Interest on BitUSD - A Proposal for Review

[Method-X]

If interest is high (10%), there will be extra demand for bitUSD - it might hurt the peg. BitUSD may trade above USD.

There will be plenty of people willing to Short USD to maintain the peg because BTSX will grow at 2x the rate of BitUSD demand.

Exactly. If anything this would balance out the bulls and the bears.

[Method-X]

 +5%  +5%  +5%

Bitcoin 1.0 : CANNOT issue monetary policy.

Bitcoin 2.0 : CAN issue monetary policy.

That about sums up the reason BTSX is a game changer.

[biophil]

Just so we're clear: This is not interest it is a dividend. The holders of bitUSD are participating in a revenue sharing plan. Also, paying out half the revenue as a dividend and retaining the other half as the insurance fund sounds good. The theory that people will look at their dividends as insurance if something bad happens I don't think will fly. The dividend is earned revenue and they'll be upset if they find one day that it needs to be used to bail out the market.


Other than those points I LOVE this idea. It makes a truly compelling case to hold bitUSD.

It has a lot of the elements of a dividend, I agree. I am thinking how to represent it to the people. 'The interest is not truly fixed, but for the last mo/3 mo/ etc it was X%' I do not know, do not like that way too much neither.

Why not represent it as a revenue sharing plan? The market makes money off YOUR bitUSD and gives you a cut. The more money the market makes off your bitUSD the more you make. Nice and simple once we get away from referring to it as Interest. Interest to me is someone paying you a fixed, agreed upon, rate to use your money. That's not what's going on here.

Agreed, you could package it like interest, but there's very little fundamentally that makes this interest. It is revenue sharing, plain and simple. Presenting it as revenue sharing makes it obvious that the "interest rate" is negatively correlated to the quantity of bitUSD, which makes it easier to see that it's not a Ponzi scheme, nor is it inflationary, nor is it price-fixed.

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[GaltReport]

BitUSD is incredibly useful as a trading instrument but the "sales pitch" for the average Joe is something like this:

1) Buy BitUSD today and you will be able to sell it back for 98% of what you paid for it (due to the spread)
2) Once you have BitUSD you get all of the benefits of Bitcoin, instant transfers, privacy, security.
3) As a merchant the "cost" of accepting BitUSD (at parity) is currently equal to the cost of a credit card (a few percent)

Initially demand from traders will to hedge against BTSX volatility will help the market grow, but what we *REALLY WANT* is for people to store their wealth in the system, not just their trading account.  To do this BitUSD needs to offer a return that is explicit.  IE: it shouldn't be done via the value deviating from the peg.

Right now the network earns USD via the market and via transaction fees (yes transaction fees can be paid in USD).  This income is saved for a "rainy day" which we don't actually expect to happen, but could.  The value as an insurance system could be better used to pay interest to USD holders.   If BitUSD were an interest bearing asset, then the interest would compensate for the risk of black swans in the same way that the insurance fund does today.

So far BitUSD has earned $1800 on $485,000 issuance in just 2 weeks of light trading.  This is about .4% yield every 2 weeks or about 10% per year.   I have no idea how this will play out over time, but I suspect that it will result in a significant yield for BitUSD holders.   The more people hold BitUSD the more BTSX is worth.   So it is in the best interest (No pun intended) of BTSX holders to pay interest on BitUSD from the fees collected.

I would like to implement it as follows:
1) If you hold a balance for less than 1 month, you earn nothing.
2) If you hold a balance for one year or more then you earn (YOURUSD / TOTAL_USD) * COLLECTED_FEES_BALANCE
3) If you hold a balance for less than one year then you earn a pro-rated amount.     (YOURUSD / TOTAL_USD) * COLLECTED_FEES_BALANCE * FRACTION_OF_YEAR_HELD^2

The result is that long-term holders of BitUSD earn much higher yields than short-term holders.  The yield should more than cover the cost of the spread and thus your pitch to the average Joe is much stronger:

1) Buy BitUSD and earn more (much more) on your dollars than you do at your bank.
2) Enjoy all the other benefits of crypto.

This feature would have a greater impact on adoption than just about anything else being discussed. 

Discuss.

+5% +5% +5%

Glad you are thinking about the average joe.  So important.  Putting aside the fact that I am no expert in the economics of this all, I'd have to say that THIS SOUNDS GREAT!!  If this works, it has an almost frightening level of possibilities.  :)

[tonyk]

But isn't is usual that the interest is NOT fixed? at least in germany that is the case :)

No I am also searching for workaround because we do not actually know how much fees will be collected, so promising 5 or 10% is kind of misleading. And I want to be able to tell them 'our interest is higher than the one in the bank'.

Why not represent it as a revenue sharing plan? The market makes money off YOUR bitUSD and gives you a cut. The more money the market makes off your bitUSD the more you make. Nice and simple once we get away from referring to it as Interest. Interest to me is someone paying you a fixed, agreed upon, rate to use your money. That's not what's going on here.

True, but as explained above, telling the people it is higher than in the bank is a powerful selling point, imo.

[Riverhead]

Just so we're clear: This is not interest it is a dividend. The holders of bitUSD are participating in a revenue sharing plan. Also, paying out half the revenue as a dividend and retaining the other half as the insurance fund sounds good. The theory that people will look at their dividends as insurance if something bad happens I don't think will fly. The dividend is earned revenue and they'll be upset if they find one day that it needs to be used to bail out the market.


Other than those points I LOVE this idea. It makes a truly compelling case to hold bitUSD.

It has a lot of the elements of a dividend, I agree. I am thinking how to represent it to the people. 'The interest is not truly fixed, but for the last mo/3 mo/ etc it was X%' I do not know, do not like that way too much neither.

Why not represent it as a revenue sharing plan? The market makes money off YOUR bitUSD and gives you a cut. The more money the market makes off your bitUSD the more you make. Nice and simple once we get away from referring to it as Interest. Interest to me is someone paying you a fixed, agreed upon, rate to use your money. That's not what's going on here.

[xeroc]

But isn't is usual that the interest is NOT fixed? at least in germany that is the case :)

[tonyk]

Just so we're clear: This is not interest it is a dividend. The holders of bitUSD are participating in a revenue sharing plan. Also, paying out half the revenue as a dividend and retaining the other half as the insurance fund sounds good. The theory that people will look at their dividends as insurance if something bad happens I don't think will fly. The dividend is earned revenue and they'll be upset if they find one day that it needs to be used to bail out the market.


Other than those points I LOVE this idea. It makes a truly compelling case to hold bitUSD.

It has a lot of the elements of a dividend, I agree. I am thinking how to represent it to the people. 'The interest is not truly fixed, but for the last mo/3 mo/ etc it was X%' I do not know, do not like that way too much neither.

[bytemaster]

I think the key is make bitusd  liquidity, if nobody use it , it means nothing.

If there is demand it will become liquid.

If you think a little about this statement .. can you come up with anything similar in the current financial world??

If people *WANT IT* then you can *SELL IT*.   Something only becomes illiquid if there are fewer buyers today than there are sellers and sellers are unwilling to take a loss.

[bytemaster]

What about the original idea of shorters paying interest to the longs - is that lo longer workable? I always thought that was nice and simple because you could charge a fixed amount from shorters relative to how long the short position was open for.

Shorts pay market fees to enter their positions, these fees go into the fund, and thus get transferred to the USD holders.   Shorts "bid" to be first in line to short and thus the interest rate they pay is now also determined by the market.

We could "price fix" a minimum amount the short must out-bid the ask and thus a guaranteed fee.

[xeroc]

I think the key is make bitusd  liquidity, if nobody use it , it means nothing.

If there is demand it will become liquid.

If you think a little about this statement .. can you come up with anything similar in the current financial world??

[bytemaster]

What about the original idea of shorters paying interest to the longs - is that lo longer workable? I always thought that was nice and simple because you could charge a fixed amount from shorters relative to how long the short position was open for.

Shorts pay market fees to enter their positions, these fees go into the fund, and thus get transferred to the USD holders.   Shorts "bid" to be first in line to short and thus the interest rate they pay is now also determined by the market.

[speedy]

What about the original idea of shorters paying interest to the longs - is that lo longer workable? I always thought that was nice and simple because you could charge a fixed amount from shorters relative to how long the short position was open for.

[Riverhead]

Just so we're clear: This is not interest it is a dividend. The holders of bitUSD are participating in a revenue sharing plan. Also, paying out half the revenue as a dividend and retaining the other half as the insurance fund sounds good. The theory that people will look at their dividends as insurance if something bad happens I don't think will fly. The dividend is earned revenue and they'll be upset if they find one day that it needs to be used to bail out the market.


Other than those points I LOVE this idea. It makes a truly compelling case to hold bitUSD.

[bytemaster]

I think the key is make bitusd  liquidity, if nobody use it , it means nothing.

If there is demand it will become liquid.