Interest on BitUSD - A Proposal for Review

[santaclause102]

I see the need for interest on BitUSD but why offer more interest if BitUSD is held longer without selling (not only totally but proportionally)?

[arhag]

A short position has collateral from two sources: one is the BTSX paid by the BitAsset buyer (I call this BTSX the reserve); the other is the BTSX paid by the short seller (I call this BTSX the margin). The collateral = reserve + margin. The current rule is that the margin needs to be at least equal to the reserve initially (200% backed initially). At some point the short seller covers or the DAC does a margin call. If the price of BTSX goes down with respect to the BitAsset, then some of the margin is needed to cover the BitAsset debt when covering. Whether the short seller covers at a loss or the DAC does a margin call, the mechanism would work the same way it currently does. However, if the short seller covers at a profit, things would work a little bit differently compared to today. If the short position is covered at a profit, that means that only a portion of the reserve is needed to pay the debt and the remainder is profit. This remainder should be split according to some percentage specified when the short position was created and one part is paid as profit to the short seller and the other part is collected by the DAC as a fee (in reality the cover would require excess BitAssets to not only cover the debt but also the value of the fee according to the current price so that the DAC essentially trades the BTSX fee for the BitAsset fee). These fees are collected to pay variable interest to the BitAsset holders in a way similar to what I described earlier.

I'm not sure introducing a Capital Gains Tax into BTSX is a good marketing tool.

It is amazing how the same exact mechanism can be viewed in so many different moral ways due to different perspectives. This is a "Capital Gains Tax" where you get to decide the tax rate, not the government. You can choose a zero "tax rate" but if the market decides you are being too cheap, then you will never get your short matched. Just like if you are being too cheap with your bid/ask you might not ever get that matched. When there is bid/ask overlap, the DAC could in theory return that value back to the traders, but it "taxes" it instead, and we don't seem to have a problem with that. I'm sure marketing people can avoid making the mechanism sound like a "bad thing" to people. Anyway, any thoughts about the mechanics/economics itself?

[starspirit]

I like the idea of BitUSD longs receiving interest to better improve the demand-side. However, I find another set of rules to consider is making things more confusing to me over time, and such rules still have no way of ensuring ample liquidity around the peg price. Why is the idea (proposed elsewhere) of a floating rate paid from shorts to longs apparently being rejected?

Like Agent86 I don't like where this is sourced from - being a transaction fee (up to 11%) on shorts. This is not really sustainable if we want strong market growth, which is accommodated by growth in new long/short positions.

I would also be upset if having to hold more than 12 months to fully earn this reward. I want to use my BitUSD as much as possible. Isn't that the goal?

[Markus]

This proposal is problematic because it destroys the fungibility of BitUSD. BitUSD that haven't moved are suddenly different from, and more valuable than, other BitUSD. His proposal encourages "banks" to spring up -- businesses that allow users to deposit their BitUSD on a fiduciary basis, and try really hard to keep from moving their BitUSD. Users then have some outside mechanism to move around claims against BitUSD deposits while the deposits themselves sit in the bank vaults and accumulate the maximum interest since they never move. The users and banks would then split the enhanced interest they extract, making this arrangement economically sustainable.
You can read about my alternative proposal here:  https://bitsharestalk.org/index.php?topic=8422.0

Very good point! Essentially this means having a progressive interest rate would encourage trading outside of BitSharesX rather than within.

A short position has collateral from two sources: one is the BTSX paid by the BitAsset buyer (I call this BTSX the reserve); the other is the BTSX paid by the short seller (I call this BTSX the margin). The collateral = reserve + margin. The current rule is that the margin needs to be at least equal to the reserve initially (200% backed initially). At some point the short seller covers or the DAC does a margin call. If the price of BTSX goes down with respect to the BitAsset, then some of the margin is needed to cover the BitAsset debt when covering. Whether the short seller covers at a loss or the DAC does a margin call, the mechanism would work the same way it currently does. However, if the short seller covers at a profit, things would work a little bit differently compared to today. If the short position is covered at a profit, that means that only a portion of the reserve is needed to pay the debt and the remainder is profit. This remainder should be split according to some percentage specified when the short position was created and one part is paid as profit to the short seller and the other part is collected by the DAC as a fee (in reality the cover would require excess BitAssets to not only cover the debt but also the value of the fee according to the current price so that the DAC essentially trades the BTSX fee for the BitAsset fee). These fees are collected to pay variable interest to the BitAsset holders in a way similar to what I described earlier.

I'm not sure introducing a Capital Gains Tax into BTSX is a good marketing tool.

[theoretical]

This proposal is problematic because it destroys the fungibility of BitUSD. BitUSD that haven't moved are suddenly different from, and more valuable than, other BitUSD. His proposal encourages "banks" to spring up -- businesses that allow users to deposit their BitUSD on a fiduciary basis, and try really hard to keep from moving their BitUSD. Users then have some outside mechanism to move around claims against BitUSD deposits while the deposits themselves sit in the bank vaults and accumulate the maximum interest since they never move. The users and banks would then split the enhanced interest they extract, making this arrangement economically sustainable.

You can read about my alternative proposal here:  https://bitsharestalk.org/index.php?topic=8422.0

[nethyb]

We should remember the fact the BitSharesX exchange is de-centralised is a significant marketable advantage over the centralised exchanges who offer an interest capability (mcxnow)  or even support BitAssets...

I for one would be very uncomfortable holding any significant amount of savings in an any centralised exchange due to the real risk of hacking, dishonesty and regulatory/government intervention.
Probability of loosing funds increases with length of time funds are kept on the centralised exchange!

I have no such concerns with BitSharesX.

If this proposal goes ahead - let make sure we highlight this front and centre

BitSharesX - Trustless Banking for Everyone

I expect this proposal could be huge for Chinese investors given the limited domestic investment options and the ever present threat of shutting down the countries access to the traditional centralised BitCoin exchanges.

As an aside - I'd like a term deposit type capability within the exchange... i.e. I'd like to lock away BTSX, BitGold, BitBTC for a period of  3months, 1 year, 5 years... mostly to force myself to invest for the long term and not FUD myself out of holding long term. Combined with BitSharesX interest this could be a great capability.

And finally - I came across this post from some crazy guy talking about this same idea back in May 2013... 

https://bitcointalk.org/index.php?topic=213588.0

Congratulations on seeing your vision to reality BM - it's a hell of an achievement!

[arhag]

Okay, after thinking about it more I don't like the bond market idea (because of the collateral risk and fungibility issues) but I also don't like shorts created at a price below the peg (peg being either the feed price or 1-hour average if feed not present). Instead, taking inspiration from bytemaster's post here, I have the following proposal for implementing interest for BitAsset holders.

A short position has collateral from two sources: one is the BTSX paid by the BitAsset buyer (I call this BTSX the reserve); the other is the BTSX paid by the short seller (I call this BTSX the margin). The collateral = reserve + margin. The current rule is that the margin needs to be at least equal to the reserve initially (200% backed initially). At some point the short seller covers or the DAC does a margin call. If the price of BTSX goes down with respect to the BitAsset, then some of the margin is needed to cover the BitAsset debt when covering. Whether the short seller covers at a loss or the DAC does a margin call, the mechanism would work the same way it currently does. However, if the short seller covers at a profit, things would work a little bit differently compared to today. If the short position is covered at a profit, that means that only a portion of the reserve is needed to pay the debt and the remainder is profit. This remainder should be split according to some percentage specified when the short position was created and one part is paid as profit to the short seller and the other part is collected by the DAC as a fee (in reality the cover would require excess BitAssets to not only cover the debt but also the value of the fee according to the current price so that the DAC essentially trades the BTSX fee for the BitAsset fee). These fees are collected to pay variable interest to the BitAsset holders in a way similar to what I described earlier.

Since shorts would be limited to the peg price, short sellers need some other way of competing with each other to get their shorts matched. The market rule would be that in the case of a tie in price, the short position with the highest percentage of profit burned as fees wins. The percentage of profit burned should adjust according to market dynamics to balance the BitAsset long and short demand since as the percentage of profit burned goes up the short sellers lose their incentive to short but BitAsset buyers have an increased incentive to hold the BitAsset due to the higher expected interest rates. If the price of the BitAsset in terms of BTSX drops even a little from the peg that it was shorted at, the short seller still has an incentive in the short-term to cover to get their percentage of the small profit. Agent86, do you see any liquidity problems with this method? Anyone see any issues with this proposal?

[Shentist]

In the past I have been stongly oposing what is now called BitUSD5 based on the fear that it would trade so high above the peg to dry up the market and even cause a run-away towards infinite prices.

This current "rewards" proposal seems to be much more workable. One thing I would like to add to the discussion:

Any thoughts on how sustainable a level of 5 or even 10 % p.a. of interest/dividends/rewards, as it was mentioned, would be? My guess is that it would quickly drop to something insignificant - like the fractions of one per cent on mcxnow.

The current amount of BitUSD existing is tiny and they have all been created recently - so lots of fees for few BitUSD.
Once interest payments start many big holders will trade with themselves to create equivalent short and long positions, effectively tying most of their BTSX holdings up in collateral. This is at no risk to them (they can cover anytime at any price) but gives them the advantage of getting a large cut of the interest payed. All this means not so many fees for very many BitUSD.

Some thoughts on other issues related:
- Wallet would have to ensure that balances are LIFO.
- Don't promise a minimum rate if you can't garantee a minimum fee's income which you can't.
- I don't like the word reward either, it sounds like someone wants me to sign up for some card to get my address and spending profile. I think interest is the wrong word for this concept and would prefer dividend but I do understand that the terms interest and dividend might be legally challenging.

good points.

only if we have trades we will get fees to get paid back as interest.

so it is to be expected that the interest will go down over time, but will help to hold the peg.

i agree that the proposel is to complicated. maybe bytemaster should count in every Joe. why not pay it out every day? would be much easier to understand and to follow.

"today 1000 BTSX in fees are collected. 1000 BTSX / 485.000 bitUSD = 0.00206185 BTSX per bitUSD or 0.75% annual bitInterest"

please consider KISS

@Agent

i don't get the bond market. how can i promise to pay something in the future and why do i want to use it? looks to me too complicated and against - KISS. on the mentioned thread i didn't found an explaination how the bond market will function and why the participants are in the market at all.

[luckybit]

earnings would also be better

Earnings is pretty good too. Rewards just sounds really scammy. I hope they don't go with that.

[luckybit]

SO THIS WHAT THE  IS ABOUT! I just got it. You guys were originally positioning the 5% to BTSX holders, not BitAsset holders.

Moving the 5% incentive to BitAsset holders is strategically much better. People who invest in crypto are growth investors, they don't care much about stability or 5% interest. Moving the 5% incentive to BitAsset holders attracts an entirely new demographic.

As demand for BitAssets grow, the value of BTSX will grow as well. It's a perfect win-win.

This is genius!

was ALWAYS for BitAsset holders... we just didn't quite know how to implement the rewards

don't call it rewards.

why not interestfees or shareinterest and short interest?

Benefits?

Anything is better than rewards.

[bitbro]

Instead of 5% interest Promise 50% of Btsx-BitUSD transaction fees or something amongst all holders of BitUSD


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[Markus]

In the past I have been stongly oposing what is now called BitUSD5 based on the fear that it would trade so high above the peg to dry up the market and even cause a run-away towards infinite prices.

This current "rewards" proposal seems to be much more workable. One thing I would like to add to the discussion:

Any thoughts on how sustainable a level of 5 or even 10 % p.a. of interest/dividends/rewards, as it was mentioned, would be? My guess is that it would quickly drop to something insignificant - like the fractions of one per cent on mcxnow.

The current amount of BitUSD existing is tiny and they have all been created recently - so lots of fees for few BitUSD.
Once interest payments start many big holders will trade with themselves to create equivalent short and long positions, effectively tying most of their BTSX holdings up in collateral. This is at no risk to them (they can cover anytime at any price) but gives them the advantage of getting a large cut of the interest payed. All this means not so many fees for very many BitUSD.

Some thoughts on other issues related:
- Wallet would have to ensure that balances are LIFO.
- Don't promise a minimum rate if you can't garantee a minimum fee's income which you can't.
- I don't like the word reward either, it sounds like someone wants me to sign up for some card to get my address and spending profile. I think interest is the wrong word for this concept and would prefer dividend but I do understand that the terms interest and dividend might be legally challenging.

[tonyk]

Interest bearing bonds require a separate market and implementation from the core BitUSD market.  A BTSX holder can sell a collateralized promise to pay a certain amount of bitUSD at a certain date in the future.  There can then be a "bond market" for these promissory notes.  The present day value of these future promises to pay BitUSD will determine short term and long term interest rates.

The part about the  interest rates is good.

The part where I see the biggest challenge is such collateralization working on a blockchain. I can not figure out a way (neither  have I read somebody suggesting working solution) where both conditions are met -repayment of the bond (debt is) guaranteed and at the same time incentive for the issuer of such bond is still present. In other words if the whole amount received through the bond sell is kept as collateral + additional collateral for the interest is needed, where is the incentive for the issuer? Anything less than that collateral leaves the bond buyer exposed to the risk of not receiving his money back.

[edit] It will take a truly independent bond market, where special market participants, will act as bond issuer and will collateralize a series of bonds (with deferent expiration dates), for this to truly work.

[joele]

1) If you hold a balance for less than 1 month, you earn nothing.

This might be a bad idea because initially people might only hold for a few weeks as the market isn't going to be mature enough that people will hold for months at a time. I think the interest should kick in immediately on a daily or even hourly basis just as what happens with https://mcxnow.com/

Their economic model is proven to work already for an exchange. Why not just copy exactly how they do it? People seem to like receiving frequent rewards even if they are very small each day or each hour. If you can feed them interest in real time that is even better for attracting holders and then once you get them holding you hook them in by increasing the rewards the longer they hold (more consecutive days is better).

So minimum could be 5% but if they hold beyond a certain amount of consecutive days then the 5% limit is removed and it can go as high as it goes.

 

[Empirical1.1]

What effect (if any) do you guys think the 5% interest will do to the price of Bitassets? Take something like bitUSD which already inflates via the US government by about 2% per year. Then we add 5% on top of that. How will the 7% annual inflation rate affect the price of Bitshares- if it will at all?

I know this is about creating a demand for Bitassets and I think it will, but are there any long term side effects regarding to the bitasset market peg in making bitUSD annual inflation at 7% when the actual inflation rate is closer to 2%???

Inflation is bad, interest is good.

So when they say there's 2% inflation it means at the end of the year $1 will on buy you $0.98 of the stuff it does today. Whereas 2% interest p.a means at the end of the year means $1 will buy you $1.02 worth of stuff. (Though if there was 2% inflation the two would cancel out.)

In your example of 5% interest and a dollar with 2% inflation would mean $1 would be worth $1.03 at the end of the year.

What will it mean for BTSX?

Very good things. Imagine two identical places. Place A gave you no interest on your money and place B did. Assuming all else is equal, you would put your money in Place B.

It's likely the BitAsset interest rate while variable will be higher than most traditional places so it means BitAssets will attract a lot of new money.

Also the nice thing if I understand it correctly is that our interest rate is self-regulating.

So for example right now there is not a lot of BitAsset buying demand but a lot of people who want to short BitAssets. They are competing with each other by essentially who is willing to pay the most when there is a chance to short. These contribute some of the fees that are then used to pay the interest. This interest attracts buyers. More buyers mean the shorts have to compete less which means less fees for interest, less interest means less demand and so on...

I think for many BitUSD holders, they would rather not worry about all of this stuff. They would just like to get some variable interest on their BitUSD balance, just like they would in their bank savings account. Using the BitUSD fees to pay this interest makes things much easier for these users. If they are unsatisfied with the rates they are getting, then they can look into the bond market.