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General Discussion / Dynamic Burning
« on: October 21, 2015, 04:37:10 pm »
Tldr: Instead of directly burning bts, those bts designated for burning should be dynamically burned by using them to create bitassets through a special transaction where the only redemption of those bts can occur through a liquidation event (margin call), providing liquidity to the network. Over time as the value of bts increases, this will work to effectively burn those bts while still providing a benefit to the network. This thread is intended to provoke thought and find out if there is a better way to manage burning that will be most productive for the network.
The theory (at best) that value rises as supply is diminished does not necessarily work well in practice. Burning is kind of like burying perfectly good gold in the ground and throwing away the treasure map in an attempt to make gold holders richer, while that gold still has perfectly good industrial uses. Imagine if that gold could still be used in an industrial setting but not available to be sold on the open market. Something similar to this may be possible with bts. Just as gold is a physical commodity, I see bts as a digital commodity (among other things), useful as collateral to generate bitassets on the bitshares blockchain.
One example of an asset that does not necessarily add value when the asset is burned is gasoline. Gasoline is an asset of limited supply that is burned, both literally and figuratively. To reduce the effects of fiat inflation, we can look at the price of US retail gasoline when priced in real money, gold. As we can see, US retail gasoline is near a 100 year low when priced in gold even though it is constantly burned. Obviously other factors are at play, such an advances in technology that make producing gasoline cheaper, but the real value of gasoline may not have been significantly affected by a reduction in supply.
http://pricedingold.com/us-retail-gasoline/
Another example, Natural Gas:
http://pricedingold.com/natural-gas/
Many bitshares users will not choose to buy, hold, or use bts. They will only want to trade bitassets. Furthermore, many users who do decide to hold bts will not choose to short bitassets into existence. Therefore, there may be a potential shortage of bitassets. The network will need these bitassets for liquidity and the way I see it, more bitassets in the system adds to liquidity, which attracts more users.
To add more bitasset liquidity, I propose that instead of burning bts, those bts be used to generate bitassets using a special transaction where the only redemption of those bts can occur through a liquidation event (margin call). Once created, those bitassets can then be sold on the open market and freely traded by users of the system. Also, bitassets can be generated for markets where there is high demand. Over time, as the value of bts rises, many of those bts will be effectively burned, while still being useful as collateral for bitassets.
For example, right now the bts/usd pair is trading at a rate of 247bts for 1usd. To achieve a call price of 500bts/usd, a collateral level of 877bts can be used at a collateral ratio of 3.55 to create 1usd. This would allow for a 50% decline in price until the position is margin called and those bts put back into circulation. However, if the exchange rate rises to 1bts for 1usd, then the price will have to fall by 99.6% in order for that dollar to be liquidated, effectively burning those 877bts into a permanent 1usd on the blockchain, making those 877bts still useful to the network but not available to the sold for any other asset outside of the blockchain.
The theory (at best) that value rises as supply is diminished does not necessarily work well in practice. Burning is kind of like burying perfectly good gold in the ground and throwing away the treasure map in an attempt to make gold holders richer, while that gold still has perfectly good industrial uses. Imagine if that gold could still be used in an industrial setting but not available to be sold on the open market. Something similar to this may be possible with bts. Just as gold is a physical commodity, I see bts as a digital commodity (among other things), useful as collateral to generate bitassets on the bitshares blockchain.
One example of an asset that does not necessarily add value when the asset is burned is gasoline. Gasoline is an asset of limited supply that is burned, both literally and figuratively. To reduce the effects of fiat inflation, we can look at the price of US retail gasoline when priced in real money, gold. As we can see, US retail gasoline is near a 100 year low when priced in gold even though it is constantly burned. Obviously other factors are at play, such an advances in technology that make producing gasoline cheaper, but the real value of gasoline may not have been significantly affected by a reduction in supply.
http://pricedingold.com/us-retail-gasoline/
Another example, Natural Gas:
http://pricedingold.com/natural-gas/
Many bitshares users will not choose to buy, hold, or use bts. They will only want to trade bitassets. Furthermore, many users who do decide to hold bts will not choose to short bitassets into existence. Therefore, there may be a potential shortage of bitassets. The network will need these bitassets for liquidity and the way I see it, more bitassets in the system adds to liquidity, which attracts more users.
To add more bitasset liquidity, I propose that instead of burning bts, those bts be used to generate bitassets using a special transaction where the only redemption of those bts can occur through a liquidation event (margin call). Once created, those bitassets can then be sold on the open market and freely traded by users of the system. Also, bitassets can be generated for markets where there is high demand. Over time, as the value of bts rises, many of those bts will be effectively burned, while still being useful as collateral for bitassets.
For example, right now the bts/usd pair is trading at a rate of 247bts for 1usd. To achieve a call price of 500bts/usd, a collateral level of 877bts can be used at a collateral ratio of 3.55 to create 1usd. This would allow for a 50% decline in price until the position is margin called and those bts put back into circulation. However, if the exchange rate rises to 1bts for 1usd, then the price will have to fall by 99.6% in order for that dollar to be liquidated, effectively burning those 877bts into a permanent 1usd on the blockchain, making those 877bts still useful to the network but not available to the sold for any other asset outside of the blockchain.
