With regard to BM's idea on BitAsset holders getting participation in BTSX growth, I tend to think that a wider community of potential BitUSD users (merchants and customers) would not want their USD surrogate holdings conflated with an equity stake, forcing them to a view on BTSX, as positive as the current BTSX community might be on this. A straight interest rate is simpler and has wider appeal.

With regard to using a prediction market to set an interest rate, does the successful operation of this depend on the consensus in the prediction market being that BitUSD will be close to pegged? Presumably if participants can't rely on that, this will change their interest rate predictions, and it really becomes a game theory of predicting what everyone else is thinking rather than the true equilibrium rate? And if that were true, then isn't the problem of the market forming a consensus that the peg will hold just transferred from the BitUSD market to the prediction market, still with no guaranteed that such a consensus will form? As per a previous comment in this thread, I admittedly still don't understand the mechanics of how the prediction market would operate, so my logic may be way off base. Sorry if it is.

To your first part, yes I agree to merchant and customers a straight interest rate has wider appeal. (However I don't know if it is simpler to implement.)

As for the second part, I think the prediction market setting the incentive rate will work well. People taking either side of the prediction market have the same risk. They are also not cross-referencing a value like a BitAsset is. (In which case you need to take account of cost + risk relative to the thing you're referencing.) Their goal will be to maintain a long term average mean for BitAssets using an incentive rate to compensate for demand imbalances and risk. They will simply be moving the incentive up/down depending on where BitAssets are currently averaging in relation to the peg.
(I'm sure it's not really that simple but in my head it is )

The reason the main BitAsset doesn't peg is because of a medium term demand imbalance (more general BitAsset short demand than those wanting to go long.) This would drive it below the peg without the 1-1 short limit or an incentive rate that matched supply and demand closer to the peg.

Then while they think the peg works now, there's actually risk that has to be accounted for as well as utility + conversion cost. Basically a lot of things that make BitAssets worth less than 1-1 so no consensus/liquidity etc. is going to make something worth more than it is.

As I just said in another thread...

For me, the most obvious example is BitBTC

Why would anyone buy BitBTC @1-1 in BTSX without an incentive?

They would then have BTSX failure/bug risk. They may not be able to re-sell BitBTC @ 1-1. They have to pay trading fees as well as the same conversion fee to real BTC as if they just sent BTSX to an exchange.

So it's obvious to me incentives will have to be added. The good news is shorts are willing to do that atm & BitBTC with incentives is a game changer   

(The other good news is over time a stable BTSX, utility and other BitAsset advantages will make BitAssets worth more than 1-1 long term.)


Edit: As Xeroc pointed out BitBTC can be transferred in 10 seconds which is an advantage and it's easier/simpler to maintain privacy so there are already some BitBTC advantages

I think a lot of people are hoping BitUSD may track USD fairly close to 1-1 most of the time.

However because people are so bullish on BTSX and shorting BTSX lets you take a leveraged position on BTSX. BTSX bulls may be willing to short still at $0.70, this trading range will be so far from the peg that it could damage the credibility of the peg. This could make people sell BTSX. This will mean less BTSX bulls willing to short below the peg and the situation will correct itself.

I don't mind a BitUSD like that but it might not appeal as much to retailers and savers.

It seems to make it stable you should introduce free market interest rates.
Then you still short 1-1 but when most people are bulls like now you will pay a higher interest rate to short BitUSD as opposed to shorting very far below the peg.

I made this prediction before BitAssets started trading.

While not as low as $0.7, the first part essentially came true. (Too many people willing to short below the peg.) Enough to warrant introducing price feeds.

The second part has been implemented (only shorting @ 1-1) but without interest rates...

The third part, interest/incentive rates are needed I think BM has a great solution here - https://bitsharestalk.org/index.php?topic=8235.msg108444#msg108444

My new prediction

Despite claims that the peg is working BitAsset creation will be minimal. (The share price will languish below $80 million CAP) Over the next few weeks the voices will get louder asking for interest.

Within a week of interest/incentives being added to BTSX the CAP will surpass Litecoin.

If interest/incentives is not added for say a month from now you should also see BitAssets already in circulation starting to fetch prices >2% below the peg on average.

(No economics degree or prediction market understanding, novice trader, don't understand options, contracts etc.. So take it with a pinch of salt but that's my prediction...)

Quote from: bytemaster on September 03, 2014, 06:32:51 pm

Interest is extremely hard to implement in an explicit manner because accounts are heavily divided and payment periods are continuous. 

A BitAsset can be defined any way that is easily calculated.  The challenge is "what interest rate should we set"?   

If you set a "fixed interest rate" then it is possible for the interest to be "too high". 

Imagine a BitAsset that paid interest equal to 25% of the growth of BTSX but had a floor pegged to the dollar.  It can "lock in" the gains on a daily basis.

Both of those at the money options; with the  volatility of BTSX.
In layman's terms - very expensive.   

So you buy $100,000 USD + 25% of BTSX growth...
BTSX doubles....   your USD investment is now worth $125,000 
BTSX halves... your USD investment is still worth $100,000

By sharing the "upside potential" with the USD holders you create huge demand.

Now once again this is price fixing ratio of profit sharing... so could have other side effects. 

Would you buy an asset that was "pegged" to daily BTSX upside growth with the shorts taking all of the downside risk?

I said it once I will repeat it again - those things must have termination date.

On the bold question - more than that, I will sell you one of those contracts. The price is generally the same as  the price of a put option (over the whole amount) + price of a call option over 25% of the whole amount.

I do not understand contracts/options like you obviously.

But I think for the average customer we don't want many BitUSD's with different termination dates.
(Though they can be done on the side in a separate section/market if it is better like you say.)

We just want one main 'BitUSD', one main 'BitGold' but with more incentives for the longs to maximise BitAsset creation.

This seems like a solution (with the prediction market) to add incentives to owning a BitAsset like BitGold without the average person having to choose between 10 BitGold options.

"guaging average supply and demand" What is guaging? 

'estimate or determine the amount' - Gauge (oops gauging not guaging)

Sorry I'm new to trading (well shorting) and am not familiar with prediction markets.

So for example I would gauge at the present time the interest rate should be at least 10% as I can already see shorts are willing to pay at least that. I would make the interest 10% then view the results/effects and raise it or lower it accordingly. My understanding is a prediction market would be doing that but much better than any one man or small group of people could.

Edit: And I guess it could take the form of sharing the upside potential of BTSX as described by BM above which I really like.

Quote from: CLains on September 03, 2014, 09:32:43 pm

We just need a way to establish the perfect interest rate by consensus.

The best way to achieve this is: "Daniel - THINK."

A prediction market.

 

Quote from: bytemaster on September 03, 2014, 10:21:59 pm

Quote from: CLains on September 03, 2014, 09:32:43 pm

We just need a way to establish the perfect interest rate by consensus.

The best way to achieve this is: "Daniel - THINK."

A prediction market.

Dont see why we need an interest rate for bitusd since it is already trading either at a discount or a premium (without the price feed). There is a prediction market already built into bitusd? This is not (only/mostly) a long term prediction market though which in turn could justify bitUSD interest rates. Such a prediction market might be hard to establish as it is very hard to predict the interest rate especially in those volatile times! With bitUSD short/long positions you just have to guess the direction (anytime in the future)...

My feeling is without the price feed in the short term there is too much shorting demand this drives the 'average' below the peg. So the peg doesn't form at 1-1. When you buy at 0.86 you're not actually getting the interest you think you are if the medium term 'average' is 0.9.

The price feed and limiting BitAsset creation at or above the peg helps it, but there is very little demand @ 1-1 from people wanting to hold value in BitAssets. The same way a new bank or exchange may have to pay you interest to attract your deposit the same for BTSX virtual vault.

There are a lot of people willing to pay a premium to short in the form of interest at 1-1.
The question is what rate of interest will maximise BitAsset creation. A separate prediction market should be able to answer that.

Also an actual interest rate is so much more marketable imo.

Imagine a BitAsset that paid interest equal to 25% of the growth of BTSX but had a floor pegged to the dollar.  It can "lock in" the gains on a daily basis.     

So you buy $100,000 USD + 25% of BTSX growth...
BTSX doubles....   your USD investment is now worth $125,000 
BTSX halves... your USD investment is still worth $100,000

By sharing the "upside potential" with the USD holders you create huge demand.

Would you buy an asset that was "pegged" to daily BTSX upside growth with the shorts taking all of the downside risk?

Thanks for the reply. WOW! Sounds amazing to me! I agree that this would create huge demand and yes I would buy it! I will be interested what others think.

A BitAsset can be defined any way that is easily calculated.  The challenge is "what interest rate should we set"?   

Yes this is a challenge that is too hard for me. What I do know is the optimal interest rate will trend lower over time as demand increases for BitAssets. I don't know how the system would/could deal with that transition?

Initial ideas...

Maybe a formula that looks at buying vs. shorting demand. If the average increases so that there are more buyers than shorters over X period the interest rate drops 2%.  So you buy the BitAsset at a certain interest rate paid daily but with the knowledge that interest rate is variable and will adjust occasionally to reflect supply and demand. Is something like that possible?

Quote from: Empirical1.1 on September 03, 2014, 04:53:45 pm

Quote from: Brent.Allsop on September 03, 2014, 04:36:32 pm

Quote from: emski on September 03, 2014, 04:23:52 pm

In this form it will either work as intended or trade will stop. It is an experiment after all.

But there is a middle ground, right?

We are attempting to get people to do what is required, by changing the prices and fees.  In other words, if things go bad, or demand for BitUSD goes way up, the cost of getting people to cover longs and shorts, and provide enough capital to cover their positions, could become so inefficient, that nobody will want to participate at the required levels?

No everything works pretty well. There's risk of flash crash in BTSX but there's an insurance fund in place.

- There's also a risk of a sudden upwards revaluation of say gold that could be difficult to deal with.
- There's the risk without a market maker in times of low liquidity or demand you may be forced to sell for less than BitAsset is worth.
- There's a risk of bug or other problem with BTSX.

All of these are risks, risks can be offset by offering interest to BitAsset holders to compensate, hence why 99% of my posts will be about interest from now till it's introduced.

Who holds the signing authority of the "insurance funds", and when do they pay out, or who makes the decision?

Also, if BitUSD started to threaten to become a new world reserve, perhaps the US, possibly in concert with other fiat currency countries, could attack it by severely manipulating or readjusting the value of the USD?  If we had to make huge dramatic decisions, that were very controversial, could the be made in time, to defend against such?

If it's still being done the way I read a few weeks ago then my understanding is the insurance fund kicks in automatically if there's not enough collateral and if that runs out the system can even temporarily dilute BitAssets and then cover the dilution with fees over time. It's very impressive.

As for manipulating the value. The feeds are supplied by trusted intelligent delegates so it would be hard and in time the feeds may not even be needed. I think the real risk is that currencies are officially devalued overnight but that wouldn't hurt BTSX I don't think that much because we would have even more collateral backing it.

As for stopping it. You can probably stop BTSX in the next 3 months still but the capability is there to do this and Ethereum are doing their own kind of twist I think so ultimately you can't stop people storing value in this way.

Quote from: emski on September 03, 2014, 04:23:52 pm

In this form it will either work as intended or trade will stop. It is an experiment after all.

But there is a middle ground, right?

We are attempting to get people to do what is required, by changing the prices and fees.  In other words, if things go bad, or demand for BitUSD goes way up, the cost of getting people to cover longs and shorts, and provide enough capital to cover their positions, could become so inefficient, that nobody will want to participate at the required levels?

No everything works pretty well. There's risk of flash crash in BTSX but there's an insurance fund in place.

- There's also a risk of a sudden upwards revaluation of say gold that could be difficult to deal with.
- There's the risk without a market maker in times of low liquidity or demand you may be forced to sell for less than BitAsset is worth.
- There's a risk of bug or other problem with BTSX.

All of these are risks, risks can be offset by offering interest to BitAsset holders to compensate, hence why 99% of my posts will be about interest from now till it's introduced.