0 Members and 1 Guest are viewing this topic.
Quote from: bytemaster on November 14, 2013, 05:06:48 pmBitUSD is the equivalent of the old bank notes that promised to pay $1 worth of value on demand. In the case of the old bank notes, this value was denominated in gold or silver. In the case of the BitShares DAC this value is $1 worth of equity, aka bitshares. The BitShares DAC can almost always make good on this promise because when someone comes to redeem a note and is unable to sell it on the market directly the value of the BitUSD in terms of bitshares will rise until the decentralized bank has the authority to call a loan and repurchase the BitUSD. Why will the value of bitusd in terms of bitshares rise rather than go down when someone comes to redeem a note and is unable to sell it on the market directly?Will the Bitshares system freeze 2 usd value of BTS as collateral or 2 bitusd value of BTS as collateral when i borrow 1 bitusd from the system?
BitUSD is the equivalent of the old bank notes that promised to pay $1 worth of value on demand. In the case of the old bank notes, this value was denominated in gold or silver. In the case of the BitShares DAC this value is $1 worth of equity, aka bitshares. The BitShares DAC can almost always make good on this promise because when someone comes to redeem a note and is unable to sell it on the market directly the value of the BitUSD in terms of bitshares will rise until the decentralized bank has the authority to call a loan and repurchase the BitUSD.
I should generate a chain of shares in "pariah99's pity/beer fund" and hope for the best... speaking of which, I have to go to a bar now
Quote from: Markus on February 27, 2014, 01:47:41 amIf the kind of asset the BitAsset is to track is defined fuzzy ("Oil" instead of "Brent Crude as traded on the IntercontinentalExchange") then arbitrageurs and other market participants can not provide a narrow tracking as they don't always know if it is over- or undervalued. Spreads will widen and the BitAsset market will be less liquid.I'm sure that they will be very specific, since the creators of the chain will have to create some mechanism by which shareholders can redeem their shares for physical assets. In the case of perfectly fungible assets like stocks and currency, the specificity will already be built in.e;fb
If the kind of asset the BitAsset is to track is defined fuzzy ("Oil" instead of "Brent Crude as traded on the IntercontinentalExchange") then arbitrageurs and other market participants can not provide a narrow tracking as they don't always know if it is over- or undervalued. Spreads will widen and the BitAsset market will be less liquid.
If there's a difference between the (PRICE OF OIL) and the (BitUSD to BitOil ratio), that would present an arbitrage gap which traders could take advantage of to make a profit. Eventually, the gap would close as more trades were made; hence, the price would tend towards the real-world equilibrium.
Edit: This was in response to both delulo and unlimited_power. I just realized that what they were asking was regarding what the unit of BitOil was, which I'm guessing is in barrels.
Quote from: bytemaster on February 19, 2014, 09:10:51 pmIt doesn't really matter how fuzzy the idea is... the resulting price will be the mean interpretation of the concept. So if you say BitOil... without specifying a type of Oil it will probably track an average of all types of Oil unless most people come to the consensus that it should track Brent.Ok. So you also suggest that there is no unit of account? For example: BitOil would give a ratio between one barell of oil and 1 bts?
It doesn't really matter how fuzzy the idea is... the resulting price will be the mean interpretation of the concept. So if you say BitOil... without specifying a type of Oil it will probably track an average of all types of Oil unless most people come to the consensus that it should track Brent.
Does the notion of termination enter into the stock market or for that matter the cryptocurrency markets.
I can't get my mind around the notion that a prediction market will converge to a correct value if there is no causal link to the delivery of a real commodity at some point in the equation. Without it, it just looks like a collective herd mentality. This sure seems like a system that could be manipulated, as indicated in earlier posts by Winslow Strong and by others in different threads. I'm not saying it won't work, I'm just skeptical. My skepticism would be greatly diminished if someone could point me (us) to an example of where this has worked successfully in the past. It would be easy enough to implement in a centralized exchange, there's nothing special about it being decentralized in the BitShares model. And no, I will not accept that successively opening and closing positions in the futures market is the same thing. I need an example of a predictive market that is non-terminating with no deliverables. If you insist that this is just an extrapolation of the futures market, we'll just have to agree to disagree.
Quote from: delulo on January 21, 2014, 09:10:21 pmWhy would it be an advantage to have terminal dates? Because at that point some party has to deliver a real asset. The market must converge to a true price since a physical commodity is changing hands.
Why would it be an advantage to have terminal dates?
I'd also like to pose a question: Have you stopped to consider why financial markets don't offer products like BitUSD? I.e. a derivative without a terminal horizon, designed to track an underlying via a yield mechanism as the tracking incentivization?
i) But all futures/options markets have a terminal date.
Quote from: Winslow Strong on November 14, 2013, 12:17:17 pmI'd also like to pose a question: Have you stopped to consider why financial markets don't offer products like BitUSD? I.e. a derivative without a terminal horizon, designed to track an underlying via a yield mechanism as the tracking incentivization?Quote from: Winslow Strong on November 15, 2013, 01:53:19 pmI asked for an example of a financial derivative traded on a market that tracks an underlying merely via a mechanism of yield-adjustment, without lump-cash settlements that compensate directly and linearly for price changes of the underlying. I've never heard of such a product, and it's premise seems to me to be ill-founded.Winslow Strong raises a compelling question here. The concept of a predictive market has been around for over half a century. BitShares, however, adds key new components: temporally unlimited with no commodity delivery required. But this is not a difficult extrapolation. Surely financial entrepreneurs would have considered such a construction at some point in the past. I can't imagine why it wouldn't have been implemented on a conventional exchange. Is there any example of this being done before? If not, it suggests that the idea has not held up to market scrutiny. And I don't see why having it de-centralized is the crucial missing piece.
I asked for an example of a financial derivative traded on a market that tracks an underlying merely via a mechanism of yield-adjustment, without lump-cash settlements that compensate directly and linearly for price changes of the underlying. I've never heard of such a product, and it's premise seems to me to be ill-founded.
I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.
If I have MtGoxUSD then MtGox will allow me to withdraw it into my bank account into BankUSD. MtGox basically guarantees this and this is why MtGoxUSD is "valuable".If I have BitUSD who will allow me to withdraw BitUSD into BankUSD? Is this a service that needs to be built? Or is BitUSD only backed by BitShares? It seems like if I own BitUSD no one will convert it directly to BankUSD without first converting it to BitShares.Since I can convert MtGoxUSD into BankUSD easier than converting BitUSD to BankUSD, it seems like MtGoxUSD is more valuable than BitUSD. Your thoughts?
Quote from: bytemaster on November 14, 2013, 05:06:48 pmThis will be an experiment, like Bitcoin. The closest thing to BitUSD is EuroDollars. Eurodollar deposits are redeemable for USD at the maturity of their deposit time. This redeemability is backed by faith in the solvency of the bank that holds your deposit. What we have been debating is why the bitshares market in BitUSD would actually track the BTS/USD rate, which would be necessary to redeem your bitUSD from the market for the value of 1 USD denominated in BTS. So this is a bit tangent to our discussion, and again is a financial product where lump-sum cash flow changes hands at some point in time. That contractual obligation (modulo trust) is sufficient to maintain a market value for Eurodollars that tracks dollars. I asked for an example of a financial derivative traded on a market that tracks an underlying merely via a mechanism of yield-adjustment, without lump-cash settlements that compensate directly and linearly for price changes of the underlying. I've never heard of such a product, and it's premise seems to me to be ill-founded.If I had to think of the closest product to bitUSD, I think it would be an equity. Equities just pay dividends, as bitUSD does, and there's no notion of any terminal value of an equity. However, equities give ownership in the net assets of a company, hence have backing in this sense. They also don't track anything other than the value of the company (by definition), which in old-school finance was proposed to be the discounted expected value of the entire future stream of dividends from that company. This makes sense as a way to value bitUSD also. However, the future dividends of bitUSD depend directly and merely on its price (in the case where margin depends on bitUSD's price). There's no underlying net profits as there would be for a company to distribute as dividends. But the price is valued from the dividends. So we have a bit of a self-referential situation going on here, and it should be clear that in this valuation model there's no reason for the market price to converge to any particular value.In the case where bitUSDs dividends are a function of an embedded BTS/USD price, then that price can be seen as analogous to something proportional to net earnings of a company. In that case, we may expect some rational valuation model to work, but I don't see any reason why the value of the dividend stream from bitUSD would converge to a certain specific proportionality factor (the one needed to make the ratio of bitUSD/(BTS/USD) prices be 1) times its net income (BTS/USD price). The price of bitUSD would be sensitive to all kinds of exogeneous things, first and foremost interest rates in the overall economy.
This will be an experiment, like Bitcoin. The closest thing to BitUSD is EuroDollars.
Why did Bytemaster stop replying to this thread? Is it just me or is this concept still unclear and needs a simple example?
I'd also like to pose a question: Have you stopped to consider why financial markets don't offer products like BitUSD? I.e. a derivative without a terminal horizon, designed to track an underlying via a yield mechanism as the tracking incentivization?Financial markets offer many flavors of tracking products - Futures, Forwards, contracts for a difference, etc. All of these involve cash flows changing hands at points in time, where the amount scales linearly as a function of the change in price of the underlying. Your BitUSD (if it were to use BTS/USD as the basis for margin requirement) incentivizes via the size of the yield changing as a function of the underlying. The yield is a rate, i.e. BTS/time. It's the first-derivative of a cash flow. The difference between actual cash flows compensating for tracking deviation and changing the first derivative of cash flows to compensate is enormous. The latter alone can never ever justify the risk in tracking deviation of an abrupt financial downturn, while the former does just fine, as long as margin remains sufficient (which you have ample protection for).I don't know the exact reasons why products like Bit/USD aren't offered on exchanges, but I'd be highly suspicious that the above lack of risk-compensation is a relevant aspect. I'd at least want to have investigated this issue by talking to professional traders / exchange operators before launching such a product. Have you done so? What was their reaction?Why haven't you simply chosen to implement an established form of financial contract, like futures or CFDs? Do you think it will help you to skirt regulation by doing it your way? I also had some impression that you wanted the system to be decentralized, which would prohibit even the incorporation of BTS/USD into BitShares, as it requires a trusted authority. But if you are open to including that price feed, then you'd be a lot safer implementing CFDs that incentivize via actual cash flows tied to the actual underlying. Your proposal seems like it's taking totally unnecessary risks in this regard.
I could debate the tracking issue to great extent, but I think the ultimate proof will be when we launch the test network.
If my theory is wrong, then all that is needed to 'make it work', is an external price feed.
I base my 'price tracking' on the behavior of prediction markets that also have no ties to the real world and yet can track arbitrary ideas or concepts.
Here is my challenge to you, role play longs and shorts against one another and see if you can manipulate the price without one side digging in. Keep in mid that longs are competing against other longs and shorts against other shorts. Then define the direction the market will move and why.
These dividends will scale down as margin scales down as shorts reduce their margin, which they will do even if you force them to cover their initial position and reenter a new one to do so. Since the margin requirements are based on the bitUSD price and not the BTS/USD exchange rate, then the goodness of the deal for the longs doesn't depend on the deviation of bitUSD from BTS/USD, so this is not a mechanism that keeps the prices tracking.Furthermore, in panics yield-incentives typically are surpassed by fear of near/intermediate term price losses. Interest only accumulates linearly in time, whereas prices can change arbitrarily quickly. LTCMs positions had crazy yields at the market prices before they had to liquidate. Still, buyers didn't enter and didn't cause their illiquid bonds to converge to the values of similar liquid ones. Whereas in the setup you describe. . .1.) Yields (dividends) won't effectively increase as bitUSD price drops, because shorts will reduce their margins - by exiting and reentering if you force this upon them.2.) There's no terminal payout, so no implied yield (price appreciation) as there is for e.g. bonds. I still see no incentive whatsoever for any market agent to buy and sell in such a way that e.g. the price of bitUSD will track the BTS/USD rate, other than the belief that it is common knowledge that they "should." I still see this as a far fragiler incentive structure that has existed in many instances in financial history where instruments that were expected to track/converge had huge deviations and didn't. On the plus side, I'll point out that your system requires far higher margin than is typical in financial markets, which should reduce the pro-cyclical feedback that occurs in financial panics. Reducing this feedback is not, however, the same thing as incentivizing convergence.I'm open to hearing new arguments or learning where I've misunderstood how the proposed system would work.
1.) So you're saying that you won't allow shorts to reduce their margin positions even if/when the bitUSD price has moved very much into the money for the shorts? This seems silly, as the shorts can still effectively reduce their margin by covering their previous position and initiating fresh positions at their desired level of exposure with new 2x margin, which would be lower than the previous 2x margin. It forces the shorts to needlessly make extra transactions to achieve the same position they could have had by just reducing their margin. Forcing shorts to cover in this way won't cause net long demand, hence won't cause the price to rise.2.) Fungibility: If you don't allow shorts to reduce their margin when their positions are in the money, then the bitUSD contracts lose fungibility. This is because the margin requirement of each would be contractually coded in at the time of creation, and would depend on the bitUSD price at that time. I doubt that this is really the way you intend for things to operate.
BitUSD Short margin requirements are based upon the highest unaccepted bid to buy BitUSD for BTS.
Shorts MUST buy back at some point if they ever want to use their collateral for anything else.
So you apply game theory between the longs and the shorts. The longs will hold out for a fair price, and it costs the shorts a lot of money to 'let it ride'. Also, for someone who is short to maximize the return on their investment they need to cover, take a profit, and re-short at the new price. As the value of BitUSD falls the collateral backing it goes from 2x to 3x to 10x to 100x... and thus the interest rate earned by those who hold BitUSD rises and the opportunity cost for the short also rises. As a result there is constant pressure for shorts to cover and and re-short at the new price. The only way for them to cover is to convince the longs to give up their higher yield and thus agree to a price near BTS/USD.Now the longs cannot hold out for ever either because at any time new shorts can enter the market if the longs try to push up the price by holding BitUSD off the market.
Ok, those who own BitUSD are earning dividends at 2x the rate of those who own BTS. Those who are Short BitUSD are paying interest at 2x the value of BTS.
The only price at which someone holding BitUSD would be willing to sell is the BTS/USD exchange rate. Otherwise, they sell the BitUSD to someone who wants a high yield investment backed by BTS.
Thanks for the response bytemaster; I know you're busy today. Just to be clear on where I'm coming from, I think bitshares and DACs in general are very cool ideas, and want them to succeed. I have much to say about what you've written, but can't reply until I get one thing straightened out.Is the margin requirement based on the price of bitUSD or BTS/USD? E.g. bitUSD is .99 whereas BTS/USD is 1.00. Is margin 1.98 or 2?The latter would be more favorable for tracking, but since USD are not endogenous to the bitshares block chain, that info would need to be fed into the blockchain by a trusted source. So the cost would be a bit of centralization, but it might be worth it.Thanks.
When the value of BitUSD falls below a dollar, SHORTS COVER. When it goes above a dollar new shorts enter the market. Margin calls force shorts to cover.
Quote from: ruletheworld on November 11, 2013, 03:30:11 amQuote from: Winslow Strong on November 10, 2013, 09:19:50 pmI don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS. Let's compare it to an ETF. There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of. Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees). Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two. But it doesn't seem that bitUSD are redeemable for paper USD. So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD? The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely. Sorry, maybe I wasn't being clear enough. For the price to track the true USD price, its necessary that buyers would have incentive to buy when the price dips sufficiently below the true USD price. What is that incentive? In a prediction market, the incentive is that eventually the share matures and is paid out, so there's a terminal value. Similarly in futures markets. With ETFs, there's no terminal date, but if the price of the ETF dips too low, theres an arbitrage opportunity for people to buy shares of the ETF and exchange it for a basket of the underlying.It sounds to me like you're saying there is no such mechanism for bitUSD. Then you are just relying on putting this idea out there that the prices should track, and hoping that others believe that others believe that others believe. . . that it should. Without some type of redeemability, I don't see how anyone could believe this will actually work.
Quote from: Winslow Strong on November 10, 2013, 09:19:50 pmI don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS. Let's compare it to an ETF. There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of. Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees). Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two. But it doesn't seem that bitUSD are redeemable for paper USD. So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD? The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.
I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS. Let's compare it to an ETF. There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of. Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees). Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two. But it doesn't seem that bitUSD are redeemable for paper USD. So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?