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Offline gulu

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A New Proposal of Interest for BitUSD Holders
« on: August 28, 2014, 10:26:49 PM »

Current problem:
BitUSD is undervalued compared to USD outside (~20% at the time of writing). Potential reason:
1) Not enough incentive to hold BitUSD. No interested received.
2) Not much demand for BitUSD for commercial usage, especially when little merchants accept BitUSD for payment.

Result to achieve:
1) BitUSD receives interest to add incentive for holding it.
2) The added incentive evens out the imbalanced force from one side of the market, which pushes the peg towards 1:1.

Goal/requirement:
1) Interest rate, R, needs to be market-driven.
2) BitUSDs are fungible, meaning they enjoy the same R. The previous proposal of BitUSDx (R = x%) would generate many kinds of BitUSDs, and inherently they are non-fungible, as they enjoy different interest rates. Here, the interest that BitUSD receives comes from the BTSX collateral, which is the loss of the BitUSD shorter.

Design principle:
More short of BitUSD pushes up R; more long of BitUSD drives down R.
(BitUSD priced in BTSX)

Range of R:
Rmin < R < Rmax, while Rmin can be negative if necessary.

Specific rules:
1) Orders can be sorted into three categories: sitting orders, driving orders, and neutral orders. When a buy order and a sell/short order are matched, usually they were initially placed in the different blocks. The one placed in the earlier block becomes the sitting order, and the other is the driving one. Sometimes, two matching orders are included in the same block, which makes both neutral.
2) Presumption: driving orders represent market direction/intention.
3) Only driving orders move R.
4) A long driving order drives R down; a short driving order pushes R up.
5) R moves 0.1% for every $x million BitUSDs in the driving order, proportionally. For instance, x can be 1, 10, or 100.

Expected end results:
1) R reaches equilibrium. This is the market-driven interest rate, which represents the wills of both sides of the market. If one side disagrees, it would move R by buying or selling BitUSDs to the direction that it prefers.

This proposal provides a general idea of how to set up a market-driven interest rate. Measures against various attacks are very likely to be in need. 
« Last Edit: August 28, 2014, 11:23:42 PM by gulu »
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Offline Shentist

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #1 on: August 29, 2014, 04:27:17 AM »
good idea!

so you get more incentive to take the side of the market who is totally ignored at the moment. now we seeing what happens if everyone believes the same.

Offline gulu

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #2 on: August 29, 2014, 04:34:03 AM »
good idea!

so you get more incentive to take the side of the market who is totally ignored at the moment. now we seeing what happens if everyone believes the same.

Right, this is the goal. Market-adjusted interest rate that balances demands from the two sides. Would like to hear feedback from Bytemaster.
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jakub

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #3 on: August 29, 2014, 10:59:00 AM »
Expected end results:
1) R reaches equilibrium. This is the market-driven interest rate, which represents the wills of both sides of the market. If one side disagrees, it would move R by buying or selling BitUSDs to the direction that it prefers.

This makes a lot of sense.
Assuming R has reached equilibrium - please explain how is this interest rate going to be applied?
I mean: how will bitUSD shorts be paying the interest R to bitUSD longs? What will be the mechanism? 

Offline yidaidaxia

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #4 on: August 29, 2014, 12:42:54 PM »
It's really a good idea. We need to provide incentive for holding BitUSD, otherwise it will just go down continuously vs USD. The pegging should be based on the useful value of BitUSD, the best way is to have massive merchants to support BitUSD so that people could use BitUSD for their daily activity just like USD(and even better). But that's would be implemented step by step, merchant by merchant, it would be a long run. And we need to provide the incentive now to push the trend back to pegging(even if it's not 1:1 or close to 1:1 now), and Gulu's proposal does make sense especially he provides a detailed solution about how it works logically. The community do need to evaluate it in details.
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Offline gordonhucn

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #5 on: August 30, 2014, 02:44:56 AM »
 +5%, this is a very practical proposal just like many other great ideas of how to operate the whole bitAssets(bitUSD for now) business to make bitsharesX market grow larger steadily. As many bitshares holders may probably agree to give a certain level of system profits to make the market grow based on business activities and real world market demands rather than just speculation of the btsx price. There are also some other ways to help market peg and btsx business development like market marker of bitUSD/USD/btsx, more gateways of bitUSD/btsx<->USD. I believe that the social consensus will work as expected eventually with no doubt, but we need to come up and try more different ways to make sure we can get there and get there sooner than later.

Offline wesphily

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #6 on: August 30, 2014, 02:52:30 AM »
I am not hardcore on forex trading BUT, I did read where interest rates were part of the equation for controlling currency prices. Monetary theory? Would be nice to have that in bit currencies.

Offline jsidhu

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #7 on: August 30, 2014, 03:39:54 AM »
I am not hardcore on forex trading BUT, I did read where interest rates were part of the equation for controlling currency prices. Monetary theory? Would be nice to have that in bit currencies.

Central banks set their borrowing rates from which the banks can borrow and lend. The interest is paid to the central bank from borrowing. The different currencies have different interest rates for holding it, thus creating a SWAP essentially where you have to pay to hold the currency pair or you get paid to hold it, i.e.: GBP/JPY where GBP interest rates where higher than JPY which had major deflationary issues before BOJ stepped in to intervene in the market to sell massive amount of JPY because people were buying JPY (at low interest) and selling GBP at higher interest creating a positive SWAP carry trade. Around the time when the central bank releases their interest rate statement you sometimes see carry trades unwinded affecting the market in mass.

The problem is once there is an interest rate applied it is subject to manipulation and speculators will feast on it to create extreme circumstances where external stimulius needs to be applied, kind of like what the bond vigilanties and carry traders which have incentive to cause JPY to rise because its cheap to borrow vs any other currency. Once BOJ stepped in I knew this wasn't going to end pretty, you have BOJ/SNB and many other central banks intervening which creates incentive to force their hand for almost free money (which is printed anyway).

An incentive should in this case needs to be totally decentralized and its hardt o see right now that if an interest based stimilus was added that it would avoid central authority or stimilus later on because its hard to cover 100% of the angles before hand, im guessing this is why this kind of thing is left out until we use the system quite a bit.
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Offline joele

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #8 on: August 30, 2014, 05:57:50 AM »
The short collateral should be borrowed from bitUSD holders that earn interest.

Offline changematey

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #9 on: August 30, 2014, 08:54:12 AM »
I am not hardcore on forex trading BUT, I did read where interest rates were part of the equation for controlling currency prices. Monetary theory? Would be nice to have that in bit currencies.
Yes. Even when you open any position, the broker pays you an interest for the currency you are long (buying) and charge you for the currency you are short (selling). Example short GBP/JPY (sell GBP, buy JPY) given by Sidhu will give you a negative interest on a day to day basis, decreasing you holding. So for a profit you need the movement to be larger than the interest being applied.
Similarly, long GBP/JPY (buy GBP, sell JPY) also called a carry trade, will give you profit + interest.

Offline bytemaster

Re: A New Proposal of Interest for BitUSD Holders
« Reply #10 on: August 31, 2014, 07:00:00 PM »
I think that a proxy for interest rate is collateral requirement.  The more collateral required the less BitUSD can be created.   
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Offline theoretical

Re: A New Proposal of Interest for BitUSD Holders
« Reply #11 on: August 31, 2014, 07:44:34 PM »
I think that a proxy for interest rate is collateral requirement.  The more collateral required the less BitUSD can be created.

No, I don't think this is true.

Sometimes I think of BitUSD holders as "creditors" and shorters as "equity investors".  In other words, the BitUSD holders get their due before shorters get anything.  Reducing the collateral increases the credtiors' risk exposure, so they would demand a bigger premium -- but there is currently no way for creditors to allow variable collateral.  And I think that's a good thing because it allows BitUSD to be fungible.  So collateral requirement is related to interest rate -- but not the same.

Now that I think about it, you might be able to allow variable collateral by making the collateral requirement equal to the average current collateralization of BitUSD plus a percentage, rather than fix it at 2x.  That should increase the demand to short when the price rises, and when the price falls it will discourage new shorts until existing shorts take their profits.  The tradeoff is BitUSD will recapitalize more slowly per short, so the risk of a margin crisis or even FDIC situation (resulting in unbacked BitUSD, a bailout, or halting the market) increases substantially.

I think the discount of BitUSD relative to real USD actually represents something like an interest rate (although it has no reference to any time horizon).

Average collateralization of BitUSD is something that we should definitely have easy access to.  I actually filed a ticket to add the feature yesterday:  https://github.com/BitShares/bitshares_toolkit/issues/726
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Offline starspirit

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #12 on: September 01, 2014, 03:27:35 AM »
Great to keep thinking about this problem, but I do not think this propel will work. There is no reason why any fixed rule (e.g. rule 5) should lead to the BitUSD being properly pegged. Buy and sell orders for BitUSD will be driven by many factors such as views on Bitshares, not just the discount/premium to real USD. So situations are possible such as where BitUSD is already at a discount to USD for some reason, people suddenly become more bearish on BTSX (buys increase on BitUSD) but the action of rule 5 would be to decrease interest paid on BitUSD and diminish the incentive further to own BitUSD over real USD.

The only way I can think of to get such a scheme to work is to actually fix the peg (i.e. fix BitUSD to real USD price) and float the interest rate. That is, people make bids and offers quoted as an interest rate rather than the price. The matching process defines the variable market interest rate at any time. With such a scheme, you would have to be ready for interest rates to vary dramatically and be extremely high at times of peak BTSX demand (e.g. see Bitfinex margin lending book as an analogy).

Offline starspirit

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #13 on: September 01, 2014, 03:29:09 AM »

*** meant proposal not propel (line 1)

Offline gulu

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Re: A New Proposal of Interest for BitUSD Holders
« Reply #14 on: September 02, 2014, 02:32:27 PM »
Great to keep thinking about this problem, but I do not think this propel will work. There is no reason why any fixed rule (e.g. rule 5) should lead to the BitUSD being properly pegged. Buy and sell orders for BitUSD will be driven by many factors such as views on Bitshares, not just the discount/premium to real USD. So situations are possible such as where BitUSD is already at a discount to USD for some reason, people suddenly become more bearish on BTSX (buys increase on BitUSD) but the action of rule 5 would be to decrease interest paid on BitUSD and diminish the incentive further to own BitUSD over real USD.

The only way I can think of to get such a scheme to work is to actually fix the peg (i.e. fix BitUSD to real USD price) and float the interest rate. That is, people make bids and offers quoted as an interest rate rather than the price. The matching process defines the variable market interest rate at any time. With such a scheme, you would have to be ready for interest rates to vary dramatically and be extremely high at times of peak BTSX demand (e.g. see Bitfinex margin lending book as an analogy).
The rule5 can be modified to be some percentage of existing BitUSD. Not a big issue. When R moves from an equilibrium, it is the result of the interest rate acting as a counter-balancing force against initial market shift.

Bidding on interest rate would make BitUSDs non-fungible, because different BitUSDs would carry different interest rate.
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