BitShares Forum
Main => General Discussion => Topic started by: starspirit on April 23, 2015, 08:52:25 am
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I would like to understand this concept better that I've seen referred to numerous times, because I'm just not getting what is meant by it. Maybe somebody can help make this concept click into place for me?
My starting point is that the holder of a bitAsset requires some assurance that its value (measured against external assets) will track the value of the real asset. Their key concern is that when they sell the bitAsset, an asset within the system, they receive enough funds that they could buy the real asset outside the system, should they wish to.
So this requires an exchange price of at least one asset inside the system to at least one asset outside the system, in order to make this calculation. This is what I understand as an external or exogenous price feed.
It's been said by many that when liquidity is significant inside the system, that we can move toward an endogenous price feed.
When people refer to an endogenous price feed, being "within the market", what exactly is meant by this? Does this involve a comparison of only the values of tokens that all reside inside the system? If so, I can't see how this provides any information about how any internal token is to be valued outside the system.
Am I understanding the concept correctly?
Thanks.
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I look at it like this:
e.g. market BTS/bitUSD
feed price is for bitUSD is BTS per USD
*) You cannot trade actual USD on the internal exchange, so we have to look for an external exchange trading USD (this might be via BTC, of course) for that BTS per USD price
*) The internal exchange then receives this price for bitUSD (from the feed) and we can then trade BTS/bitUSD
*) However, due to arbitrage the price of BTS will be affected by trading on the internal exchange
*) This means it might be possible for the price of BTS/bitUSD to be largely controlled by trading on the internal exchange as the liquidity increases
On the limit, this makes the feed price endogenous.
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I look at it like this:
e.g. market BTS/bitUSD
feed price is for bitUSD is BTS per USD
*) You cannot trade actual USD on the internal exchange, so we have to look for an external exchange trading USD (this might be via BTC, of course) for that BTS per USD price
*) The internal exchange then receives this price for bitUSD (from the feed) and we can then trade BTS/bitUSD
Got it so far.
*) However, due to arbitrage the price of BTS will be affected by trading on the internal exchange
Clarify this bit? Which price of BTS (external?) and affected how?
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Clarify this bit? Which price of BTS (external?) and affected how?
Say BTS on BTS/bitUSD is trading at a discount (compared to bitUSD) on the internal exchange compared to the price of BTS in BTS/USD on an external exchange. Arbitrage means that there is a profit opportunity to buy up the BTS from the internal exchange and sell them on the external exchange, thus affecting the price and therefore the feed price.
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Clarify this bit? Which price of BTS (external?) and affected how?
Say BTS on BTS/bitUSD is trading at a discount (compared to bitUSD) on the internal exchange compared to the price of BTS in BTS/USD on an external exchange. Arbitrage means that there is a profit opportunity to buy up the BTS from the internal exchange and sell them on the external exchange, thus affecting the price and therefore the feed price.
OK, but I think its important to be specific here. That's not quite an arbitrage because you've started in one security (bitUSD) and ended up in a different security (real USD), so you need to take account of their relative pricing before you assume a profit. In principle, you then still need to switch back to bitUSD (where you started) at the market price to complete the cycle, and when you do that I don't see where the arbitrage profit is. Let's take a discount scenario...
Let's suppose the market consensus is that a bitUSD is worth less than a real USD, maybe 0.90 USD. On the internal exchange, a bitUSD will exchange for $0.90 of BTS (measured in real dollars). And on the external exchange, a bitUSD will also exchange for $0.90 of BTS or $0.90 real USD. Because they trade the same level inside and outside there is no arbitrage, is there?
Even if traders inside the exchange believed unrelentingly in the parity of the bitUSD, and exchange it internally for $1.00 of BTS, the arbitrage is to buy bitUSD outside and sell it inside, a behaviour that will cause the bitUSD prices inside and outside to converge somewhere between $0.90 and $1.00 of a USD, which is still a discount. And I'm not sure how this has an impact on the external price of BTS at all.
Are we on the same page, or am I on a tangent?
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I'm thinking that Bitshares will create an hedging BOT to correct the price.
This hedging BOT is an investment offer that earn interest.
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I'm thinking that Bitshares will create an hedging BOT to correct the price.
This hedging BOT is an investment offer that earn interest.
I think its the action that is important, not the agent. Do you see how the hedging bot might correct the price in the scenario above?
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I'm thinking that Bitshares will create an hedging BOT to correct the price.
This hedging BOT is an investment offer that earn interest.
I think its the action that is important, not the agent. Do you see how the hedging bot might correct the price in the scenario above?
The BOT has short orders that will buy orders below the feed to correct the internal price, the external exchange will follow the internal price then.
or
The BOT will close all sell orders below feed and close all buy orders above feed price.
or
The BOT has large amount of buy and sell orders, just like what NUbits is doing.
Just my 2cents
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I'm thinking that Bitshares will create an hedging BOT to correct the price.
This hedging BOT is an investment offer that earn interest.
I think its the action that is important, not the agent. Do you see how the hedging bot might correct the price in the scenario above?
The BOT has large amount of buy and sell orders, just like NUbits is doing.
In this scenario, the bot would need to make a market such that trades are equally likely to go both ways on its book. So it needs to make a market around the level people are comfortable paying, which is $0.90 in this scenario. Market-making like this cannot force the price to peg, unless the market-maker is willing to sometimes oppose the natural direction of the market and make significant losses. Think about central banks that try to peg their currencies when the market wants to go another direction.
The BOT has short orders that will buy orders below the feed to correct the internal price, the external exchange will follow the internal price then.
or
The BOT will close all sell orders below feed and close all buy orders above feed price.
On these joele, I find your meaning a bit fuzzy, would you care to elaborate? What specific actions would the bot be taking? For example "it would buy the internal bitUSD for $0.90 of BTS, and sell for..[ ] on the [ ]"
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The BOT has short orders that will buy orders below the feed to correct the internal price, the external exchange will follow the internal price then.
or
The BOT will close all sell orders below feed and close all buy orders above feed price.
On these joele, I find your meaning a bit fuzzy, would you care to elaborate? What specific actions would the bot be taking? For example "it would buy the internal bitUSD for $0.90 of BTS, and sell for..[ ] on the [ ]"
Like Bot will buy internal bitUSD any orders below the $0.99 of BTS and will have buy walls, and has a sell order above $1.01 of bts.
or a BOT can remove all internal sell orders below the $0.99 of BTS, then if no sell orders below the feed, buy orders will eventually normalize.
Yes, there may be a loss doing this, thus there is a 30 days price settlement notice kinda bluff to traders to correct the price.
Just my 2cents
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The BOT has short orders that will buy orders below the feed to correct the internal price, the external exchange will follow the internal price then.
or
The BOT will close all sell orders below feed and close all buy orders above feed price.
On these joele, I find your meaning a bit fuzzy, would you care to elaborate? What specific actions would the bot be taking? For example "it would buy the internal bitUSD for $0.90 of BTS, and sell for..[ ] on the [ ]"
Like Bot will buy internal bitUSD any orders below the $0.99 of BTS and will have buy walls, and has a sell order above $1.01 of bts.
or a BOT can remove all internal sell orders below the $0.99 of BTS, then if no sell orders below the feed, buy orders will eventually normalize.
Yes, there may be a loss doing this, thus there is a 30 days price settlement notice kinda bluff to traders to correct the price.
Just my 2cents
I think that would be an almost certain loss. In the scenario I gave where the market's valuation of bitUSD is $0.90, the bot buys all the internal bitUSD up to $0.99, it will end up owning most of the bitUSD available, and there will be no buyers at $1.01+. They will be forced to sell at $0.90 again to get rid of it all, and make a very big loss.
"kinda bluff" sounds "kinda dodgy"? ;)
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Even if traders inside the exchange believed unrelentingly in the parity of the bitUSD, and exchange it internally for $1.00 of BTS, the arbitrage is to buy bitUSD outside and sell it inside, a behaviour that will cause the bitUSD prices inside and outside to converge somewhere between $0.90 and $1.00 of a USD, which is still a discount. And I'm not sure how this has an impact on the external price of BTS at all.
Are we on the same page, or am I on a tangent?
If the inside and outside prices converge, by definition the outside price of BTS has in fact been effected by the internal pricing?
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Even if traders inside the exchange believed unrelentingly in the parity of the bitUSD, and exchange it internally for $1.00 of BTS, the arbitrage is to buy bitUSD outside and sell it inside, a behaviour that will cause the bitUSD prices inside and outside to converge somewhere between $0.90 and $1.00 of a USD, which is still a discount. And I'm not sure how this has an impact on the external price of BTS at all.
Are we on the same page, or am I on a tangent?
If the inside and outside prices converge, by definition the outside price of BTS has in fact been effected by the internal pricing?
Only relative to a bitUSD. But not relative to a real USD. Which is all that holders care about when they take their settlement receipts and go to buy the real USD they wanted to track all along.
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Only relative to a bitUSD. But not relative to a real USD. Which is all that holders care about when they take their settlement receipts and go to buy the real USD they wanted to track all along.
What if the external exchange has a BTS/USD and BTS/bitUSD markets? Isn't it possible that a change in one leads to a change in the other?
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Only relative to a bitUSD. But not relative to a real USD. Which is all that holders care about when they take their settlement receipts and go to buy the real USD they wanted to track all along.
What if the external exchange has a BTS/USD and BTS/bitUSD markets? Isn't it possible that a change in one leads to a change in the other?
not really sure how. monsterer, I thank yourself and joele for the dialogue, but for now I still feel the evidence is lacking for this concept, and so I must continue to reject it.
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not really sure how. monsterer, I thank yourself and joele for the dialogue, but for now I still feel the evidence is lacking for this concept, and so I must continue to reject it.
Ok, lets come at this from another angle. If what you assume is true, and the internal market actions cannot affect the external price, then by associated reasoning, market making on the internal exchange cannot help to strengthen the peg?
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not really sure how. monsterer, I thank yourself and joele for the dialogue, but for now I still feel the evidence is lacking for this concept, and so I must continue to reject it.
Ok, lets come at this from another angle. If what you assume is true, and the internal market actions cannot affect the external price, then by associated reasoning, market making on the internal exchange cannot help to strengthen the peg?
Absolutely, that is true, yes. Market making cannot help enforce the peg. It can only add liquidity around the price level where buyers and sellers are willing to meet. The only thing that can help strengthen the peg is convertibility and the ability to arbitrage in free markets around that. And that depends on the price feed. This is why I criticise the view that the pegging problem will be resolved one day once we have enough liquidity in the market. I can expand further if you like.
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Absolutely, that is true, yes. Market making cannot help enforce the peg. It can only add liquidity around the price level where buyers and sellers are willing to meet. The only thing that can help strengthen the peg is convertibility and the ability to arbitrage in free markets around that. And that depends on the price feed. This is why I criticise the view that the pegging problem will be resolved one day once we have enough liquidity in the market. I can expand further if you like.
Doesn't this mean there is little point to having an internal bitAsset market? Couldn't you just replace the whole thing with a system which created and destroyed bitassets directly at the feed price, as long as each side had sufficient collateral?
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Absolutely, that is true, yes. Market making cannot help enforce the peg. It can only add liquidity around the price level where buyers and sellers are willing to meet. The only thing that can help strengthen the peg is convertibility and the ability to arbitrage in free markets around that. And that depends on the price feed. This is why I criticise the view that the pegging problem will be resolved one day once we have enough liquidity in the market. I can expand further if you like.
Doesn't this mean there is little point to having an internal bitAsset market? Couldn't you just replace the whole thing with a system which created and destroyed bitassets directly at the feed price, as long as each side had sufficient collateral?
You got me thinking laterally here. Though I'd like to ask what you specifically mean by an internal bitAsset market?
Let's consider currencies like bitUSD. The bitUSD needs to be an on-chain token to preserve its superior transactional features. And derivative markets of the bitUSD such as bills/bonds, credit markets, options and futures etc, would all be best placed internally to provide the superior exchange features that Bitshares has to offer, as well as to maximise coordination between these markets.
Specifically for the creation and destruction of bitUSD, I believe such exchange should occur at the feed price, and there should be an official window where this occurs (in my white-paper, that is the Currency Creation Market). But if we are willing to consider a more open architecture to the creation of the bitUSD itself, yes I suppose you are right that the official window where bitUSD is exchanged for collateral could be external to the system, such as a UIA, with bitUSD as a UIA token. I expect this adds additional risk however, and may not be an optimal path. My preference is still for this window to be internal.
As we are discussing elsewhere, its also possible that the collateral used is not BTS. It could for example be BTC, currently the most recognised and accepted form of digital collateral. This could be converted to an on-chain collateral token (e.g. a substitute bitBTC) useful for many other bitAssets and applications, but again with extra risk that needs to be minimised.
It's further possible to consider alternatives for the structure of the short side. While it makes sense for short speculators to be on the other side of bill, bond, and derivative markets, where there is greater symmetry between longs and shorts and markets have a floating price, at the official window as I've described it might make more sense for the short side to consist of a pool of investors sharing in the benefits of currency issuance, such as a spread on all window transactions.
From a purely commercial perspective, these are all possibilities that can be considered and the various pros and cons weighed against each-other.
So yes, once we reject the idea of an endogenous price feed, and accept that the price feed is critical to underlie convertibility and valuation throughout the system, then the thinking naturally leads in some of these directions. I think we can consider a product suite better suited to current market demand as a result.
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Starspirit,
I'm curious to know what level of importance you place on the current external price feed. How much do you trust it and why? Currently it seems we are using BTC38, BTER, Yunbi exchanges to extrapolate the external 'real' USD/ BTS market. I would suggest it is more likely these external price feeds are being manipulated than the internal price feed. Since there is forced 30-day settlement and a heavier collateral burden for long positions in BTS (short bitUSD), all one has to do is buy internal bitUSD and manipulate the external feed downwards. I'm not saying that is what is occurring, but I wouldn't be surprised if were.
Remember BTC38 & BTER are centralized exchanges. I'd be skeptical about trusting their pricing. If we had a trusted exchange with high liquidity we can rely more on price feeds. I'm open to using external price feeds when there are better sources, but right now there aren't any. Furthermore I think the current internal floating free market mechanism is fine and the social consensus will drive the market towards the perceived value of a dollar.
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Starspirit,
I'm curious to know what level of importance you place on the current external price feed. How much do you trust it and why? Currently it seems we are using BTC38, BTER, Yunbi exchanges to extrapolate the external 'real' USD/ BTS market. I would suggest it is more likely these external price feeds are being manipulated than the internal price feed. Since there is forced 30-day settlement and a heavier collateral burden for long positions in BTS (short bitUSD), all one has to do is buy internal bitUSD and manipulate the external feed downwards. I'm not saying that is what is occurring, but I wouldn't be surprised if were.
Remember BTC38 & BTER are centralized exchanges. I'd be skeptical about trusting their pricing. If we had a trusted exchange with high liquidity we can rely more on price feeds. I'm open to using external price feeds when there are better sources, but right now there aren't any. Furthermore I think the current internal floating free market mechanism is fine and the social consensus will drive the market towards the perceived value of a dollar.
Like everyone here, I don't trust the external price feed. It just logically follows from my view that an external price feed is critical to peg to external assets, that we need to accept the requirement for a price feed, build the best possible product around it, and manage the feed price mechanism in ways to minimise these bad effects as much as possible. Otherwise we keep trying to prove an ideal that will never be and flounder commercially, in my personal opinion. I'm away for next week and a bit, and I will write more on the issue when I return.
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You got me thinking laterally here. Though I'd like to ask what you specifically mean by an internal bitAsset market?
I was thinking in pure CFD terms; you'd have a queue of longs and queue of shorts (with varying leverages, and corresponding collaterals), matching a long with short creates two CFD's at the price feed. So, no need for an internal orderbook.
The trouble is, you then lose the concept of the bitAsset completely, since both parties must end up back in BTS after they close their orders.