Author Topic: Interest on BitUSD - A Proposal for Review  (Read 43067 times)

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Offline aaaxn

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Also, I think it is important that we don't advertise that we are promising any specific yield on BitAssets. That is a promise that we cannot really deliver since it is out of our hands. We should be saying BitAssets provide yields up to 5% per year (or whatever we think the number should be). Meaning that it is possible that the yield rate could be 0%. These yields are added benefits of holding BitAssets in the system, but it is not necessary for BitShares X to be valuable.
I was confused with all these promises of fixed yield payed from shorts to longs. It won't work this way, but if yield is variable and comes from fees than it might be ok.

Offline arhag

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I do like how you are focusing on where the actual growth is coming from. So where is the growth coming from in the case of BitShares X that allows for such high (expected) interest rates? The answer is that it comes from the expected increase in value of BTSX. As more people adopt the system, meaning transfer their wealth outside the blockchain into BitAssets, this should drive the market cap of BTSX up. Shorts and BTSX holders get to benefit from that price increase.
I think that what you described is some kind of ponzi design. Bitshares plans to promise high fixed interest rates, but only under condition that there will be ever expanding flow of new money to system. If that fails to materialize entire thing will collapse, because there will be no way to pay promised interest.

The entire thing will not collapse if the growth of BTSX stops. Even if interest/yields on BitAssets is zero, there is still some demand for holding on to them because people want price stability. In fact, even during the saturation stage it would still be possible to provide some yield to BitAssets because the revenue of the DAC (from transaction fees and bid-ask overlap) can still exceed the costs (which only need to be the relatively low costs of the delegates' running their servers).

My comment on the high yields was made when the shorts were effectively paying the longs through the old market rules. In the old rules, if you wanted to get your short matched, you had to effectively pay a fee through bid-ask overlap. These fees were then used to pay yields on BitAssets. Obviously, that would only be sustained if short demand is greater than long demand (meaning everyone believes that BTSX value is going to grow). If we reach a point of saturation (say BitShares X adoption is already huge), then the short demand will no longer be very high and the fees from that bid-ask overlap would become much smaller (thus the yields to BitAssets would have to be smaller).

Now, with the new market rules, shorts are prioritized by collateral rather than the fee they pay. So you can think of the revenue from bid-ask overlap fees to be what they would have been during the saturation stage. This means that BitAsset yields will be smaller than they would have otherwise been (but it is all for a good reason: a stronger peg).

Also, I think it is important that we don't advertise that we are promising any specific yield on BitAssets. That is a promise that we cannot really deliver since it is out of our hands. We should be saying BitAssets provide yields up to 5% per year (or whatever we think the number should be). Meaning that it is possible that the yield rate could be 0%. These yields are added benefits of holding BitAssets in the system, but it is not necessary for BitShares X to be valuable.

« Last Edit: September 19, 2014, 05:50:20 pm by arhag »

Offline Chuckone

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I do like how you are focusing on where the actual growth is coming from. So where is the growth coming from in the case of BitShares X that allows for such high (expected) interest rates? The answer is that it comes from the expected increase in value of BTSX. As more people adopt the system, meaning transfer their wealth outside the blockchain into BitAssets, this should drive the market cap of BTSX up. Shorts and BTSX holders get to benefit from that price increase.
I think that what you described is some kind of ponzi design. Bitshares plans to promise high fixed interest rates, but only under condition that there will be ever expanding flow of new money to system. If that fails to materialize entire thing will collapse, because there will be no way to pay promised interest.

"Ponzi scheme" is thrown around way too much these days.

It has nothing to do with that in my understanding. Basically the more transactions there are, the more there will be transaction fees collected, the more there will be to redistribute to BTSX holders through the burn rate. In the case of bitAssets, more there are shorts, more there is bitAssets created, the higher the market cap of BTSX will need to be to have enough collateral for all those bitAssets. The fees collected from those shorts will then be redistributed to bitAssets holders (anyone, correct me if I'm wrong).

Tell me where the definition of "Ponzi scheme" fit in?

Offline aaaxn

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I do like how you are focusing on where the actual growth is coming from. So where is the growth coming from in the case of BitShares X that allows for such high (expected) interest rates? The answer is that it comes from the expected increase in value of BTSX. As more people adopt the system, meaning transfer their wealth outside the blockchain into BitAssets, this should drive the market cap of BTSX up. Shorts and BTSX holders get to benefit from that price increase.
I think that what you described is some kind of ponzi design. Bitshares plans to promise high fixed interest rates, but only under condition that there will be ever expanding flow of new money to system. If that fails to materialize entire thing will collapse, because there will be no way to pay promised interest.

Offline tonyk

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The best approach would be a where bitassets are also honored proportional to asset market cap

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True, but if we can learn from past experience, he will probably be true financial and marketing genius.... Then he will offer 10% to just the BTSX (even only those not held in collateral), will make the best IPO of all IPOs for 45% and will award himself with the remaining 30% just cause it is the only way to make BTS WWX from billion dollar business into a trillion dollar one....
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline toast

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The best approach would be a where bitassets are also honored proportional to asset market cap

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Offline voldemort628

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What about the downside when a new X DAC, say Bitshares XC is announced and the distribution is based on the snapshot of BitsharesX chain? 

If say Bitshares XC snapshot of Bitshares X is announced, would there be a run for BTSX and all(or a large number of) short positions are closed?

PS: Bitshares X is (still) supposed to be the protoDAC of the X family, meaning future X DACs will 100% honour BitsharesX right?
« Last Edit: September 09, 2014, 02:26:22 am by voldemort628 »

Offline starspirit

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Why not loan out my bitusd to systerm or other peaple, then I get Interest.

System's interest is m;Private's interest is n*m.

There are two kinds of shorts:  those creating new USD backed by BTSX... and those borrowing and selling existing USD backed by BTSX.    I think we can facilitate the second kind of market where people bid on interest rate.  Now people will BUY USD to lend to SHORT at interest.  This will really support the peg by creating a ton of buying demand without increasing the supply of BTSX.  This second kind of shorting can be done with User Issued assets as well.

There is a lot of merit in this idea. Although technically the extra demand in the BitUSD market from those buying and lending must be exactly matched by the BitUSD supply from those borrowing and selling (net neutral on demand), both parties ought to be willing to trade close to the peg price in the bitUSD market because the appropriate compensation/cost is now borne in the lending market. This allows the market to escape the current impasse where bitUSD longs and shorts can't easily meet within the price constraints on the bitUSD market. It should lead to a lot more liquidity and trading, if only for the ability to lend and borrow.

Those who decide to buy BitUSD and not lend (e.g. money held for liquidity needs by merchants and consumers) would earn zero (apart from the about-to-begin transaction fee sharing scheme) just as users of real USD cash earn zero, but reward can be obtained for lending money for various periods to those that want to use it (just like depositing or lending real USD in the current financial system). Borrowing/lending matching services could be opened to the free market to provide.

This idea should be explored further!



Offline tonyk

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Why not loan out my bitusd to systerm or other peaple, then I get Interest.

System's interest is m;Private's interest is n*m.

There are two kinds of shorts:  those creating new USD backed by BTSX... and those borrowing and selling existing USD backed by BTSX.    I think we can facilitate the second kind of market where people bid on interest rate.  Now people will BUY USD to lend to SHORT at interest.  This will really support the peg by creating a ton of buying demand without increasing the supply of BTSX.  This second kind of shorting can be done with User Issued assets as well.

Have you figured out how to collateralize such bitUSD loans?
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline bytemaster

Why not loan out my bitusd to systerm or other peaple, then I get Interest.

System's interest is m;Private's interest is n*m.

There are two kinds of shorts:  those creating new USD backed by BTSX... and those borrowing and selling existing USD backed by BTSX.    I think we can facilitate the second kind of market where people bid on interest rate.  Now people will BUY USD to lend to SHORT at interest.  This will really support the peg by creating a ton of buying demand without increasing the supply of BTSX.  This second kind of shorting can be done with User Issued assets as well.
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Offline x.ebit

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Why not loan out my bitusd to systerm or other peaple, then I get Interest.

System's interest is m;Private's interest is n*m.
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Offline arhag

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I think it's important to preserve the distinction between asset interest, shorting profit, and BTSX share value appreciation and deflation.  The default position for participants is holding BTSX, and profiting as adoption increases demand, and destroyed fees deflate the supply.  As these things happen, the BTSX shares you hold increase in value.

Shorting and longing assets is a distinct sub-business.  The shorters are leveraging to amplify their gains betting on BTSX increases, but doing so requires finding asset holders who are willing to miss out on potential BTSX gains in exchange for stability and interest payments.  The asset holders have to bet that the shorters are over enthusiastic about BTSX appreciation.

The actual value growth is all from adoption and usage of the entire platform, and that's the baseline for shorting and asset holding.  Relative to that baseline, at any given moment it will be profitable to go short or long, but not both.  Either the shorts profit at the expense of the longs, or the longs profit at the expense of the shorts.  The interest rate should be such that the market is approximately evenly split on which is expected to be the more profitable position.

I don't think normal transaction fees and revenue should ever be used for asset interest, because that erodes the baseline.  Interest should be exclusively payed by those taking short positions.

Well said. I just have two comments.

Quote
The interest rate should be such that the market is approximately evenly split on which is expected to be the more profitable position.

I don't quite agree that it needs to be evenly split. There is a lot of value in having short-term stability in the BitAsset (it makes it useful as a currency) that holders may demand the BitAsset even if they aren't getting "their fair share" of the interest. But the larger point of this statement is that it means the interest rate should be variable because the baseline growth of BTSX is going to be variable.

Quote
I don't think normal transaction fees and revenue should ever be used for asset interest, because that erodes the baseline.  Interest should be exclusively payed by those taking short positions.

Not necessarily. BTSX holders and shorters are getting a benefit from dividends. Those dividends come from transaction and other market fees (after paying delegates). So why not share part of those dividends with the BitAsset holders as well? That would make the shorts and longs more evenly split.
« Last Edit: September 06, 2014, 10:54:25 pm by arhag »

Offline Troglodactyl

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Now when everyone gets excited about bitAssets paying interest, I would like to point out to macro-economical perspective---

Why is that bank deposit used to pay nominal interest throughout the most of the recent history?
- well, this is primarily because banks were lending money, received from savers, to businesses, property buyers etc. at somewhat higher interest rates than they paid out to the savers on deposits.

And why were most businesses and property buyers were able to pay those higher interest rates?
- well, that's primarily because there was some positive real growth in the economy, meaning nominal growth rates exceeded inflation rate, and corporate profits and household income growth exceeded the higher interest rate which was due to the banking sector. E.g. fiat USD from savings were put into productive use by extending credit for investment within the economy.

So, here my questions:
- how would credit business work with regards to BitsharesX?
- how can bitUSD be lent out to businesses or property buyers?
- how would credit risk in such system be managed?

I will try to formulate more thoughts on the topic in the near future.

I am not sure if I am understanding your question properly, but let me attempt to answer anyway. First of all, BitShares X does not have any lending functionality as it is typically understood (meaning requiring trust in how the lent money will be used to eventually pay back the debt). I hope a future DAC will enable that functionality (I have some thoughts on that subject here).

It is true in a sense, however, that just like a bank, BitShares X is taking deposits (BTSX bids) and is making use of them to hopefully earn profits (in this case from shorting BitAssets, and the profits mostly go to the people doing the shorting not the DAC itself), and perhaps with this new interest proposal will now be sharing some of those profits with the depositors (BitAsset holders) by giving them "interest".

I do like how you are focusing on where the actual growth is coming from. So where is the growth coming from in the case of BitShares X that allows for such high (expected) interest rates? The answer is that it comes from the expected increase in value of BTSX. As more people adopt the system, meaning transfer their wealth outside the blockchain into BitAssets, this should drive the market cap of BTSX up. Shorts and BTSX holders get to benefit from that price increase. Since shorts can get higher returns than just holding BTSX, there is an incentive to short if you are a BTSX bull rather than just holding. But there is competition for shorting (there is after all limited BitAsset demand). So shorts are forced to share some of their expected profits with the BitAsset holders to incentivize them to allow the shorts to happen in the first place, just like banks need to incentivize depositors with interest to allow the deposits to happen in the first place. As long as on average BTSX value keeps growing at high rates, a high interest rate on BitAssets can also be sustained. Eventually, sometime in the future, when BitShares X is saturated (meaning there aren't any new people with wealth left to convince to adopt this system), BTSX growth should settle down and thus BitAsset interest rates will be forced to go down. I think some non-zero interest rate should still be possible then because the DAC is still able to earn revenue from transaction fees and market fees from operating the decentralized exchange.

I think it's important to preserve the distinction between asset interest, shorting profit, and BTSX share value appreciation and deflation.  The default position for participants is holding BTSX, and profiting as adoption increases demand, and destroyed fees deflate the supply.  As these things happen, the BTSX shares you hold increase in value.

Shorting and longing assets is a distinct sub-business.  The shorters are leveraging to amplify their gains betting on BTSX increases, but doing so requires finding asset holders who are willing to miss out on potential BTSX gains in exchange for stability and interest payments.  The asset holders have to bet that the shorters are over enthusiastic about BTSX appreciation.

The actual value growth is all from adoption and usage of the entire platform, and that's the baseline for shorting and asset holding.  Relative to that baseline, at any given moment it will be profitable to go short or long, but not both.  Either the shorts profit at the expense of the longs, or the longs profit at the expense of the shorts.  The interest rate should be such that the market is approximately evenly split on which is expected to be the more profitable position.

I don't think normal transaction fees and revenue should ever be used for asset interest, because that erodes the baseline.  Interest should be exclusively payed by those taking short positions.

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I have had white board designs for how to reenforce the peg via 2 markets. 1 market sets the "premium" shorts must pay.. ie: the amount they must bid over the ask. With this 2-market system the short interest would be curtailed by those speculating on the premium market. The result would be a peg and automatic "interest" rate setting for BitUSD.

BitUSD would always be valued at $1 because the interest rate/risk premium would adjust to compensate for supply/demand/risk assessments of the market.

That said we have a MAJOR bootstrapping problem with all markets. They require a network effect and high liquidity to function. It is hard enough to find speculators on the BitUSD vs BTSX market let alone a "meta-market". A system that requires 2 markets to function is way too difficult to bootstrap at the same time. 

Indeed, this would be the ultimate solution. It would create two interconnected markets:
- the first one being the bitUSD/BTSX market as we have now (with shorts artificially prevented from shorting below 90% of the market feed)
- and second one ("meta-market") trading the predicted dividend (or interest rate) that bitUSD shorts need to pay to bitUSD longs on the first market to keep the supply and demand on the first market in balance

Thus the second market will be trying to predict future imbalances on the first market and the result of this prediction will be applied on the first market. Looks like a solid solution fully addressing the problem that I have when I think about implementing interest rates: how to flexibly adjust the sweet spot that will make bitAssets holders happy without overcharging the bidUSD/BTSX traders (as overcharging kills liquidity).

The two-market solution would be a very nice approach but I agree with BM that it's probably too early for Bitshares X to be able to bootstrap two interconnected markets at the same time.

But maybe we can achieve a good solution by combining the existing trading rules and the proposals made it this thread.
Let's assume the following:
- there is a rule that prevents bitUSD shorting below 90% of the market feed (as we have now)
- bid-ask overlap is collected by the system as a trading fee (as we have now)
- a fixed percent (e.g. 50%) of the trading fee gets paid to the bitUSD holders as dividend (as it was proposed in this thread)

It seems to me that the above elements constitute a nice self-regulating mechanism:

1. When shorts are supplying more bitUSD than there is demand for it, this sequence of events happens:
-> the shorts quote close to the 90% limit
-> this produces big bid-ask overlaps so the trading fees collected by the system get bigger
-> the system has a large pool of trading fees to be distributed to the bitUSD longs as dividends
-> as dividends grow there is an increasing incentive to hold bitUSD so the demand for it rises and this counteracts the initial imbalance

2. When there is more demand for bitUSD than the shorts are willing to supply, this sequence of events happens:
-> the shorts quote far from the 90% limit
-> there are very few bid-ask overlaps so the trading fees collected by the system get smaller
-> the system has a small pool of trading fees to be distributed to the bitUSD longs as dividends
-> as dividends get smaller there is a decreasing incentive to hold bitUSD so the demand for it falls and this counteracts the initial imbalance

My only doubt is whether this feedback loop is quick enough to be effective.
« Last Edit: September 06, 2014, 09:30:43 pm by jakub »

Offline arhag

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Eventually, sometime in the future, when BitShares X is saturated (meaning there aren't any new people with wealth left to convince to adopt this system), BTSX growth should settle down and thus BitAsset interest rates will be forced to go down. I think some non-zero interest rate should still be possible then because the DAC is still able to earn revenue from transaction fees and market fees from operating the decentralized exchange.

first, arhag - thanks for your elaborate answer! this makes sense as long as BTSX can grow at decent rates.

"at saturation", the question becomes how much annual profit can BitsharesX potentially generate without getting involved into credit business. E.g. if annual profits can be at USD 2bn from operating a worldwide decentralised exchange, then perhaps market cap of USD 20bn sounds reasonable, with some non-negative interest still being paid on bitAssets. What I am pointing out, is that it would be difficult even in theory to get an order of magnitude bigger than that, unless BitsharesX gets somehow involved into extending credit - perhaps a decentralised lending union DAC... banking business has been primarily about credit throughout the civilised history, so it might be worth a thought. perhaps too early though, or BM already has answers ;)

Yeah, it is hard to tell how much revenue (as a percentage of BitUSD issued) the DAC can generate from fees alone (excluding profit sharing of shorts). Personally, I don't really care if the interest rate is zero in the saturation stage. I think BitShares X should be used for currency and other DACs would be used to store other forms of wealth: different DACs with corporation-issued assets representing stock in the company; Lending DACs with loans and bonds collateralized only by reputation or perhaps liens on other digital assets that can sold on the decentralized exchange (like shares in corporations ) or go up for auction (like BitShares domains); even traditional financial institutions using the blockchain to issue user-issued assets representing mutual/hedge funds. I think there are a lot of possibilities for the future, but in all of these cases it requires the wealth holder to exercise due diligence and evaluate the investment, and it typically requires trusting other people and perhaps locking up capital for some period of time.