Author Topic: Proposal - Significant Enhancement to Market Engine  (Read 24878 times)

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Offline gulu

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I cannot agree more with Vitalik that BitUSD will either be 1 or 0. To extend the theory, BitUSD20 will either be 1 or infinity, providing that 20% of interest is higher than most shorts willing to pay.

A market-adjusted interest rate is the best tool I can think of so far. The goal is to let the market determine the right interest rate in an unmanned way, meaning there needs feedback from the market. The feedback would better not be based on price feed. Let us think about what the market would do when the interest rate is too high. And let that characteristic be the feedback.

In another proposal, I presumed that shorts would proactively cover their position when the interest rate is too high, resulting in more proactive buy orders of BitUSD to take the already-existing sell orders. Or because high interest rate pushed BitUSD price to be greater than 1, there are more proactive sell orders than buy ones. But either way, we can use this kind of characteristic to lower the interest rate, slowly. This method does not require price feed.

For the time being, we can make the advantage of price feed to determine the interest rate. It probably will be much easier from implementation perspective.  If it works, then move on to getting rid of price feed, meaning use parameters inside of the market.
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Offline jsidhu

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I cannot agree more with Vitalik that BitUSD will either be 1 or 0. To extend the theory, BitUSD20 will either be 1 or infinity, providing that 20% of interest is higher than most shorts willing to pay.

A market-adjusted interest rate is the best tool I can think of so far. The goal is to let the market determine the right interest rate in an unmanned way, meaning there needs feedback from the market. The feedback would better not be based on price feed. Let us think about what the market would do when the interest rate is too high. And let that characteristic be the feedback.

Thing is fear is always a stronger driver than greed (that is why the market always falls faster than it rises). So imagine if the incentive was even there, increasing as bitUSD fell. Confidence would also fall inline with an increase of interest rates (fees at which shorts have to pay increase)... thus we could have a case where people are "willing" to take a cut for an extended period of time because they beleive the system is broken and place a higher value in the system returning them any funds rather than a lucrative interest rate. If fees tend towards infinity as price tends towards 0, it will never get to 0. But it may stay away from 1 for a long time, and that it what will help people realize that the peg is here to stay and works. You need those incidences which make people have that fear and greed and we come out just fine... thats what drives market confidence up through the roof. Over time the spread will narrow and confidence rises, the black swans will happen but confidence curve will have higher lows every time, subsequently higher btsx prices. In fact you can probably draw a parallel between the decrease of spreads and the increase in btsx long term. They should be inverse of each other. Don't try to artificially fix what naturally should occur.

Im not sure about bitUSD above 1 and what incentive you can place to bring it back to 1, maybe long's pay fees to shorts?

Who would pay the fees to short on bitusd20? Why would someone use this and pay more when bitusd would have the liqudity they need?
« Last Edit: September 17, 2014, 06:55:26 pm by jsidhu »
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Offline gulu

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I cannot agree more with Vitalik that BitUSD will either be 1 or 0. To extend the theory, BitUSD20 will either be 1 or infinity, providing that 20% of interest is higher than most shorts willing to pay.

A market-adjusted interest rate is the best tool I can think of so far. The goal is to let the market determine the right interest rate in an unmanned way, meaning there needs feedback from the market. The feedback would better not be based on price feed. Let us think about what the market would do when the interest rate is too high. And let that characteristic be the feedback.
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Offline Gentso1

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Agent86 has entered the building!  8)

I just want to say, keep the eagle eye view firmly in mind: In the end nobody is going to care how much work the price feed does if they get 30% on bitUSD and it is regarded as safe enough and close enough pegged to USD. Whoever does this will destroy everyone else.
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Offline gulu

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This proposal only focuses on killing the short demand. It does not do much on the bidding side. It would probably help, but may not be enough.

Compare the cost to the benefit. I am not convinced.
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Offline maqifrnswa

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BM,  look like delegates need to spend more resource/time on you new proposal.

Agreed.  If delegates are expected to update something once per (day, hour, minute) then a delegate account in the top 101 should be allowed to publish the update once per (day, hour, minute) without paying a fee.

More demands on delegates means two things: (1) it becomes less of a Decentralized Autonomous Company and more of a Delegate Accountable Company, where delegates are responsible for actually controlling the market a little bit (since they now have to control how fast/slow changes happen). (2) More responsibility means it is more like a job, and as such need to be compensated competitively (which goes back to my request for variable delegate pay in order to allow for market forces).

Overall, the system makes sense - but on principle I'd rather not have delegates be required to make judgement calls (where are the walls, what is an acceptable spread, how fast/slow should things change). Feeding in pure data from an exchange is OK, the system just needs to digest that data. When delegates make judgement calls, the delegates (not the system or the market) have to digest the data.
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Offline theoretical

BM,  look like delegates need to spend more resource/time on you new proposal.

Agreed.  If delegates are expected to update something once per (day, hour, minute) then a delegate account in the top 101 should be allowed to publish the update once per (day, hour, minute) without paying a fee.
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Offline theoretical

We have fixed price shorts... they only sell when the "feed is below their price" and can set what ever collateral ratio they want (greater than 2x). 

Blowing through the sell wall won't be a problem because at a certain price BitUSD demand goes away to.  "high BitUSD" is much less of a problem than "low BitUSD".

So how exactly do the feeds compete on collateral then?  Under your system, if there's a short at 32.00 offering 2x collateral and another short at 32.01 offering 10x collateral, and the feed is at 31.80, what happens?

My understanding was that both shorts would be forced to execute at 31.80, since the number (32.00 or 32.01) is a maximum price.  And then the 10x collateral would win (take priority).  Am I misunderstanding?
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Offline twitter

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BM,  look like delegates need to spend more resource/time on you new proposal. 
witness:

Offline jsidhu

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We have fixed price shorts... they only sell when the "feed is below their price" and can set what ever collateral ratio they want (greater than 2x). 

Blowing through the sell wall won't be a problem because at a certain price BitUSD demand goes away to.  "high BitUSD" is much less of a problem than "low BitUSD".

But this reliance on feeds is becoming necessary whereas a properly designed incentive system can do away from a feed? (thinking long term) We need to try to keep dependence on feed down upon design reviews not increase them? I only say properly as I believe there is a solution out there without the feeds.

I've always that either you are a bull or a bear, you can't be both long term. Ofcourse it will increase liquidity but I think marketing the product will go a longer way to help with the spreads. I'm not so sure about the assumption that the bears would cause a higher spread if there simply just more bears around.
« Last Edit: September 17, 2014, 06:10:57 pm by jsidhu »
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Offline bytemaster

We have fixed price shorts... they only sell when the "feed is below their price" and can set what ever collateral ratio they want (greater than 2x). 

Blowing through the sell wall won't be a problem because at a certain price BitUSD demand goes away to.  "high BitUSD" is much less of a problem than "low BitUSD".

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Offline theoretical

So under bytemaster's proposal, shorts would all execute at the feed price and compete on collateral.

I like the idea of letting high collateral positions absorb the short demand:  The more BTSX is tied up in collateral, the better the BTSX price.

I dislike the increased reliance on the feed.  And as gulu noted, forcing shorters to sell at the feed will risk a "demand crisis":  When BitUSD demand is high, it might blow through the "short wall" at the feed and get little resistance thereafter, since few BitUSD holders would want to place Ask orders when they think BitUSD is going up.

What if we allow two different types of shorts:  "feed shorts" which must sell at the feed and compete with each other by offering more collateral (but 2.20x is the minimum), and "fixed-price shorts" which sell for 2x collateral?  Feed shorts always get priority over normal shorts, but normal shorts are there to back up the system when nobody wants to feed short (i.e. in a bear market).

If we do see a bear market and nobody wants to feed short because everyone thinks BitUSD will go up in the short term, then normal shorts will still be able to sell at a premium to the feed, increase the supply, limit BitUSD rise, and prevent a BitUSD shortage or "demand crisis" where everyone wants BitUSD but there isn't enough to satisfy the demand, driving prices upward.

I would also like to propose adding an optional minimum price (as well as a maximum price) to a feed short.  Giving users more control is always good!
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Offline jsidhu

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This is an earlier proposal:https://bitsharestalk.org/index.php?topic=7865.0

The main point is to add an market-adjusted interest rate. The interest is from the collateral, serving as a fee from the shorts paid to the longs. This adds cost for shorting BTAs. Of course, the interest rate can be negative, if the demand ever reverses. In the traditional stock market, you do pay fees to your broker for borrowing stocks.

The adjustable interest rate can be determined from parameters in the market. For example, if BitUSD is consistently trading under feed price, then the interest rate rises, adding incentive for people to buy and hold BitUSD.

As Vitalik Buterin argued here: https://bitcointalk.org/index.php?topic=324830.msg3581512#msg3581512

The peg will either tend towards 0 or 1 (0 under a black swan event when it breaks), 1 otherwise. What we need is a system such that the further away from 1 (up or down) the more incentive to bring it back to 1, above 1 shorts have an incentive, below 1 longs have an incentive and further away the more incentive. Thus you will not tend towards 0 under a black swan as incentive should be high enough to start bringing it back to 1. Ofcourse you argued that time should be considered and that may be a valid parameter, ie: the longer it is above 1 the more incentive, and people start to anticipate the event that it goes below 1 and the covers happen.
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Offline tonyk

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Sorry that I could not post faster... just had to buy some bitAssets to be ready to cover my extensive short positions and even to be  a bit long now....

Now, buying bitAssets instead of outright selling means that I ultimately believe in the system (as always). Not so happy with the month and a halve we (read you) are going to work hard to implement this market 'non-improvements', instead of concentrating on having a stable (non-buggy product) and start marketing to the world, increasing the demand for bitUSD. Utility of bitUSD is the ONLY thing that will ultimately strengthen the peg.


PS
 Quick question -Which order will go first?
short 1 bitUSD at 0.99999, with 2x collateral, or
short 1 bitUSD at 1.00000 BTSX/bitUSD, with 17x collateral?

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« Last Edit: September 17, 2014, 06:00:34 pm by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline gulu

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I do not think this proposal would achieve the goal of 1:1 peg.

The reason why there lacks liquidity is because the peg does not work well. The reason why the peg does not work well is because there are imbalanced demands from two sides of the market. Right now, there is not much incentive to hold BitCNY or BitUSD. Sometime in the future, there might be too much incentive to hold BTAs, if much forced coverage occurs, which makes the interest of holding BTAs high enough. That is to say, the demands from two sides of the market will fluctuate, and we need a self-adjustable tool to compensate the demand difference. There will be ALWAYS uneven demands from the two sides.

Under this proposal, even if the collateral multiple is raised, as a BTSX bull, I personally do not have the incentive to hold BitUSD/BitCNY and be a market maker. I don't care as much for the collateral as for how much interest I would receive for holding BTAs. Take BitCNY for example, why would I want to hold BitCNY while I can earn higher interest holding real CNY outside?

What is our goal? 1:1 peg for BTAs, right? Only when this occurs, will there be exchange agents that honors 1:1 exchange. Then merchants are willing to take BitUSD/BitCNY as payment, because they know they can exchange for real USD/CNY anytime.

Market makers want to earn the spread. This is their only goal. Simple as that. In a one-sided market, no one dares to be the market makers, because they would end up holding most of the BitUSD/BitCNY while no one else wants to hold. Higher/adjustable collateral would not solve the problem of one-sided market.

Open to discussion, and ready to be persuaded.

The purpose of this proposal is to address exactly what you said:  market makers shouldn't have to hold BitUSD *EVER* because who wants BitUSD in an experimental system unless they really believe in the peg *and* believe BTSX is currently overvalued *or* they are using BitUSD as a merchant who doesn't want volatility.

The early adopters, the bulls, are the ones who want the peg to work and they should be able to provide a peg and "make the market" without being stuck holding BitUSD.

So as a market maker if you "short" 100% of the BitUSD you sell... then you you buy BitUSD you go from being "leveraged BTSX" to just "BTSX".   You make the spread without exposure to USD.

There is demand for checking accounts that don't pay interest or "trading accounts" which don't pay interest as high as available elsewhere.  If there is a dollar crisis and banks start paying 50% interest then no one will want to hold USD for long (due to hyper-inflation) but that is an issue with the USD and not BTSX.

A little confused. Are you saying someone can short with less than X1 collateral? Could you give an example, please?
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