Quote

If you think a premium to buy a smartcoin is outrageously high, short it.

And what is a criterion for "outrageously high"?

That's for the market (and every individual player) to decide 
Me, personally, I'd guess 10% or more until liquidity improves and SQP goes to 100%. Which is about what the market is at in general.

Q) Is there another design which doesn't have the same biased risk profile, or is this just a natural consequence of not having redeemability?

Mathematically, I believe it is a natural consequence. Here's the argument:

From game theory, there are two possible moves:
1) Create smartcoin (short)
2) Destroy smartcoin (settle)

We need to make a game such that the rules of the game encourage creation and destruction such that value is maintained.

Now, like all currencies, you can choose how you want to maintain value. You can have a centralized bank/group of people controlling supply (Federal Reserve), or you can have a fix value as currencies that are on the "Gold Standard." For the sake of merchants and liquidity, BitShares has made the decision that 1 smartcoin should always be redeemable for 1 underlying asset of BTS. That is, BitShares is on the "Gold Standard." (well, technically, bitGOLD is on the "gold standard," but you get what I mean  ) This also means that a centralized group of people are NOT needed, and thus you can rely on decentralized data (feed) to maintain your gold standard (versus the federal reserve)

So now that BitShares is on the Gold Standard, what should the rules be such that creation and destruction incentivize the gold standard?

General rules:
1) When in oversupply, destruction (settling) should be incentivized
2) When in undersupply, creation (shorting) should be incentivized


We need to come up with a system, on a blockchain, that does that. There are really one two rules that can possible be implemented. However, the optimum implementation parameters are unknown and are thus parametrized in BitShares. However, these specific rules MUST be followed, as there really is no other way to achieve our goal given the boundary conditions.

Destruction rule:
1) At any time you are allowed to destroy a smartcoin by exchanging 1 smartcoin for its value in underlying asset

BitShares Implementation: Since underlying value asset is not determined within our system, we need to pull it from external sources that actually trade real versions of the underlying asset. Thus, settlement price should be a function of external price feed.
Arbitrage Profit for enforcing the rule: Finite and the difference between what you can buy the asset for now and what you can settle it for.
Long term profit: None if performed via arbitrage.
Risk to settler: None, besides change in feed between settlement request and execution (see below)

To reduce risk of manipulation via a "sneak attack" on the market: time delay between declaring a settle and settle
To reduce the risk of manipulation by "buying out" the entire market: settlement limits volume to a % of the total volume


Creation rule:
1) You can create (short) at any time to yourself

Implementation: Shorting to yourself at any time is allowed as long as you maintain collateral so that the smartcoin you create is "backed" by something of value
Arbitrage Profit: None
Long term Profit: Infinite and based on the difference in growth rate between smartcoin and BTS.
Risk: uncertainty in the future value of smartcoin relative BTS.

Outcome of rules:
Settlers (longs) have zero risk; shorts have non-zero risk. Therefore, shorts should sell to longs at a premium. The price of this premium is a function of variance in the expected BTS growth rate relative to the underlying asset as well as the variance in the premium itself.

There is one issue I've been struggling with for months:
Problem:
Mathematically, the value of the premium shorts sell to longs is a function of expected future variance in the value of that same premium - which makes it very difficult to calculate. However, markets do this all the time - it's basically pricing the derivative of a derivative. It's like trading options of VIX.
http://sixfigureinvesting.com/2010/01/trading-vix-options/

Conclusion:
Given the boundary condition of "BitShares wants to be on the Gold Standard," it directly follows that 1 smartcoin > underlying asset and forced settlement must exist.

after 2 years of experimenting I think the best was the first and original rule..depending on demand for bitassets the bitusd could be at a discount or a premium..period..no expiration no SQP and shinny formulas..nothing..traders would short when bitasset was at premium and people would buy bitasset when in discount forcing the peg
Merchants accepting bitusd as a form of payment would know that at some point their bitasset would worth more or less but at least there would be liquidity from traders and the risk for not beeing able to convert all their bitasset in fiat would be minimal..Now after 2 years we have no liquidity, no traders in the DEX nothing..anyway..

I agree about SQP. Margin calls should only happen when they absolutely must (since it is destroying BTS when in undersupply), and therefore should be tied to whatever is the most liquid/accurate market values. SQP of 1 (fixed to price feed) makes most sense until internal markets are liquid enough.

"traders would short when bitasset was at premium and people would buy bitasset when in discount forcing the peg"
That did not work. The very first bitshares (version 0.1 or something like that)  tried this with no price feed or incentives to maintain peg, and price ran away very quickly. Why should I pay for something with no intrinsic value just because it has the label "USD" on it? I'll sell you 1000 maqifrsnwaUSD for 1000.

forced settlement is both the "gold standard" and the "federal reserve." It is the "gold standard" since you can always redeem your smartcoin for the equivalent value in something else. It is the "federal reserve" since it incentivizes the destruction of smartcoins when supply exceeds demand such that value is maintained. What (fiat) currency in the world exists without either a "gold standard" or a "federal reserve?"

Confession of a force-settler (before the GUI made it easy):
I will confess that I was a forced-settler before the GUI came out. I was a force-settler because I spent the time to learn the system inside and out in order to test some bots for both smartcoins and UIA (I believe UIA with properly regulated KYC is the growth market for BTS). My bots know nothing about the underlying assets, they only know the market rules: Sell high, buy low, never sell an asset for less than it can be settled for, if you can buy an asset for less than it can be settled then buy the assets and settle. This behavior is rational, generates profit, and keeps BitShares working efficiently - so it is a win-win for everyone. I feel it is a "service" to the community. I probably settled 1-2k CNY since it started. No other market presented settlement opportunities. I did not know why CNY presented this opportunity; I guessed there was a larger supply of "whales" trying to gain leverage any way they can in risky ways.

When I first heard of Transwiser, I was shocked at the business model (since it seemed like it would always lose money since 1 bitCNY> 1CNY) but also extremely impressed that they figured out to "beat the system" where I could not. The service was great for BTS and I was looking forward to them expanding to other currencies.

When I heard about the price feed data inaccuracy, at first I felt bad but then realized that the error was in some thinking smartcoins were something they were not. See: https://bitsharestalk.org/index.php/topic,20375.0/topicseen.html Even if the feed was incorrect, all businesses must know that the feed is all that matters and build their business model off of that (or work to correct the feed).

Now that we're almost through this "crisis," I think we're all stronger. Feeds are more accurate, people know what smartcoins are, and businesses know to research the system completely before building on top of it.

It's alike but not same. In 0.9 one can re-short and close earlier position so that she won't be settled, a lot safer for shorters. In 2.0 shorts come with more risks.

Thank you, good point.
I do agree there are more risks for shorts in 2.0, i've been floating the short's version of "forced settlement" to reduce those risks, a "forced buying" where a short can always buy from the fee pool at feed+ some percentage. Shorts will have more risk than longs, so bitCNY > CNY, but at least shorts would have a backstop in case of a short squeeze.

My point was, manipulating the market due to one actor not being able to get their pricing straight is strange to me.  I get why it is done and wish Transwiser wasn't being bled to death for Bitshares sake, but the point is... this thread kinda backs up his question.

I agree, and this is what I don't understand:
1) Force settlement was working perfectly as intended and has been described for 6+ months
2) Force settlement is pretty much the same situation as in 0.9.* (every position older than 30 days could be settled at feed and in priority of collateralization).
3) Inaccurate price feeds combined with a misunderstanding of the system lead to a mistake in a business model that cost a business money.

The solution should have been to fix the price feeds, better document the system, and correct the business model, not turn off a working and essential feature.

Why is forced settling essential? Since the blockchain cannot exchange 1 bitCNY for 1 real CNY in your bank account, it must give incentives to control supply such that 1 bitCNY is approximately equal to 1 real CNY. Forced settlement accomplishes that when there is an oversupply (profiting the forced settler), and short selling a premium accomplishes that when in undersupply (profitting the short seller, although I think there should be something else more explicitly helping the short seller). This is essential to understand by everyone involved in trading. You can make the argument to increase the fee to settle or to increase the difference between settlement price and feed (both are settings that can be adjusted by the committee), and I agree that those could be good solutions.

I want Transwiser to succeed, but the response of stopping all asset settlement seems to be the equivalent of "cutting off your nose to spite your face."
https://en.wikipedia.org/wiki/Cutting_off_the_nose_to_spite_the_face

they said, you should know these risks when you borrow, but many shorters' positions come from 0.9.*, no force settlement at that time, they are now rudely added the force settlement.

and, from any perspective, the force settlement rule do much more bad than good, it remove the incentive to short but benefit speculators most.

I know this rule is there, but I strongly suggest to disable it for BitCNY, it is not to change Bitshares for one business, but to change Bitshares to protect the users, to benefit a big sub-community.

0.9.* had essentially the same forced settlement rules as bitshares2.0. All positions older than 30 days old were available for sale at the feed, in order of collatoralization. just like in 2.0 where all positions are available for sale at feed in order of collateralization.

Incentives for the SmartCoin Seller

The next question becomes:  what are the incentives for the SmartCoin seller (liquidity provider).  As I look at the SILVER:BTS market right now I see a settlement price of 4289.5 and a latest price of 4619.  Assuming settlement price hasn’t changed since the latest price, the SmartCoin seller asked for a 7.69% premium to collateralize bts in the form of silver and sell it.  For simplicity, suppose this was for 1 ounce of silver.  That means the SmartCoin seller received 329.5 bts as compensation for providing liquidity in the silver market.  The buyer was willing to pay 329.5 bts to obtain 1 ounce of silver and the trade took place.  This premium is a function of market dynamics and fluctuates over time as buyers and sellers agree on prices and premium.  Premium is often charged for buyers of physical commodities and derivatives of physical commodities as outlined in the oil example above.  Rarely do buyers get a discount in these transactions except for some cases in futures contract backwardation.

Nice write up. Your description of shorting is great (assuming a liquid market). We don't have a liquid market yet, which is why the premium is so high.

I agree with jakub -- smartcoin technology/idea isn't the issue, it's system trust combined with low liquidity. Shorters are taking on huge risks (in a thin & low market cap platform), and longs don't seem too keen on paying the premium demanded. UIAs fix that by eliminating the need for shorters until market cap increases.