It has been over a month, and no response to my critical manipulation. I myself have not thought of a way to prevent it.
Neither "limiting trading based on market depth" nor "maximum price movement per block" will prevent a sudden decrease in the market price of USD/BTS on external exchanges (which are absolutely required if one is using PoS). This price decrease will de-collateralize everything, resulting in cascading margin calls that cause BTS to fail to track every asset (as they will all be doubling in value toward the same infinity, as shorts sell to avoid Mcalls and longs sell to cash out their BTS [both at rates "faster" than the collapse in external USD/BTS thanks to the new 'maximum price movement' requirement (which is artificially slowing the internal USD/BTS)]).
Moreover, I feel that the fee structure...
Fees are calculated based upon how much of the order book you walk.
Given bids of 99, 98, 97, and 95.... to buy it all up in one go you enter an ask for 4@95. You will receive 4*95=380 rather than 99+98+97 = 389 for a fee of '9'. Obviously, if you attempted walk the book all the way down to 50, your fees are going to average 25%.
...encourages low volume (more trades = higher fees, as is obvious in the above example, 1 bid=0 fees), and large spreads (as you literally pay for every dollar the market-price moves past your existing bids/asks). As volume collapses, the market may lose all of its liquidity completely. Strategically, people will be hesitant to enter a soon-to-be-illiquid market.
All phenomena create an equilibrium of non-tracking and no trade.
( This thread promises tips in exchange for "finding attacks", but I have not yet received any tips. My Bitcoin address is 1DSrFGXJdsFw2MsrgwHeQxWq1djQk4jcyD )
MolonLabe, my apologies for not following up on this thread in a while and of course some tips are due for some of the attacks presented.
Attempting to summarize your claimed attack:
1) Sudden decrease on external exchanges in excess of a 50% fall in value would immediately leave some BitUSD un-collateralized... assuming this was a real devaluation and not a 'flash crash' due to technical glitch on external exchanges. In this particular case the shorts deserve to lose everything and the longs get their maximum return. This isn't so much an attack as a real market movement where real value should change hands.
2) In markets most trades / volume is considered noise and is not based upon new information entering the system. There will be lower volume and wider spreads with this system, but think of it is nothing more than a filter that eliminates noise. The result is that market participants actually have a clearer picture of the value and risk.
3) After thinking through it some I think we can conclude that a short position's maximum cover bid is 2x their initial open price. If the market moves by more than that amount before the shorts can cover then the holders of BitUSD can choose between keeping their BitUSD or selling for 2x the shares they purchased at. This would cause BitUSD to momentarily be valued less than real USD as it would become pegged to the value of the collateral backing it. The holders of BitUSD have a limited insurance policy agains volatility equal to the collateral. They are not promised 100% peg like an IOU reserve system would.
4) So lets assume there is a 75% fall in the value of BTS and that initially 1 BTS = $100... now 1 BTS = $25 USD. This means that there are 2 BTS backing every 100 BitUSD and thus we now have $50 of value backing 100 BitUSD. The BitUSD holders have only one way to exit their position, they must sell their BitUSD and the shorts are only offering $0.50 on the BitUSD. The short has no incentive to cover so they can hold their offer for ever. The long has two choices, take $0.50 on the BitUSD or hold the BitUSD and wait for BTS to recover. Whether they hold or sell they are effectively invested in BTS because the value of their BitUSD is now pegged to BTS until the value of the collateral rises above $1 per BitUSD.
So lets study this limit condition a tad closer: does the market stop, clear, and automatically reset or does it fail for ever?
a) Assume BTS price in real USD is still out there and trading at $25 USD and thus whatever caused the 75% instant devaluation is not causing further decline.
b) Assume you hold BitUSD... what price would you sell it at? You will not sell below $0.50 on the BitUSD because there are open bids at that price.
c) What price would you buy it at? You will buy BitUSD at any price less than the value of its collateral.
d) What price would you short it at? You will still short it at a rate of 25 BitUSD to BTS because you can make money when it goes up to 50 BitUSD per BTS.
In other words in a rapid downward movement BitUSD will become decoupled from USD proportional to the percentage of shorts that run out of collateral. The market will recognize this fractional insolvency. If 100% of all shorts run out of collateral, the value of BitUSD becomes pegged to BTS until enough new shorts enter the picture to reduce the overall insolvency. The longs can either eat their losses or hold and wait for the value of the collateral to recover. Once the value of the collateral recovers then the peg to USD resumes.
Now an attacker could attempt to manipulate the price and cause a short squeeze that will wipe out all shorts. But they will not be able to cause BitUSD to be unbacked all together... the most they could do is drive it to the value of the collateral.
How can an attacker profit?
1) the attack must be fast (high fees)
2) the attacker must short BitUSD into the short squeeze caused by their own buying of BitUSD
- the attacker's behavior is actually the same behavior of honest market participants in response to excessive buying of BitUSD
3) the attacker covers their short positions with the BitUSD they bought to send the price up.
The assumption of Molon is that if the market recognizes any attack it could become fulfilling as everyone joins the attack. The basis of these markets is all in predicting what others will do as that is the foundation of the peg. If consensus suddenly changes then the peg will follow that consensus all the way to its logical conclusion. So you could attack the peg by attempting to persuade the market that an attack is happening and inevitable and if you are successful then it will be self-fulfilling.
So if an attack starts and people believe that someone is attempting an attack then they have three choices:
a) wait it out and be long BitUSD... no profit/no loss in the long run
b) knowing that the price eventually will revert, you can short with 10x the collateral so you don't face a margin call and can profit as the price falls... this will hinder the attack and make you money no matter what.
c) Join the attack.... buy BitUSD while shorting at a higher price and cover with the difference.
The people being attacked in this instance are the shorts who face a margin call (and fee) based on something other than fundamentals. As a short observing market behavior you know that you can be attacked at any time. Your choices are:
a) cover early, this will help accelerate the attack by causing buying pressure on BitUSD
b) add collateral and ride it out.
c) join the attack by covering early and re-entering a short position later.
So it is clear that if enough wealth joins the attack everyone will join it.... but what are the risks of joining the attack?
a) If you join the attack at the top of the 'bubble' or the attack fails to hit critical mass, then you just bought BitUSD high and will lose money.
What does this mean for trading strategies? It means that shorts who are worried about such an attack will only enter the market toward the peak of the attack (ie: when they think there is a major bubble) and otherwise will not go short without ample collateral at prices they think are reasonable.
The more I think about it this entire 'attack' is no different than any regular bubble, pump & dump psyop. These are features of all markets and from the perspective of market participants this would be no different than a bubble in Bitcoin.... buy a bunch of BTC slowly over time... then trigger a buying rush with rumors... sell at the top. If you can get leverage so much the better.
People who trade on leverage are always vulnerable to bubbles. Trading on leverage in a thin market with high volatility is RISKY by definition... it is also profitable for the same reason. Therefore, any losses are part of the 'game' and ultimately the price will track as depth and volatility decrease.