Here is my take on the concept of Bitshares X. I hope it can be useful for those who are still a bit confused. If I got something wrong please let me know so I'll edit and fix it.
First a few definitions to avoid ambiguity:
1. "Bitshares X" is a Decentralized Autonomous Company (DAC). Bitshares X being a DAC is not crucial here so if you are not familiar with the concept of DACs then for now you can think of it as a money payment business similar to PayPal or Visa.
2. "btsx" is a share in the Bitshares X business. You could think of it as a currency unit but for now it is easier to think of it as a share in a business.
3. "bitUSD" is a concept that does not have a direct analogy in the current financial system so it might be a bit difficult to grasp at first. bitUSD is an asset that represents as many btsx as there are needed to be worth one USD. So if the current market price of btsx is 0.028 USD per btsx then one bitUSD represents 35.71 btsx (=1/0.028). If the price moved to 0.050 USD per btsx then one bitUSD would represent 20.00 btsx and so on.
The primary purpose of the Bitshares X system is the ability to generate bitUSD (and other similar assets like bitEUR, bitGold etc). bitUSD is useful because (by definition) it has the same purchasing power as fiat USD and at the same time is as easily transferable as bitcoin.
So how can bitUSD come into existence? In essence by matching into pairs two kinds of people:
- those who prefer stability (i.e. they prefer avoiding losses even if it means the possibility of renouncing gains)
- and those who prefer risk (i.e. they prefer to have the chance to earn profits even if it means the risk of incurring losses).
As we will see in the next section the side effect of this matching happens to be our primary purpose: the bitUSD.
Imagine two people: Alice and Bob. Each of them owns a balance in btsx (in other words both have a long position in btsx). And for both of them the base currency is USD (which means they have bought their btsx with USD and their main concern is valuation of btsx in terms of USD).
Let's assume that Alice prefers stability and is worried that the value of her btsx [relative to USD] might fall soon and she would like to hedge against it: she wants the value of her btsx [relative to USD] to be maintained in case the market price of btsx falls. In other words she would like to hedge her long position in btsx.
Bob has the opposite view: he is confident that market price of btsx will rise soon and he would like to take advantage of his prediction: he wishes he had more btsx than he already has so that he could profit from the predicted price rise even more. In other words he would like to leverage his long position in btsx.
If btsx was a standard crypto-currency Alice in order to execute her hedge would have to sell all of her btsx and keep her wealth in USD for a while (at least until she decides the danger of btsx falling further in value [relative to USD] is over and it's safe to convert her wealth back into btsx).
Also, if btsx was a standard crypto-currency Bob in order to take advantage of his prediction would have to borrow USD (or in some other way get USD funds) and buy the extra btsx to increase the amount of btsx he already has and then he would have to hold this increased amount of btsx for a while (at least until he decides his prediction of btsx rising further in value [relative to USD] is no longer valid and then to reduce his btsx holding to its original size and sell the extra btsx to pay back his USD debt).
But maybe there is a smarter way to do this. Consider this:
Let's assume Alice finds Bob and says "Hey, Bob, I know you like the risk so here are my btsx, please take care of them. I don't care how many btsx will be left when I come to get them back. All I care is that they maintain their value in the future as it is now."
And Bob says: "That's fine, I'll be glad to do that. So I am taking your btsx and here is a receipt you need to show me in the future to claim your btsx back. I cannot promise how many btsx will be left but I can promise that their dollar value will be as it is today."
Both parties should be happy to make a deal because this way they both get what they initially wanted: Alice is hedged in case the market price goes down and Bob is able to keep the profits from Alice's btsx in case the market price goes up. Obviously the opposite is also true: Alice will have to give up any gains on her btsx in case the market price goes up and Bob will have to cover (using his own btsx) Alice's loss in valuation on btsx in case the market price goes down.
And here comes the final trick: we can see that Alice's part of the deal with Bob has a constant revaluation in terms of USD so we can package it as a separate asset and call it "bitUSD". What's more, we can make it transferable to other people - this is possible as from Bob's perspective it doesn't really matter who the counter-party is, all he really cares for is that his part of the deal is unchanged.
So how can the above relationship be implemented inside Bitshares X? Let's try to translate it into more financial terms:
1. Alice's and Bob's complementary needs are matched together by the system inside Bitshares X. This can be easily done through the standard bid/ask matching.
2. Alice converts her btsx into bitUSD. In other words she goes long bitUSD and short btsx. We can also say she sells her btsx for bitUSD. Now she is free to do with her bitUSD whatever she wants: she can keep it or sell it (for fiat USD or btsx) to anyone who is willing to buy. This way bitUSD is released into the world.
3. The amount of btsx received from Alice gets "frozen" inside the system and now we need Bob to take care of its value. By taking up this role Bob becomes the actual issuer of the bitUSD that Alice has released into the world. We can say he goes short bitUSD and long btsx.
4. To perform his part of the deal, inside the Bitshares X system Bob enters a long position in a futures contract for the amount of the "frozen" btsx (the short position in this contract is taken by the system itself). The futures contract refers to the market price of btsx. Bob will be using his own btsx as a means to cover any losses in case the market price goes against him (i.e. it goes down).
5. Bob just like Alice can easily free himself from the deal but in a slightly different way than Alice. To terminate his part of the deal Bob communicates his will to the Bitshares X system and as a result the following things happen simultaneously:
- The futures contract is terminated with Bob forced to accept any losses or profits resulting from the contract.
- The "frozen" btsx is used by the system to buy for Bob on the market the same amount of bitUSD that has been initially issued by him. The important thing is that it does not need to be "the same" bitUSD he has issued: it can be any bitUSD existing in circulation.
- As a result Bob has now both long and short position in bitUSD. Bob's short and long positions in bitUSD cancel out and this amount of bitUSD ceases to exist.
6. In case things go wrong for Bob and he gets close to running out of his own btsx to support the futures contract the system automatically terminates the contract for him as described in 5.EDIT: The last section has been modified according to bytemaster's suggestions:
1. Alice's and Bob's complementary needs are matched together by the system inside Bitshares X. This can be easily done through the standard bid/ask matching.
2. Alice converts her btsx into bitUSD, i.e. she sells her btsx for bitUSD. And now she is free to do with her bitUSD whatever she wants: she can keep it or sell it (for fiat USD or btsx) to anyone who is willing to buy. This way bitUSD is released into the world.
3. The amount of btsx received from Alice gets "frozen" inside the system and now we need Bob to take care of its dollar value. By taking up this role Bob becomes the actual issuer of the bitUSD that Alice has released into the world.
4. To perform his part of the deal, inside the Bitshares X system Bob enters a long position in a
contract for difference* for the amount of the "frozen" btsx (the short position in this contract is taken by the system itself). The contract refers to the current market price of btsx. To make sure Bob will deliver on the contract he is required to place his own btsx as collateral which will be used by the system to cover the losses in case the market price of btsx goes against him (i.e. when it goes down).
*
http://en.wikipedia.org/wiki/Contract_for_difference5. Bob just like Alice can easily free himself from the deal but in a bit different way than her. To terminate his part of the deal Bob uses his own btsx to buy on the market the same amount of bitUSD that has been initially issued by him. The important thing is that it does not need to be the same bitUSD he has issued: it can be any bitUSD existing in circulation. Once Bob has bought back the bitUSD the system releases the "frozen" btsx and they are passed to him - this should compensate him for the btsx he had to spend to buy back the bitUSD.
6. Now that Bob has equal long and short positions in bitUSD the following things happen simultaneously:
a. The contract for difference is terminated. Whatever is left from the collateral is returned to Bob - this way he is forced to accept any losses or profits resulting from the contract.
b. Bob's long and short positions in bitUSD cancel out so they can be safely removed from the system. And when this happens the amount of bitUSD initially issued by Bob ceases to exist.
7. In case things go wrong for Bob and the collateral gets close to being insufficient the system automatically uses the "frozen" btsx to buy back the bitUSD on Bob's behalf and the system unwinds Bob's position using the sequence of events described in [6].
Topic: New to BitsharesX - some questions (Read 13293 times)
