I suggest we all take a step back and take 15 minutes to (re-)read https://bitshares.org/technology/price-stable-cryptocurrencies/ .
What I take from that
- The settlement price guarantees price stability to holders of BitAssets. This guarantee defines the peg.
- Shorters are supposed to sell their shorted BitAssets at a premium to cover their risk.
- BitAssets are expected to trade at a premium, due to the inherent risk of shorters. The premium is expected to be higher in a BTS bear market.
- The premium is supposed to encourage merchants to accept BitAssets.
- The premium does not play a significant role to traders or other users of BitAssets.
My conclusions
- BitAssets are working right now exactly in the way they are supposed to be working.
- The premium we are seeing in BitAsset markets is due to the BTS bear market. The settlement price is not the cause of this. (Coincidentally, BitCrab's attacks on forced settlement always seem to happen in a bear market.)
- When (if) the BTS price is rising again, the premium will automatically reduce to something close to zero. (IIRC, two months ago there was actually a negative premium on the markets, where some people bought below the feed and used forced settlement to make a profit.)
- The premium is good to have, for shorters, merchants and customers. It is the natural market mechanism to keep everyone's interests balanced.
- We want bitCNY to be pegged to CNY. By changing the settlement offset to 1% we are moving the "guarantee", which in turn means that bitCNY will be pegged to .99 CNY. This is an undesired side effect.
Furthermore, every piece of documentation I have seen tells BitAsset buyers that they can always exchange their BitAssets for an equivalent amount of BTS. The word "guarantee" is used in several places in that context. Do we really want to unilaterally declare that guarantee void, thereby destroying all credibility of the very concept of BitAssets?
From all of this follows that
- the proposed change is not necessary - it is the function of the premium to encourage shorters, not the function of the settlement offset
- the proposed change does not have the desired effect - the reason for the premium and the risks of the shorters is the BTS bear market, not the settlement offset
- the proposed change is extremely harmful to our ecosystem, due to its side effects - it redefines 1 bitCNY to be worth 0.99 CNY and destroys our credibility, because we will be breaking our own guarantees.
@pc you make some good points and are clearly passionate about your position.
Your first argument is that adjusting BitCNY parameters would represent the breaking of an implied guarantee. I & I think most would disagree, SmartCoins are still in the nascent stages of design/adoption/parameter tweaking and are subject to change if agreed by shareholders. (They have already undergone major and controversial changes such as the removal of yield and the introduction of forced settlement itself.)
Your second argument is that SmartCoins are functioning well and the change is not desirable anyway.
While I believe you are correct that part of the premium at any time is related to the BTS market, bear/bull the 100% forced settlement feature also plays a role.
1. When you guarantee liquidity at the expense of shorts and at 1-1, this adds a significant burden to shorts that they will price in via an
additional premium. By lowering the forced settlement number as well as the amount that can be forced settled you reduce this burden and therefore not only bring the price close to the peg (which is favourable) but also reduce the risk premium shorts need to charge & thus create a tighter peg overall.
1. What about lowering the request settlement to 99%?
It should lower the premium and it's fair that there should be a cost associated with accessing liquidity at the expense of shorters.
Hopefully market makers will step in the majority of the time but the ability to get $0.99 on the dollar in 24 hours regardless of market conditions would still be very appealing to longs and merchants imo.
2. The closer forced settlement is to 1-1 the higher the potential for forced settlement manipulation which has already been an issue in the past and creates an additional risk premium too.
Does the BitShares price feed reference last traded prices at weighted exchanges or does it average last traded prices over a certain amount of time?
What I mean is there is that there is usually a 1-2% spread between buy and sell prices for BTS on BTC38 and Polo.
If you are force settling and you know it will reference last traded prices at a specific time then it would be in your interest to make tiny sell trades so that the last traded price is in your favour by 1-2%. It your force settle is going through at a thinly traded time it may also be in your interest & very cheap to move the price by another 1-2%.
That would assume that you know when witnesses publish a price and how many witnesses publish it ..
This could be fixed by tracking trades over time or running a weighted average over time but that involves alot of work to upgrade the feed script into a time-sensitive feed script.
Fortunately, this time-sensivity is also achieved by different witnesses running their scripts at different time instants.
We may consider replacing the last price with the "(highest bid + lowest ask)/ 2" that would make it a little more "fair"
Cool, yeah I'm just wondering if the forced settlement at 100% can currently be exploited.
I think your other suggestion of introducing a 1-2% forced settlement fee could also help address that if it was a potential issue...
- Settlement can be discouraged by asking for a percentage fee (1-2%) (this will move the peg AROUND parity. Flat fee for settlement can also be increase which has some negative effects on pred. markets
3. Merchants - I believe merchants are most interested in the size of the potential market of users as well as the speed, simplicity and cost of fiat conversion via something similar to BitPay.
Without a tightly pegged, liquid SmartCoin there will be no users and no attraction for merchants to serve that market. (So it's not chicken and egg, users come first) Second is middlemen who can convert from SmartCoins to fiat. Transwiser provides this service for BitCNY and they believe they can do it better with a lower forced settlement so it should actually improve merchant adoption from that perspective too.
3. SmartCoins are not working well imo. They have gained low/no traction with the current parameters since being introduced 7 months ago. They have a tiny 2-4% of existing market share (never mind
potential market share.) and no/low merchant adoption and clearly need some improvements.
In addition to lowering forced settlement, I am personally also in favour of other measures that reduce the burden on shorts so that their risk premium is reduced thus creating a tighter peg overall.
I am also in favour of subsidizing liquidity & I am also in favour of subsidizing SmartCoin yield.
https://bitsharestalk.org/index.php/topic,21597.msg286581.html#msg286581While clearly not optimally designed yet, SmartCoins have the potential to be absolutely huge and when you get the formula right & I believe they will really take off.