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Offline bytemaster

What goes up... Preston Byrne
« on: August 24, 2014, 03:56:08 AM »

ttp://prestonbyrne.com/2014/08/24/what-goes-up/

This article is far more fair than his prior articles and focuses entirely one the "black swan failure mode".... the dreaded 50% fall that happens so fast BitUSD ends up only partially backed by BTSX.   An event similar to a bank run, hyper inflation, or bankruptcy of a traditional banking institution.   

The only issue is that Preston is arguing against the straw man that we claimed BitUSD will ALWAYS under ALL conditions be worth $1 with 0 risk.  We do not claim this and have never claimed this when you read the details.  Sure high-level marketing always has fine print with financial instruments.  We have always maintained that BitUSD will vary in price around the value of the dollar and that in the event of a massive black swan BitUSD is worth at most 2x the BTSX you spent to buy it.   

All banks make claims that are far less sound that BTSX makes.   Namely, they claim you can withdraw your deposit on demand.   They borrow short term and lend long term.  They create USD on illiquid, non-fungible, collateral (housing, cars, etc) that can be just as volatile as any crypto-currency and is subject to fire, flood, weather, and owner abuse.  The mechanics of BitUSD creation are far more sound than any fractional reserve bank creating USD with similar accounting principles. 

So claiming that Mt. Gox USD is always worth a dollar is the same as claiming BitUSD is always worth a dollar.  Sometimes GoxUSD is worth more than paper USD (if you want to buy in the next 48 hours)... sometimes it is worth less (you need paper USD in the next 48 hours).   Thus GoxUSD vs Paper USD has similar price volatility to BitUSD / Paper USD.  You don't see anyone complaining about exchanges making the claim that your USD deposits are pegged to the dollar yet the RISK that you could get nothing for your Gox USD is always there.

Quote
The relevance of the issue is that BitSharesX does not benefit from protections available to users of deposit-taking banks or other financial institutions, such as guaranteed deposits or claims in insolvency.

A DAC offers depositors the same thing regular banks do in the event of insolvency, their debt is converted to equity.   As far as I can tell BTSX offers a far more efficient conversion to equity than any claims system.   As long as BitUSD holders accept this risk then BitUSD can serve a valuable role.

So the only questions that remain are:
 
Is BitUSD pegged to the USD while volatility is within the design tolerance?  Yes
Is there value in having an instrument that is pegged within the design tolerance?  Yes
Is it possible to tweak the design parameters to reduce risk (ie: increase collateral?)... Yes
Is it possible to back BitUSD with printing BTSX?  Yes (to some extent)

If the prior steps are true, then the system is very valuable even with its limits.  You cannot eliminate risk, you can only change its nature, hedge, and insure.   BTSX provides an innovative new tool to manage your risk.  Users can trade risk of bank failure, government seizures, capital controls, lack of privacy, slow transactions and high fees for the risk of a black swan in BTSX valuation or their private keys being stolen.   Every individual will evaluate these risks differently.  The key is to know the risks when you act so you can choose to accept them or not.



« Last Edit: January 25, 2015, 08:44:29 PM by vikram »
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 tonyk

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Re: What goes up... Preston Byrne
« Reply #1 on: August 24, 2014, 04:06:55 AM »
Yes, there are reasons why somebody else insuring you is better than self insurance.
But being the word's vault and reserve come with its risks... in that regard those guys were up to something... they just did not get it to what exactly...

Much better article, btw.


[EDIT] My main talking buddy in the last few days -jl777 - has his concerns bunched in the same way of thinking, btw.
« Last Edit: August 24, 2014, 04:18:15 AM by TheOnion »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline lucky331

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Re: What goes up... Preston Byrne
« Reply #2 on: August 24, 2014, 04:08:15 AM »
Quote
So claiming that Mt. Gox USD is always worth a dollar is the same as claiming BitUSD is always worth a dollar.  Sometimes GoxUSD is worth more than paper USD (if you want to buy in the next 48 hours)... sometimes it is worth less (you need paper USD in the next 48 hours).   Thus GoxUSD vs Paper USD has similar price volatility to BitUSD / Paper USD.  You don't see anyone complaining about exchanges making the claim that your USD deposits are pegged to the dollar yet the RISK that you could get nothing for your Gox USD is always there.

good post.  learning bit by bit. 

thanks.  :)


Offline santaclause102

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Re: What goes up... Preston Byrne
« Reply #3 on: August 24, 2014, 08:16:22 AM »
I'd consider the discussion on ttp://prestonbyrne.com/2014/08/24/what-goes-up/ one of the most informative!

Can we please remove all bolt and scammy looking claims???

A response like the initial blog post a few days ago is triggered by claims like

Quote
High Yield Savings

Save in Gold, Silver, Gas, Anything

Instant Transfers

Better than a Swiss Bank [noting again that yes, they actually say this]

Never Frozen

Free Market Decentralization!

If I would know nothing about the system and I would see these claims I would also have the tendency to run! It is too good to be true without providing an explanation.
« Last Edit: January 25, 2015, 08:44:44 PM by vikram »

Online aloha

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Re: What goes up... Preston Byrne
« Reply #4 on: August 24, 2014, 09:16:25 AM »
Quote
Law-abiding people in developed countries benefit from not having their assets seized and also from substantial deposit guarantees. When they deal with “deposits” at functioning exchanges and regular banks, their deposit balance represents a contractual obligation on the depository institution to return those funds at par.

Dear Preston,

So the question for me is who do I trust more with my money big banks or BTSX. Let me google "depositors lost money" and find out result.
Not to mention that most western banks are really bankrupt.
aloha  :)

Offline santaclause102

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Re: What goes up... Preston Byrne
« Reply #5 on: August 24, 2014, 12:02:54 PM »
The collateral issue only has a negative effect if the drop in BTSX value happens so fast that the shorts can't react fast enough to redeem their short positions for BTSX again, correct?

The collateral issue only has a negative effect if the drop in BTSX value happens so fast that the margin can not be called automatically, correct? How quick would that have to be?

But:
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Worst case 100% of all margin positions in the network are blown and as a result some users end up holding BitUSD while there are no short positions left that are required to cover.
(http://wiki.bitshares.org/index.php/Market_Peg) How is it possible that some BitUSD stay uncovered? Do the long and the short positions not have the same volume?
« Last Edit: August 24, 2014, 12:18:13 PM by delulo »

Offline puppies

Re: What goes up... Preston Byrne
« Reply #6 on: August 25, 2014, 07:08:11 AM »
Quote
“If there is not enough liquidity it is also possible for the network to ‘print’ BTSX necessary to make great deals relative to a trusted feed. IE: if BitUSD bids are over 10% above the feed, print BTSX to short BitUSD and if it is under the feed by 10%, cover the short. Simply knowing there is unlimited sell pressure at 10%+ and a large cover at -10% could also enhance the system. The benefit of this “system trading” is that the profits from shorting high and covering low go to the shareholders.
“…I think the market peg will be so effective that those trading rules would never be hit in the first place.”

That’s a far cry from what you’re saying here on this website: (1) BTSX is an innovative tool to manage your risk, (2) we don’t live in a perfect world, and (3) “All banks make claims that are far less sound that BTSX makes.”

Wow Daniel, I think he got you there.  Saying that you believe the peg will hold within +/- 10%.  Why thats tantamount to telling people to take out second mortgages and invest it in BTSX because its a 100% sure thing.  You should be ashamed of yourself.

plus the top quote is much longer, and isn't numbered.  Its almost like you were talking about completely different things.


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The banks’ claims are not at issue here; BitShares’ claims are.

I wonder what those claims might be

Quote
You cite some of the worst examples of business mismanagement in history as your comparator, and blame the US government for investor losses under Mt. Gox in order to present BTSX as a “compromise” when so compared. There really is no comparison. For the average Joe, the likelihood of losing an FDIC-insured bank account balance is close to zero (which I note the BTSX website claims BTSX is superior to, at least if we assume that by “Swiss bank” the website means a bank of more substantial repute than a local farmers’ cooperative in rural Vermont).

Is this the website that you said you didn't have control over and had asked for the fine print to be more prominent?  Plus everyone knows that the only gauge of a bank is how likely you are to lose your deposit.  No one judges a bank on cost, efficiency, privacy, or morality.


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I am cognisant that antigovernment and anti-corporate rhetoric plays to the gallery.

However, this rhetoric is not in my opinion responsibly made, exaggerating the risk of relying on regulated, mainstream financial service providers while minimising or indeed ignoring completely the risks of BitSharesX to a group of people who are unable to understand the difference (though they might think they can).

You really should learn to rely on the government to regulate and protect your finances.  They only have your best interest at heart.  Thankfully I don't need to understand the difference between regulated entities and BitSharesX, I can just rely on the regulators to tell me who to trust.

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The technology is interesting, but the structure is flawed: speaking objectively, BTSX/BitAssets cannot provably do what the marketing material claims it can do. I think you have an obligation, at the very least, to make this point abundantly clear to everyone who is about to throw money at it.
When you say things like “…I think the market peg will be so effective that those trading rules would never be hit in the first place.” or "However, I am betting the farm that it will work :)" how is anyone supposed to know that bitassets tracking is not 100% guaranteed.  In fact you really should come up with a backup plan in case they don't track. 

https://metaexchange.info | Bitcoin<->Altcoin exchange | Instant | Safe | Low spreads

Offline jae208

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Re: What goes up... Preston Byrne
« Reply #7 on: August 25, 2014, 07:51:55 AM »
Bitassets will track trust me :) its going to work im certain ofnit.
http://bitsharestutorials.com A work in progress
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Offline 麥可貓

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Re: What goes up... Preston Byrne
« Reply #8 on: August 25, 2014, 08:03:27 AM »

Quote
You cite some of the worst examples of business mismanagement in history as your comparator, and blame the US government for investor losses under Mt. Gox in order to present BTSX as a “compromise” when so compared. There really is no comparison. For the average Joe, the likelihood of losing an FDIC-insured bank account balance is close to zero (which I note the BTSX website claims BTSX is superior to, at least if we assume that by “Swiss bank” the website means a bank of more substantial repute than a local farmers’ cooperative in rural Vermont).

Is this the website that you said you didn't have control over and had asked for the fine print to be more prominent?  Plus everyone knows that the only gauge of a bank is how likely you are to lose your deposit.  No one judges a bank on cost, efficiency, privacy, or morality.


another logical flaw in this paragraph is that the author criticized BM "cite some of the worst examples of business mismanagement in history as your comparator". However,

Quote
My article sought to make one point, and one point only.
...
or to put it another way, the value of all outstanding bitAssets will largely exceed the value of all BTSX during a black swan so it will implode on itself.

so the author was critisizing BitSharesX during black swan, while not allowing people to comapre it with BitShares competitiors during black swan.
PTS: PmRVDPymZqSAZEXauHZSewrUrE66af7epT
BTSX: michaelcat
Delegate Team: x1.sun  x2.sun

 

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