Rules:
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- The volume of the bucket is given by the demand for a bitAsset (bitUSD)
- The goal is to keep the water level constant at the consensus level (say 1
meter)
- When people want to have bitUSD .. the volume of the bucket increases
As an example, they add an extra bucket via a pipe to the main bucket.
Water starts to flow from the main bucket (the market) to the users bucket
(pocket
). The price he has to pay for his water (in liters) depends on
how much water is in the main bucket. As the water level decreases .. the
price per liter/gallon increases. Obviously, the water gets rarer and rarer.
The more the water level moves below the consensus level the more expensive
it gets.
- When people want to get rid of their bitUSD .. the volume of the bucket is
decreased .. The seller wants to put their water back into the main bucket and
pump it through the pipelines. The water level in the main main bucket rises
and moves above the consensus level. Hence, the price decreases because of the
surplus. Other participants no start increasing their buckets because the water
(bitAsset) is cheap now in contrast to if they had to buy earlier.
- The total amount of bitUSD is the volume of the bucket .. and thus the demand
for bitUSD
The Market Peg
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The Market Peg is a device (look previous post) that works as follow:
http://en.wikipedia.org/wiki/File:Ballcock.svg- In the main bucket there is an extra devise with a ventile that can control
the water level.
- when the swimmer goes below a certain threshold (i.e. the height/depth of the
water, and thus (indeirectly) the price of the bitUSD) .. the ventile opens
and new bitUSD are created to fill up the bucket and the demand.
- In order for the ventil to produce water ... someone has to go buy water ...
the price for the new water depends on the water level in the bucket.
Obviously the water level is lower than the consensus level and as such the
water is expensive if you want to get some. However, he cannot create water
out of thin air. But he can borrow it from the local water supply with the
promise to give it back and sell it for the higher-than-consensus price at
the market (the main bucket). As a security the local water supply offers the
water at TWICE the market price. The buys accepts the deal and fills up the
main bucket.
- when the swimmer is at a certain level (ie. height/depth of water) above the
consensus level (150% afaik)the swimmer makes the ventile to close again and
call for margin (unless someone buys water/bitAsset).
A margin call is performed such that the guy who bought water from the local
water supply and sold it to the market at a high price has to buy his water
back again at a cheaper price to pay his loan at the local water supply. Thus
he makes a loss.
I am not so sure about the last paragraph describing the margin call ... could s.o. check?