Markets have been trading for almost 2 weeks and despite a buggy client and difficult to use interface and low liquidity, BitUSD has held up and is highly correlated to the BTSX / USD market moves. Recent changes that have been made will provide further assurance that the PEG will hold and as the market gains confidence in this fact liquidity will slowly rise and spreads will narrow.
I wanted to take an opportunity to discuss how the market rules are implemented and why I am confident that they will be sufficient.
First I will summarize the rules for BitAsset markets assuming the BTSX : USD market where BTSX is priced in terms of USD. For the purpose of providing concrete examples, we will assume a median price of $0.03 per BTSX.
1) 51 delegates or more must publish a price feed at least once per day
- if they do not publish the feed, then the market reverts to a 1hr moving average.
- if a feed is published, the 1hr moving average is set to the feed.
2) No short orders can be published to the network at a price 11% above the 1 hour moving average. (ie: they must be less than 0.0333)
- the minimal short quantity is 100 BTSX
3) Short orders will only be matched against asks that are below the moving average. (ie: people must be selling BTSX for less than $0.03)
- the highest short order is matched first, so a short selling USD at $0.03333 will be matched against someone buying USD at $.02999 and the difference (0.003333) * volume is captured as a fee.
4) A margin call will be executed any time the highest bid is greater than 90% of the moving average and the highest bid is less than the call price.
- the initial call price is 66% of the short price (ie: $0.022 for a short entered at $.033). This is the price at which 75% of the collateral would be required to buy back the USD necessary to cover the position.
- If a margin call is executed and there is any collateral left over, then 5% is kept as network fees and 95% is returned to the owner.
5) There are no restrictions on what prices people can set for normal BitUSD/BTSX trading. All parties will receive what they ask for.
6) Rounding errors are inevitable when using fixed point math, any such rounding error is deemed to be a network fee.
- for example you may place an order to buy $1.00 USD but end up with $0.99999 USD.
7) The network saves all fees earned in USD and in the event that a short position lacks the necessary collateral to cover during rapid market movements, then the network will provide the stored USD.
You cannot use the collateral of your short position to buy the USD necessary to cover the position. This USD must be purchased separately.
- This requirement creates a kind of "virtual collateral" that all shorts must maintain so they can cover for either profit taking or loss prevention.
9) When you partially cover a position it will reduce your exposure, but your collateral is not returned until the position is fully covered.
So our original goal for BitShares X was to enable the creation of "market pegged" assets that do not rely on an IOU to maintain their purchasing power. We had hopped that no feeds would be necessary, but that hope will have to wait for a future day when the BitAsset markets mature and have enough liquidity to set prices on their own. In the mean time we have to use price feeds, so I would like to discuss what this means for the peg.
Prices feeds are considered undesirable because they are always "delayed" and potentially subject to manipulation. They represent a kind of price fixing that generally hurts markets and prevents them from adapting to rapidly changing conditions. With the way BitShares X uses price feeds however, most of these pitfalls are completely avoided. The price feed is used for exactly two purposes: limit when new shorts can execute and limit when margin calls can happen. The feed provides no restrictions whatsoever on how BitUSD vs BTSX can trade which means that BitUSD vs BTSX is a fully free market that is able to respond instantly and honestly to all market conditions. Once the market grows large enough the volume of straight BitUSD to BTSX trades will be able to provide enough liquidity that restrictions on the shorts will have little impact on the price discovery.
When it comes to margin calls, it is still subject to market fluctuations within 10% of the price feed and thus at best the price feed can delay a margin call slightly in extreme volatility. Under normal market conditions where the volatility is less than -10% of the price feed we can safely claim that margin calls are also market-based and not artificial.
At the end of the day the price feed prevents BitUSD from ever being shorted to 0 and prevents market manipulators from seizing collateral. It will have very little influence once the market matures and thus market participants are mostly trusting the market rather than the feed producers.
There is only one "edge-case" risk that needs to be noted: if 51% of the feed producing delegates collude to publish a very high price feed *AND* they have sufficient BTSX they could end up shorting more BitUSD than the market can currently support. The result will be BitUSD temporarily trading below a dollar. The other risk is for delegates to collude and publish a lower feed and then using significant capital to buy up the order book and trigger fake margin calls. Both of these "attacks" require large amounts of capital and a large amount of collusion. They would hurt BTSX value and thus these delegates would likely be voted out very quickly and accurate price feeds restored. In both cases the attacker would likely lose more money than they could make, especially if they attempted to short BitUSD while attacking the network. Such an attacker would end up margin called when the network corrects.
Conclusion: the market pegs are working and will get better!