BitShares Forum
Main => General Discussion => Topic started by: starspirit on January 13, 2015, 02:09:06 am
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I was struggling with this conundrum, open to thoughts of others. My tentative conclusion is BTS does not earn income at all, at least in the traditional sense.
If a company earns income in USD, its underlying asset base rises due to the profit. It can then:
1) distribute this profit to share owners as cash (dividend)
2) use the cash to buy back and burn shares (effectively distributing cash while increasing the value of remaining shares) or
3) keep it retained in the business to increase the value per share.
In each case, there is a return to investors in aggregate as a result of the profit. Importantly its the profit that drives the return, not the form of distribution or re-allocation.
Without a profit, representing an accrual of value of assets held by the entity, no change to the share structure (e.g. burning shares) adds value to the group of owners as a whole. Therefore burning per se (a mere change in ownership structure after the fact of value-creation) cannot be considered income of the entity, and it does not lend any increase in valuation to the entity as a whole.
As BTS (and derivative bitAsset) transactions occur, and BTS are burned, the value per share rises, but the value of the entity does not. There has been no externally-derived value to the group as a whole that can be distributed. There has only been a transfer of value from those burning BTS through transactions to those not. Doesn't this mean that the BTS burning through transaction fees, which we often designate as "income", does not give any value to BTS at all?
This line of thinking has led me to wonder if any crypto-asset can theoretically earn profit, in the traditional sense of the word, unless shares in it represent ownership accrual in things that exist outside its own share ledger. For example, a company has a balance sheet made up of assets outside of its own shares. I think the only way this can be replicated in our ecosystem, or to create "profitable" DACs, is with a resource management system built around the required block-chain(s), that allows the use and improvement of other assets in order accrue more of them (an example is that Music is forced to manage assets (like music tracks) outside the Notes block-chain).
If there is no income, value accretion is driven solely by the increasing utility of the coin itself in use or exchange. This is also potentially a valid approach, but is not so different in approach to most other crypto-currencies in general.
Views?
End Brain-Dump.
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Burning BTS is equivalent to income under the assumption that there will be demand for the DAC's services in the future.
First imagine that Apple immediately took any profit from the sale of a macbook and used it to buy back stock.
Now imagine that Apple first pre-sold coupons redeemable for macbooks and bought back stock from the presale.
The key is that someone had to buy the BTS in the first place for it to be redeemable for a service.
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Burning BTS is equivalent to income under the assumption that there will be demand for the DAC's services in the future.
First imagine that Apple immediately took any profit from the sale of a macbook and used it to buy back stock.
Now imagine that Apple first pre-sold coupons redeemable for macbooks and bought back stock from the presale.
The key is that someone had to buy the BTS in the first place for it to be redeemable for a service.
I'm happy to assume that the DAC does offer valuable services in the future, which gives the money some value today. I'm not sure that makes burning equate to income in the present however, because its simply an internal cost provided by some BTS owners to other BTS owners. This creates a paradox that the higher the fee income, the greater the burden on others, and the less efficient the economy.
Suppose you had a choice of participating in one of two economies, each using gold money. In economy T0, there are zero transaction fees. In economy T10, there are 10% transaction fees, and gold extracted as fees is destroyed in a nuclear furnace. Which economy would you rather participate in? In which economy would the total remaining supply of gold be valued more highly? Which economy would be more efficient?
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I don't understand the analogy - is the version where we don't burn BTS and instead put it into a pot of spendable funds somehow analagous to the zero-fee economy?
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I don't understand the analogy - is the version where we don't burn BTS and instead put it into a pot of spendable funds somehow analagous to the zero-fee economy?
Yes, assuming there were no costs to maintain the integrity of the network, for which we need a minimum fee in practice.
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I don't understand the analogy - is the version where we don't burn BTS and instead put it into a pot of spendable funds somehow analagous to the zero-fee economy?
Yes, assuming there were no costs to maintain the integrity of the network, for which we need a minimum fee in practice.
Ok, then why is there a 10% fee in the other scenario?
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I don't understand the analogy - is the version where we don't burn BTS and instead put it into a pot of spendable funds somehow analagous to the zero-fee economy?
Yes, assuming there were no costs to maintain the integrity of the network, for which we need a minimum fee in practice.
Ok, then why is there a 10% fee in the other scenario?
Only because somebody thought it might be a good idea to offer an income stream to money-holders, to attract investors to that economy. Apart from that, consider the two ecosystems equal. My question is, does the 10% income stream increase the value of the money in the T10 economy. Maybe that's not a fair comparison, because people will not participate in an economy where fees are unreasonable, but they will in one where the fees are seen to be reasonable. But still, even if the fees are reasonable, any income earned in saving years turns into a cost in consuming years. So I'm still unsure whether the fee stream increases the value of the total money supply.
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But it's not like we are charging *extra* BTS just to burn it right? We're just burning whatever we already charge. I still don't get it..
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But it's not like we are charging *extra* BTS just to burn it right? We're just burning whatever we already charge. I still don't get it..
Correct, and what we are doing is right. This is only a hypothetical - which could be done - to illustrate that income from internally generated fees may not be valued given the benefit to some stakeholders exactly matches the costs to other stakeholders. This is different to a company that earns income externally, to the benefit of all owners, and therefore trades at a multiple of this income.
At the risk of too many analogies, imagine Apple encouraged all its employees to use Apple shares to perform any economic transactions between its different divisions, took a reasonable cost-based fee in shares for running the program, then burnt these shares. Should the total valuation of Apple rise due to this additional income stream? I don't think it should, because Apple's externally generated profits from customers (paying into the system) have not directly increased. The burning is just a reallocation of shares. It's just not making sense to me, but then I'm probably not making sense to you!
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But it's not like we are charging *extra* BTS just to burn it right? We're just burning whatever we already charge. I still don't get it..
Correct, and what we are doing is right. This is only a hypothetical - which could be done - to illustrate that income from internally generated fees may not be valued given the benefit to some stakeholders exactly matches the costs to other stakeholders. This is different to a company that earns income externally, to the benefit of all owners, and therefore trades at a multiple of this income.
At the risk of too many analogies, imagine Apple encouraged all its employees to use Apple shares to perform any economic transactions between its different divisions, took a reasonable cost-based fee in shares for running the program, then burnt these shares. Should the total valuation of Apple rise due to this additional income stream? I don't think it should, because Apple's externally generated profits from customers (paying into the system) have not directly increased. The burning is just a reallocation of shares. It's just not making sense to me, but then I'm probably not making sense to you!
Right, it's total valuation should stay exactly the same, not increase. This isn't an "additional income stream" in apple's case, compared to BTS, where all BTS buyers are "customers" contributing income. It think it would be analagous if apple forced its different departments to actually pay the same price as the customer for various services rendered, like if each individual employee was a separate economic entity trying to maximize its own profits.
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I might be not following this conversation completely, but I think the key thing here is anyone being charged a transaction fee is a customer in BTS (even shareholders transferring funds or registering a delegate). Other companies are able to accept multiple forms of value-storage devices (USD, for example), but on the BTS blockchain, all customers *must* pay in BTS. That means any customer *must* have BTS (or a bitasset backed by BTS), which they can obtain at market rates. When this customer pays a fee (a percentage of the BTS they purchased at market rates), it is distributed to all shareholders (burned).
I think eventually it might make sense to pool the fees together and distribute them to shareholders via quarterly dividends. While this might seem economically equivalent to burning them, the problem is that the market may lag behind due to the psychological factor of how intangible burn-dividends are. And as an added bonus, quarterly dividends would have much higher marketing potential.
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Obviously the analogy is not perfect, for instance if we burn all BTS value drops to 0. :P
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I might be not following this conversation completely, but I think the key thing here is anyone being charged a transaction fee is a customer in BTS (even shareholders transferring funds or registering a delegate). Other companies are able to accept multiple forms of value-storage devices (USD, for example), but on the BTS blockchain, all customers *must* pay in BTS. That means any customer *must* have BTS (or a bitasset backed by BTS), which they can obtain at market rates. When this customer pays a fee (a percentage of the BTS they purchased at market rates), it is distributed to all shareholders (burned).
OK, I think this has helped me to make a distinction, feel free to let me know if it makes sense.
When there is no value transfer into the system (e.g. BTS transaction fees, registrations etc, where BTS is simply given up to be burned), these cannot increase the valuation of the entity as a whole, so these fees do not increase the total valuation of BTS to owners (though there is a net transfer between them). When there is value transfer into the system (for example, a customer is forced to buy BTS at market to pay a fee, such as for a bitAsset transaction), then there is cash or some other value received by the seller of BTS, and the total valuation of BTS is still retained after the burn, albeit on a lower supply. Therefore there has been net income to BTS holders in aggregate equal to the fee/BTS burned.
So not all burns are equal for the purpose of valuing BTS, but for the most part, I would think burns relate to customers buying BTS to pay fees (especially as bitAssets grow).
I think eventually it might make sense to pool the fees together and distribute them to shareholders via quarterly dividends. While this might seem economically equivalent to burning them, the problem is that the market may lag behind due to the psychological factor of how intangible burn-dividends are. And as an added bonus, quarterly dividends would have much higher marketing potential.
Despite all the above, I would not recommend moulding traditional practices into these new systems. I would prefer we force our paradigms to adapt to the new approaches available to us.
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Burning BTS is equivalent to income under the assumption that there will be demand for the DAC's services in the future.
First imagine that Apple immediately took any profit from the sale of a macbook and used it to buy back stock.
Now imagine that Apple first pre-sold coupons redeemable for macbooks and bought back stock from the presale.
The key is that someone had to buy the BTS in the first place for it to be redeemable for a service.
I've tried to flesh out the analogy to make sense of it to myself.
So I own 1/10 shares of Apple and Apple is worth $100. $10 shares. And Apple's factory can produce Macbooks at no cost. So Apple pre-sells a voucher that says "Good for 2 Macbooks" for 20 USD. Then Apple takes that 20 USD and buys 2 shares back from other shareholders who want out and Apple burns those two shares. So now there are only 8 shares. I still own 1. So I have 1/8 shares of Apple. Assuming Apple is still worth the same as before ($100), then now my 1/8th is worth $12.50.
But although Apple can make Macbooks for free, it still has some costs. There are bandits and vandals and other evildoers who will destroy the factory unless Apple creates 0.01 shares every year and gives it to a security company.
At the end of the year, Apple sells 2 macbooks, buys 2 shares, burns them, but then creates .01 shares and gives them to the security company.
Now I have 1 out of 8.01 shares and the company is still worth $100.
Apple = BTS
Apple stock = bts
macbooks = transactions on the bitshares blockchain
factory = blockchain
shareholders = bts users
shares from other shareholders = unclaimed bts
voucher = bts (shares in the company and fees are the same thing)
security company = delegates
What do you think?
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Burning BTS is equivalent to income under the assumption that there will be demand for the DAC's services in the future.
First imagine that Apple immediately took any profit from the sale of a macbook and used it to buy back stock.
Now imagine that Apple first pre-sold coupons redeemable for macbooks and bought back stock from the presale.
The key is that someone had to buy the BTS in the first place for it to be redeemable for a service.
I've tried to flesh out the analogy to make sense of it to myself.
So I own 1/10 shares of Apple and Apple is worth $100. $10 shares. And Apple's factory can produce Macbooks at no cost. So Apple pre-sells a voucher that says "Good for 2 Macbooks" for 20 USD. Then Apple takes that 20 USD and buys 2 shares back from other shareholders who want out and Apple burns those two shares. So now there are only 8 shares. I still own 1. So I have 1/8 shares of Apple. Assuming Apple is still worth the same as before ($100), then now my 1/8th is worth $12.50.
But although Apple can make Macbooks for free, it still has some costs. There are bandits and vandals and other evildoers who will destroy the factory unless Apple creates 0.01 shares every year and gives it to a security company.
At the end of the year, Apple sells 2 macbooks, buys 2 shares, burns them, but then creates .01 shares and gives them to the security company.
Now I have 1 out of 8.01 shares and the company is still worth $100.
Apple = BTS
Apple stock = bts
macbooks = transactions on the bitshares blockchain
factory = blockchain
shareholders = bts users
shares from other shareholders = unclaimed bts
voucher = bts (shares in the company and fees are the same thing)
security company = delegates
What do you think?
Looks right to me.
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If people need to buy BTS from a current holder on an exchange, in order to burn it, then yes burning BTS represents income. In this case, the income results from the person who buys and burns BTS paying money to whichever BTS holder was willing to take the least money for their BTS.
Everyone is happy. The person who bought and burned BTS benefitted from whatever service they used. The person who sold the BTS received money. Every other BTS holder had the option to accept that amount of money for their BTS but did not, indicating that they prefer to hold the BTS. They benefit by owning a larger share of the remaining BTS 'company'.
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Real question is: how many years do we estimate it will take for us to become profitable and earn more income than what is being spent on payed delegates?
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Real question is: how many years do we estimate it will take for us to become profitable and earn more income than what is being spent on payed delegates?
Well, in 4 years delegate pay will be half what it is today when measured in BTS.
Every BitUSD sold is also a "product sale" provided it is not "returned". After a certain period of time we can count the "minimum BitUSD supply over the past X period of time" as a sale. If it is returned after that we can book it as a "loss".
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Real question is: how many years do we estimate it will take for us to become profitable and earn more income than what is being spent on payed delegates?
Well, in 4 years delegate pay will be half what it is today when measured in BTS.
Every BitUSD sold is also a "product sale" provided it is not "returned". After a certain period of time we can count the "minimum BitUSD supply over the past X period of time" as a sale. If it is returned after that we can book it as a "loss".
I suppose that every bitUSD sold into existence represents BTS being taken out of supply temporarily. ("Frozen," if we're to stay with the chemistry metaphors.) I think what trips people up, including myself, is that the profits are indirect. We're not getting profits in USD and distributing it amongst ourselves. We're reducing the supply of the shares to pay shareholders. The share buyback analogy is complicated and sort of skirts around what's actually happening. This is the business plan as I understand it:
1) Bitshares pays shareholders by increasing shareholder equity.
2) Bitshares increases shareholder equity by increasing the price of BTS.
3) Bitshares increases the price of BTS by enticing people to remove BTS from supply (either burning or freezing it) in exchange for leverage, stability, betting, etc.
4) The more participation there is in these activities, the more BTS that will be removed from supply.
5) Given the same demand for participation in these activities measured in USD/EUR/etc., BTS should rise in value measured in USD/EUR/etc.
It's basically doing what Goldfinger was trying to do with gold. Goldfinger broke into Fort Knox to irradiate America's gold, thereby reducing the supply, making his gold worth more. With BTS, we're trying to reduce the supply by offering services that result in the incineration of BTS.
But in order for this to work, we have to assume that
1) The amount of USD/EUR/etc. flowing into BTS tomorrow will be the same or greater than the amount of USD/EUR/etc. flowing into BTS today.
2) The amount flowing out is not increasing relative to what's flowing in.
Burning and freezing BTS is not strictly income. I don't think any accountant could possibly record the burning of BTS as income. At the same time, that burning is extremely likely to result in income through capital gains.
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I suppose that every bitUSD sold into existence represents bitshares being taken out of supply temporarily. "Frozen," if we're to stay with the chemistry metaphors. I think what trips people up, including myself, is that the profits are indirect. We're not getting profits in USD and distributing it amongst ourselves. We're manipulating the supply of the stock to pay stockholders. The share buyback analogy is complicated and sort of skirts around what's actually happening. This is the business plan as I understand it:
1) Bitshares pays shareholders by increasing shareholder equity.
2) Bitshares increases shareholder equity by increasing the price of BTS.
3) Bitshares increases the price of BTS by enticing people to remove BTS from supply (either burning or freezing it) in exchange for leverage, stability, betting, etc.
4) The more participation there is in these activities, the more BTS that will be removed from supply.
Yep. That's about how it works. Remember there's a finite amount of BTS available for these things -- only what people are willing to put into them, which is of course less than the full market cap because some people just want to sit on their BTS or have decent amounts of BTS readily available for trading, voting or whatever.
So if the demand for these activities exceeds supply, the people who want BitAssets or whatever will start a bidding war for BTS. If the price of BTS goes up and shorts start to win, in the long run they'll have incentive to re-short because their existing short can only win so much.
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I suppose that every bitUSD sold into existence represents bitshares being taken out of supply temporarily. "Frozen," if we're to stay with the chemistry metaphors. I think what trips people up, including myself, is that the profits are indirect. We're not getting profits in USD and distributing it amongst ourselves. We're manipulating the supply of the stock to pay stockholders. The share buyback analogy is complicated and sort of skirts around what's actually happening. This is the business plan as I understand it:
1) Bitshares pays shareholders by increasing shareholder equity.
2) Bitshares increases shareholder equity by increasing the price of BTS.
3) Bitshares increases the price of BTS by enticing people to remove BTS from supply (either burning or freezing it) in exchange for leverage, stability, betting, etc.
4) The more participation there is in these activities, the more BTS that will be removed from supply.
Yep. That's about how it works. Remember there's a finite amount of BTS available for these things -- only what people are willing to put into them, which is of course less than the full market cap because some people just want to sit on their BTS or have decent amounts of BTS readily available for trading, voting or whatever.
So if the demand for these activities exceeds supply, the people who want BitAssets or whatever will start a bidding war for BTS. If the price of BTS goes up and shorts start to win, in the long run they'll have incentive to re-short because their existing short can only win so much.
So we're basically skipping to bitcoin year 2140. Then we're kicking the miners out completely to cut costs (at no disadvantage). Then we're creating a business model where economic activity on our platform fuels share deflation, which in turn increases shareholder purchasing power (even if demand remains flat). This is incredible.
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Every BitUSD sold is also a "product sale" provided it is not "returned". After a certain period of time we can count the "minimum BitUSD supply over the past X period of time" as a sale. If it is returned after that we can book it as a "loss".
I don't believe this accounting is appropriate. This is my understanding...
With each incremental bitUSD sale, there is additional leverage for more bullish individuals (shorts) to buy BTS. That does not in itself create additional income for BTS owners - it merely represents the market being bid up by the most bullish cohort that now has additional leverage to concentrate the BTS further into their hands. [Incidentally, the valuation of BTS will not be bid up by 1 USD as this depends on the price sensitivity of demand for BTS].
Imagine this...
Bank XYZ takes deposits, and lends out on those deposits to borrowers for the sole purpose of buying Bank XYZ shares, which clearly bids up the shares. Should new deposits be treated as income of Bank XYZ? Where is the income on Bank XYZ shares that will support the higher valuation? Aren't the deposits callable and therefore a liability? Based on a number of recent blog posts, I'm pretty sure we would shoot down this sort of accounting.
[Edit: On the other hand, if there were a reasonable expectation of additional income streams as a result of the increased customer base, such as cross-selling of insurance and other services, on top of the transaction fees, then this might justify the increase in valuation, and that's what I hope we eventually see - although this would still be future income potential rather than current income.]