I'm glad we are finally reaching an understanding. My issue is I really don't like price fixing and would prefer a design that can last. I rather avoid requiring some other consensus mechanism to constantly tweak parameters if there is another market-based solution that can take care of it. Of course, the trade-off with that as you mention is that the BitUSD holder has difficulty predicting what kind of returns he will get.
As I alluded to, what we do is pay 5% when we can, with any surplus going to bond-holders. When we can't pay 5%, we shut down writing new bonds and pay whatever we can afford.
Shorts are, of course, free to charge a premium above the peg, which they can use against their interest obligation. That is fairly close in practice to a variable interest rate.
My proposal here has the shorts paying a fixed interest rate. I have an idea for charging shorts variable interest based on their leverage ratio, allowing a limited number of shorts to be initiated with high leverage (not enough to jeopardize the system) and giving people incentive to maintain lower leverage ratios (in the form of reduced interest on the portion they are "borrowing.") However that idea is more complex, and I want to focus on one problem at a time.
So if you make the assumption that BTSX growth will always be good enough that you can sustain a 5% interest rate without depleting the insurance fund, then is it fair to say that you are basically taking the free-market variable interest paid by shorts, buffering it into a fund, and then paying that interest out capped at 5% to BitUSD holders, and then using the excess interest to pay for the BitBonds?
I'm not sure if I made this clear, but I intended in this proposal to have all shorts pay the same interest rate, I was thinking 7%. That interest would be paid by an appropriate exponential increase in the short position's short BitUSD balance, which would gradually lower their margin call price. Thus you should always be able to pay 5% to longs and have the 2% spread plus fees go to insurance and BitBonds, unless and until you get a margin crisis.
If so, that means if BTSX growth slows (thus reducing interest rates shorts are willing to pay) and/or transaction and ask/bid overlap fees shrink, you risk having BitBonds become worthless (since they wouldn't pay higher interest than just holding BitUSD),
Re-read the sections on BitBond mechanics. The BitBonds are fully backed by BitUSD. If the BitBond fund is depleted, the network will stop writing new BitBonds. BitBonds already in circulation will pay their full face value in BitUSD, and can be sold in user-to-user transactions for less than face value if someone doesn't want to wait for the interest payment schedule (the buyer would receive an implied interest rate based on the price at which this transaction occurs).
the insurance fund providing no protection against black swans, and in extreme situations perhaps not even being able to pay the full 5% interest. I would tweak the "graceful degradation" to prioritize the insurance funds before the the 5% interest.
It was my intention to prioritize the insurance fund over 5% interest, unless the insurance fund already has sufficient capital.
Even then, I still don't care for the BitBond concept all that much. I don't see why we should be rewarding people more for long term commitment. Why not just take the excess interest and give that value to the shareholders instead?
If by "shareholders" you mean "BTSX holders", we would have to convert the BitUSD-denominated funds into BTSX to be destroyed. Which would require a network-controlled "bot" doing open market operations on the BitUSD / BTSX market. Yes, my auction mechanism is basically a bot that operates in the BitBond / BitUSD market, but in that market we have a very clear idea of what the "fair" value of a BitBond is (one BitUSD) and even the most abnormal market conditions cannot change that.
Also, if other cryptocoins are anything to go by, there will be some time until we have people setting up businesses using BTSX or BitUSD to sell things that people want to buy. Relatively few people want to put their money in the BitShares ecosystem because there are few products; relatively few people want to create products because there's not enough consumer buy-in. This is true of all cryptocurrencies, even Bitcoin -- and triply true for brand-new ones like BTSX / BitUSD. It would be helpful to the ecosystem if we had some product which can only be bought with BitUSD, is useful to any consumer in arbitrarily large quantities, and whose producer can fill arbitrarily large orders. BitBonds are that product.
Finally, I think BitBonds will prove to greatly increase the value of BTSX. I'd suggest you re-read the sections on BitBond mechanics. The existence of N BitBonds means N BitUSD, most of which come from investor principal, are "temporarily burnt" and are guaranteed to remain out of circulation for (on average) six months. This means the BTSX collateral for those BitUSD is also guaranteed to stay removed from circulation for an identical period. Indeed, you can view the BitBond auction as the network converting its BitUSD balance to BitBonds at a 1:1 ratio, then giving away those BitBonds to incentivize investors to voluntarily remove their BitUSD from circulation by converting it to BitBonds at a 1:1 ratio (and using an auction mechanic to focus on the investors who accept the smallest incentives relative to the BitUSD they're willing to convert).
Locking up large amounts of BTSX in collateral for long periods of time makes BTSX more scarce and thus increases its value.