanged into USD by shops. BitUSD could be cheaper, hopefully and probably many user will not care about BTSX if  1their BitUSD = always 1USD.

Forex is a bigger market. Focus on replacing Forex.

Forex is for sure lucrative market. Forex traders count every pip in EUR/USD on some platforms even 1/2 pip.
If I am not badly wrong, the stability of BitUSD/USD is a key factor.

I'm personally quite comfortable with the risks as outlined by BM in his 'worst case in practice' example, I also agree with providing the most BitUSD stable peg possible & hedging is possible. I'm just always marketing focused though & the above is bad.

I noticed BM wrote this - 

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".

What about marketing the potential debasement as temporary? We re-direct fees from burning into a fund that aims to get to 'X' size that will be able to serve that purpose. I think no dividends for a while is more marketable that unexpected dilution.

[valtr]

BTSX description from detractor, NXT/Bitcoin supporters etc.

Unlike other digital currencies or DAC's that have either no inflation like NXT or defined limited inflation like Bitcoin. BTSX has the ability to print new money when required just like the Federal Reserve & the other central banks we all know and love! But unlike central banks which only create a little bit of inflation, BTSX can create a lot all at once! So in a 50% flash crash for example, where you've already lost 50% of the value of your BTSX, we could devalue you by up to a further 25%! Won't that be a fun few hours to remember! But don't worry about the smart money & professional traders because a minority can hedge themselves and the rest will just sell very early on in a crash leaving the regular guys like you holding the bag when there's a problem. It's just like a real economy! Welcome to BTSX - The future of money!

I could see this being posted against nearly every positive sentiment for Bitshares on other forums, very bad for PR reasons along with the ideology.

On second thought BitUSD must be stable to be widely used for payment by customers, shops etc. Today payment in BTC is exchanged into USD by shops. BitUSD could be cheaper, hopefully and probably many user will not care about BTSX if  1their BitUSD = always 1USD.

Forex is a bigger market. Focus on replacing Forex.

Forex is for sure lucrative market. Forex traders count every pip in EUR/USD on some platforms even 1/2 pip.
If I am not badly wrong, the stability of BitUSD/USD is a key factor.

[luckybit]

BTSX description from detractor, NXT/Bitcoin supporters etc.

Unlike other digital currencies or DAC's that have either no inflation like NXT or defined limited inflation like Bitcoin. BTSX has the ability to print new money when required just like the Federal Reserve & the other central banks we all know and love! But unlike central banks which only create a little bit of inflation, BTSX can create a lot all at once! So in a 50% flash crash for example, where you've already lost 50% of the value of your BTSX, we could devalue you by up to a further 25%! Won't that be a fun few hours to remember! But don't worry about the smart money & professional traders because a minority can hedge themselves and the rest will just sell very early on in a crash leaving the regular guys like you holding the bag when there's a problem. It's just like a real economy! Welcome to BTSX - The future of money!

I could see this being posted against nearly every positive sentiment for Bitshares on other forums, very bad for PR reasons along with the ideology.

On second thought BitUSD must be stable to be widely used for payment by customers, shops etc. Today payment in BTC is exchanged into USD by shops. BitUSD could be cheaper, hopefully and probably many user will not care about BTSX if  1their BitUSD = always 1USD.

Forex is a bigger market. Focus on replacing Forex.

[valtr]

BTSX description from detractor, NXT/Bitcoin supporters etc.

Unlike other digital currencies or DAC's that have either no inflation like NXT or defined limited inflation like Bitcoin. BTSX has the ability to print new money when required just like the Federal Reserve & the other central banks we all know and love! But unlike central banks which only create a little bit of inflation, BTSX can create a lot all at once! So in a 50% flash crash for example, where you've already lost 50% of the value of your BTSX, we could devalue you by up to a further 25%! Won't that be a fun few hours to remember! But don't worry about the smart money & professional traders because a minority can hedge themselves and the rest will just sell very early on in a crash leaving the regular guys like you holding the bag when there's a problem. It's just like a real economy! Welcome to BTSX - The future of money!

I could see this being posted against nearly every positive sentiment for Bitshares on other forums, very bad for PR reasons along with the ideology.

On second thought BitUSD must be stable to be widely used for payment by customers, shops etc. Today payment in BTC is exchanged into USD by shops. BitUSD could be cheaper, hopefully and probably many user will not care about BTSX if  1their BitUSD = always 1USD.

[valtr]

The challenge we face is that people can cancel their orders.  Unless we prevent people from canceling orders if canceling the order would put the market with insufficient depth. 

So many potential rules and they all have nasty consequences.

I will strongly advise against any rules preventing people from cancel-ling their orders.

0.02 BTSX

If Bitshares is to be a trading engine for forex, futures, commodity market, traders must be able to cancel their orders.
I think not be able to cancel order will turn off many potential users automatically.

[Pocket Sand]

BTSX description from detractor, NXT/Bitcoin supporters etc.

Unlike other digital currencies or DAC's that have either no inflation like NXT or defined limited inflation like Bitcoin. BTSX has the ability to print new money when required just like the Federal Reserve & the other central banks we all know and love! But unlike central banks which only create a little bit of inflation, BTSX can create a lot all at once! So in a 50% flash crash for example, where you've already lost 50% of the value of your BTSX, we could devalue you by up to a further 25%! Won't that be a fun few hours to remember! But don't worry about the smart money & professional traders because a minority can hedge themselves and the rest will just sell very early on in a crash leaving the regular guys like you holding the bag when there's a problem. It's just like a real economy! Welcome to BTSX - The future of money!

I could see this being posted against nearly every positive sentiment for Bitshares on other forums, very bad for PR reasons along with the ideology.

[Empirical1]

All of that said lets consider very carefully this flash crash event because the numbers being thrown around about potential dilution are FUD.

I was working from your previous description of an extreme event -

The MAXIMUM ratio is ~33% based upon current rules which means almost all XTS would be locked up as collateral and the remaining XTS held in reserve to buy back USD to cover the collateral.    Under this situation a 65% flash crash would result in a $8.5 million short fall which would mean a 25% dilution event. 

The 'worst case in practice' seems less threatening to be sure. 

So the "worst case" is that all bids cancel at once and the new "high bid" is 25% of the old high bid (75% fall instantly).   All margin positions get called at once and 66% of the USD is purchased back by the collateral.  The remaining 33% of the USD is purchased back by issuing new shares.   So if you started with 30% of the cap represented by USD then you are looking at a 10% dilution in a "worst case" 75% crash.    In practice crashes will be slower, many of the positions will be covered without any dilution and less than 30% of the cap will be represented by USD.   So I think what we are looking at here is a whole lot of fear about a "bad event" that you can "hedge against" and is "unlikely" to happen where the potential losses from "dilution" are less than the average daily volatility of Bitcoin.

I agree with luckybit that it's less of a numbers problem than a marketing problem when you start adding the potential for unexpected dilution to a digital currency or DAC though.

I'll come back with some NXT FUD description of BTSX under '3' in a bit.

Edit:

(Please bear in mind the following is designed for maximum provaction and FUD. I know BTSX is more like a company than a currency. I'm just playing Devil's advocate and putting the worst anti-marketing out there now I can think. So that it can be counter-acted now rather than later.)

BTSX description from detractor, NXT/Bitcoin supporters etc.

Unlike other digital currencies or DAC's that have either no inflation like NXT or defined limited inflation like Bitcoin. BTSX has the ability to print new money when required just like the Federal Reserve & the other central banks we all know and love! But unlike central banks which only create a little bit of inflation, BTSX can create a lot all at once! So in a 50% flash crash for example, where you've already lost 50% of the value of your BTSX, we could devalue you by up to a further 25%! Won't that be a fun few hours to remember! But don't worry about the smart money & professional traders because a minority can hedge themselves and the rest will just sell very early on in a crash leaving the regular guys like you holding the bag when there's a problem. It's just like a real economy! Welcome to BTSX - The future of money!

[bytemaster]

The challenge we face is that people can cancel their orders.  Unless we prevent people from canceling orders if canceling the order would put the market with insufficient depth. 

So many potential rules and they all have nasty consequences.

I will strongly advise against any rules preventing people from cancel-ling their orders.

0.02 BTSX

I tend to agree.

[tonyk]

The challenge we face is that people can cancel their orders.  Unless we prevent people from canceling orders if canceling the order would put the market with insufficient depth. 

So many potential rules and they all have nasty consequences.

I will strongly advise against any rules preventing people from cancel-ling their orders.

0.02 BTSX