Author Topic: Using Exchangers could peg BitAssets with free markets (for comment)  (Read 825 times)

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Offline starspirit

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Here is an idea I've been toying with for comment. Everyone agrees it would be ideal for BitAssets to peg better while having as little market intervention as possible.

An idea has already been discussed in other threads of using a floating interest rate (paid from shorts to longs) to better equate the supply and demand around the peg price.

Suppose there were a competitive group of 'exchangers' present who would be willing to make a two-way exchange of the BitAsset for the real Asset on a 1:1 basis. Each would independently set a floating interest rate, paid from BitAsset shorts to longs, that they would be willing to make this two-way exchange at. Each exchanger would have a book of the BitAsset (yielding them the rate) and the real Asset, and the rate they choose would depend on their existing inventories and perceived risks and returns on each holding. Escrow services would be available to enable these exchanges without any counterparty risks. Anybody could conceivably offer an exchange or escrow service, but in the case where the real Assets have a monetary nature (e.g. BitUSD or BitGold) this would be limited to the usual regulations around KYC and AML laws etc (such as existing online currency exchangers).

The floating interest rate (paid from shorts to longs) can then be set equal to something like the volume-weighted average interest rate of the BitAsset-RealAsset transactions made with the exchangers, which effectively represents where the market is indifferent between holding the BitAsset and the real Asset.

Now lets imagine some scenarios...

Suppose the exchangers set their interest rates too high. This favours longs, so BitAsset is bid higher than the real Asset, and arbitragers exchange their real Asset holdings for BitAsset holdings with the exchangers and sell these on market at a profit. Exchangers rapidly lose BitAssets, and their ability to earn the higher yield, until they bring rates to a level where the market price of the BitAsset is back in line with the realAsset.
Conversely if exchangers set their prices too low, they become loaded with BitAsset until they increase rates to a point where the market price is approximately pegged.

This approach has a number of advantages:

- It avoids any market intervention. It simply requires an extra thing to float, being the interest rate, which is necessary in any case if we want a stronger peg (i.e. less float) on the price.
- To get a good peg, it does not require all market participants to be able to deal with the exchangers. They merely need the confidence that there will be a set of arbitragers who will do enforce this.
- Merchants and customers have another convenient method of dealing with BitUSD and having confidence in its value.
- It is preferable to just relying on a social consensus spontaneously evolving around price behaviour, because there is no guarantee such a consensus won't be "BitUSD is always at an X% discount to realUSD" or "BitUSD is well pegged with interventions, but after that we don't know" or any other common view that may hold based on the evolving history.
- It is preferable to market interventions that dry up liquidity and prevent market growth.
- Confidence in the market peg and good liquidity quickly expands the entire market, making all of us Bitshares X owners very very wealthy.

There may be risks of exchanger collusion that I have not thought through, but the more open and competitive this market it, the less its an issue.

That's the basic idea. Feel free to stress and criticise the concept, I'm just initiating this in case the idea has some merit.