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Offline Empirical1

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BM Black Swan insurance fund proposal
« on: August 17, 2014, 01:28:04 AM »

I noticed BM proposed these changes in the dry run 15 thread which I quite like. What do you guys think?

https://bitsharestalk.org/index.php?topic=6949.msg93214#msg93214

Sending the market fees (USD) to an insurance fund rather than converting them to XTS and burning them as dividends or paying the funds to delegates would provide a more controlled way of insuring against price volatility.

Over time the network would end up accumulating a large balance of USD that it could hold in reserve.  If something happened then this reserve could be drained or even "go negative" for a while.   So if you assume a reasonable spread on market orders (buy/sell overlap) then it is very likely the market will have a large and growing balance of USD.

When a short is unable to cover, the network can just give up some of its own USD instead. 

So in a major price correction you just have to ask yourself what percent of the USD will be "uncovered", how long will it take the network to accumulate that percent, and how likely is it to occur.   

The event is most likely to occur as a result of an "attack" where someone tries to manipulate the price.  Increasing the reward for the attack by printing XTS makes the attack more likely.  If you can trigger a margin call and insure that your bid is very low then the potential printing is unbounded.

I think having BitUSD "unbacked" after such an event may be better at discouraging the attack.  The attackers prize would thus be limited to collecting the margin rather than printing unlimited XTS.   The market peg might still hold even with surplus USD floating around until enough fees are collected to take it out of circulation.

So... I am going to propose the following changes:
1) USD fees are never converted to XTS to be burned, they are kept as insurance on black swans
2) If the "current price" is greater than max bid, then we average in max bid.  If the current price is less than min ask, then we average in min ask.  This has the effect of using the median because you are essentially truncating outliers and limiting the effect a single block can have on the average price. 

Someone pointed out that FDIC insurance (printing XTS) may be ok for some bit assets (USD) it would be a major problem for other bit assets (Bit PPC) in the event the BitAsset lost the interest of the market participants.   This would result in a major problem where one "stale" bit asset that was still insured would be very insecure.
« Last Edit: August 17, 2014, 01:35:26 AM by Empirical1 »

Offline Empirical1

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Re: Bytemaster's Black Swan insurance fund
« Reply #1 on: August 17, 2014, 01:28:21 AM »
Questions

1)  Each BitAsset will build & have  it's own Black Swan fund right?

2)  If there is an attack, that creates a lot of unbacked BitUSD but the cause of the attack is corrected.

I assume we could start a BitUSD2 on the same blockchain which starts from scratch with the fix implemented that can exist alongside BitUSD1?

3) Because not that it would be pretty, but this is such a new experimental area that I think the Blockchain could survive a BitUSD 'fault' in the first month. Especially now BTSX isn't bailing out the BitUSD.

What about calling it 'BitUSD Experiment' or something and if it holds up well for a month, then change the name, kind of what BitShares was planning to do with X?
« Last Edit: August 17, 2014, 01:36:51 AM by Empirical1 »

Offline tonyk

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Re: BM Black Swan insurance fund proposal
« Reply #2 on: August 17, 2014, 01:39:35 AM »
I do not see the need for bitUSD_2
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline Empirical1

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Re: BM Black Swan insurance fund proposal
« Reply #3 on: August 17, 2014, 01:56:37 AM »
I do not see the need for bitUSD_2

I don't pretend to understand everything here properly. But it seems that if there was a successful attack on BitUSD1 that drained the reserve fund and created a large amount of unbacked currency that BitUSD1 may go quite far away from a peg that resembles the value of a USD.

If you identified and corrected the cause of the attack you could start BitUSD2, which would start from scratch and be fully backed and therefore trade closer to a USD peg.

Offline fuzzy

Re: BM Black Swan insurance fund proposal
« Reply #4 on: August 17, 2014, 01:56:59 AM »
This is a great idea
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Offline tonyk

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Re: BM Black Swan insurance fund proposal
« Reply #5 on: August 17, 2014, 02:12:29 AM »
I do not see the need for bitUSD_2

I don't pretend to understand everything here properly. But it seems that if there was a successful attack on BitUSD1 that drained the reserve fund and created a large amount of unbacked currency that BitUSD1 may go quite far away from a peg that resembles the value of a USD.

If you identified and corrected the cause of the attack you could start BitUSD2, which would start from scratch and be fully backed and therefore trade closer to a USD peg.

-It should be highly unlikely to have not fully backed bitUSD; 
-The unbaked/not fully backed bitUSD is not the end of the world;
-The proposed system provides a way to 'eat them up'/remove them over time.

On a different issue:
'fully backed and therefore trade closer to a USD peg.
'
'fully backed' is not the reason the peg holds...fully backed means backed by 2x BTSX.
 being backed by even 1 BTSX  for 1 Unit of value in bitUSD should be more than enough. (and this only happens in fast and huge drop in BTSX).

On a third issue (Probably the most important):
BM have consistently referred to such bitUSD as unbacked - in reality the bitUSD in existence are not individually backed. So if you have 99 USD backed 100% and you add 1 backed 0 % you actually have 100 bitUSD backed 99%. You do not have some backed and some not. The reason for that is that from holders perspective you do not hold backed or unbacked bitUSD, you just hold one that have the same qualities as the rest of them.




« Last Edit: August 17, 2014, 02:39:27 AM by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline xeroc

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Re: BM Black Swan insurance fund proposal
« Reply #6 on: August 17, 2014, 07:27:49 AM »
This makes the market a little more complicated for outsiders but if it helps to get a stable peg we should give it a try.

further, BM thinks that unbacked usds will be very unlikely.
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Offline Empirical1

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Re: BM Black Swan insurance fund proposal
« Reply #7 on: August 17, 2014, 12:36:18 PM »
I do not see the need for bitUSD_2

I don't pretend to understand everything here properly. But it seems that if there was a successful attack on BitUSD1 that drained the reserve fund and created a large amount of unbacked currency that BitUSD1 may go quite far away from a peg that resembles the value of a USD.

If you identified and corrected the cause of the attack you could start BitUSD2, which would start from scratch and be fully backed and therefore trade closer to a USD peg.

-It should be highly unlikely to have not fully backed bitUSD; 
-The unbaked/not fully backed bitUSD is not the end of the world;
-The proposed system provides a way to 'eat them up'/remove them over time.

On a different issue:
'fully backed and therefore trade closer to a USD peg.
'
'fully backed' is not the reason the peg holds...fully backed means backed by 2x BTSX.
 being backed by even 1 BTSX  for 1 Unit of value in bitUSD should be more than enough. (and this only happens in fast and huge drop in BTSX).

On a third issue (Probably the most important):
BM have consistently referred to such bitUSD as unbacked - in reality the bitUSD in existence are not individually backed. So if you have 99 USD backed 100% and you add 1 backed 0 % you actually have 100 bitUSD backed 99%. You do not have some backed and some not. The reason for that is that from holders perspective you do not hold backed or unbacked bitUSD, you just hold one that have the same qualities as the rest of them.

 +5% Thanks for the detailed explanation, yes all of that is my understanding too.

I see you disagree and you're probably right. My concern is still that we missed something critical in testing that creates a back-door/some massive attack vector. This is the first time something like this is being 'turned on'

Calling it an experimental name for the first month and having the ability to start another BitUSD on the same blockchain is a way to insure BTSX against a major problem with BitUSD version 1. But as you say that is probably not needed...

Offline yellowecho

Re: BM Black Swan insurance fund proposal
« Reply #8 on: August 17, 2014, 01:07:33 PM »
Sounds like a very reasonable idea to me. 
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Offline Empirical1

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Re: BM Black Swan insurance fund proposal
« Reply #9 on: August 18, 2014, 12:47:38 AM »
Speaking of insurance. At the moment a lot of the BitShares talent is co-located, which seems to have worked out great. However that's not very decentralised. While there's no insuring BM. Are there people not currently co-located that are incentivised and capable of delivering BitAssets in their current form to DACsunlimited for release on BTSX.

Offline tonyk

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Re: BM Black Swan insurance fund proposal
« Reply #10 on: August 18, 2014, 12:52:56 AM »
Speaking of insurance. At the moment a lot of the BitShares talent is co-located, which seems to have worked out great. However that's not very decentralised. While there's no insuring BM. Are there people not currently co-located that are incentivised and capable of delivering BitAssets in their current form to DACsunlimited for release on BTSX.

To be totally honest I have never, ever, understood any of alt's posts (my hope has always been that the people that matter, do).
Reading this I feel the same way totally lost, as what do you mean.
Can you please re-phrase.
« Last Edit: August 18, 2014, 03:07:53 AM by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline Empirical1

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Re: BM Black Swan insurance fund proposal
« Reply #11 on: August 18, 2014, 02:06:33 AM »
Speaking of insurance. At the moment a lot of the BitShares talent is co-located, which seems to have worked out great. However that's not very decentralised. While there's no insuring BM. Are there people not currently co-located that are incentivised and capable of delivering BitAssets in their current form to DACsunlimited for release on BTSX.

To be totally honest I have never, ever, understood any of alt's posts (my hoe has always been that the people that matter, do).
Reading this I feel the same way totally lost, as what do you mean.
Can you please re-phrase.

I think the BitShares development team should be more decentralised.

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Re: BM Black Swan insurance fund proposal
« Reply #12 on: August 18, 2014, 02:25:36 AM »
Opening a short transaction as I know is as follows:
If I short bitUSD, I am collecting BTSX and putting up collateral BTSX. The person buying it is selling his/her BTSX to get the bitUSD.

Closing the transaction from the short side:
He would use BTSX to buy back bitUSD.(hopefully less BTSX than he received to profit)

Closing from the long bitUSD side:
He would sell the bitUSD and receive BTSX. (hopefully get more BTSX back than originally sent to profit)

So here is where I don't follow. If the shorter can't cover, meaning he doesn't have the BTSX to buy the bitUSD back, then where will the seller of the bitUSD get the BTSX for giving up the bitUSD? 

If you are going to confiscate the bitUSD, you have to simultaneously create BTSX to pay for that bitUSD (since the shorter couldn't cover his portion of BTSX owed to the transaction).

So now you created more BTSX and you are keeping the "unbacked" bitUSD "alive". It would seem if that bitUSD was just sitting there waiting for castrophe that eventually the free market will tend to move to that point just because everyone knows the fail safe is in place. At some point the system will get purged because it's an option.

If you are okay with the BTSX creation and hoarding of bitUSD, then I'll ask:
How will the platform determine who's bitUSD to buy back? Not all bitUSD will be on the table at once. So the new bitUSD insurance fund is going to act as an active market maker setting "untrue" bids on bitUSD. This is not a good idea. You are guaranteeing liquidity through default.
« Last Edit: August 18, 2014, 03:07:02 AM by skyscraperfarms »

Offline tonyk

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Re: BM Black Swan insurance fund proposal
« Reply #13 on: August 18, 2014, 03:23:04 AM »
Opening a short transaction as I know is as follows:
If I short bitUSD, I am collecting BTSX and putting up collateral BTSX. The person buying it is selling his/her BTSX to get the bitUSD.
TRUE

Closing the transaction from the short side:
He would use BTSX to buy back bitUSD.(hopefully less BTSX than he received to profit)
TRUE

Closing from the long bitUSD side:
He would sell the bitUSD and receive BTSX. (hopefully get more BTSX back than originally sent to profit)
TRUE

So here is where I don't follow. If the shorter can't cover, meaning he doesn't have the BTSX to buy the bitUSD back, then where will the seller of the bitUSD get the BTSX for giving up the bitUSD? 
The system is selling those bitUSDs, so think of it as if it does not care if it gets BTSX


If you are going to confiscate the bitUSD, you have to simultaneously create BTSX to pay for that bitUSD (since the shorter couldn't cover his portion of BTSX owed to the transaction).
No confiscation planed/implemented.
... well no confiscation at the time of that transaction at least. The plan is to trick customers to give them to us beforehand for free. :)
Joking aside, those USDs will have been already collected beforehand by the system  as fees.


So now you created more BTSX and you are keeping the "unbacked" bitUSD "alive". It would seem if that bitUSD was just sitting there waiting for castrophe that eventually the free market will tend to move to that point just because everyone knows the fail safe is in place. At some point the system will get purged because it's an option.
You are saying that because you have insurance you will find a way to put your house on fire? or I missed the logic somewhere?

If you are okay with the BTSX creation and hoarding of bitUSD, then I'll ask:
How will the platform determine who's bitUSD to buy back? Not all bitUSD will be on the table at once. So the new bitUSD insurance fund is going to act as an active market maker setting "untrue" bids on bitUSD. This is not a good idea. You are guaranteeing liquidity through default.
Previous answer(s) should have explained that you just misinterpreted something. If not ask the q again.


« Last Edit: August 18, 2014, 03:31:11 AM by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline speedy

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Re: BM Black Swan insurance fund proposal
« Reply #14 on: August 19, 2014, 02:31:56 PM »
So are BitAssets still on course for starting in August? Just wondering.

 

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