Great link and thank you.  I know this conversation gets brought up from time to time.  I'm looking to open up the conversation on whether economic abstraction is a good or bad thing for BitShares.  The ethereum community takes this issue seriously enough for Vitalik to respond to the idea^1.  He says the dev community is considering going so far as to mandate ether payments over tokens at the protocol level.  This would be tantamount to BitShares saying you can no longer pay for network fees in open.btc. 

Personally I like affording users the ability to pay in whatever asset they choose.  Although I do see a lot of advantages to setting the fee schedule in USD/CNY denomination.  Even if the default fee pay is set in USD, users can still retain the option to manually toggle over to BTS (which would now be variable against the USD rather the the other way around).  Does this make sense?

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1- https://www.reddit.com/r/ethtrader/comments/9ch5ls/the_collapse_of_eth_is_inevitable_techcrunch_can/e5av470/?utm_source=reddit-android

No, we haven't saw that the premium stimulate people to do more shorting, as high premium is always with BTS price down trend and high risk that play a much important role for a shorter to make decision.

Jerry,

Thank you for your thoughtful comments above.  You've provided clarity into your rationale for the negative feedback price feed idea.  I support your effort for it and am eager to see what the future brings.

Clearly you are right that the premium remains, so the incentive mechanisms are not functioning as we intend.  I think what pc is missing is the interplay between the cost of capital, short squeeze ratio, and the equivalency between the premium and the risk of stakeholding. 

1) Yes it may be the case that a bitUSD trading for 1.02 should incentivize short sellers.  In reality it takes a large amount of capital in BTS to synthesize enough bitUSD to sell down to par (this is expensive and hard to justify from the traders perspective). 
2) Combine this with the additional risk placed by the short squeeze ratio which in effect creates a 'net-negative' force on the supply of bitUSD.  As margin calls accumulate with a squeeze ratio above 1 what you see is more and more bts collateralizing less bitUSD (same for any asset).  This downward spiral in outstanding bitUSD exacerbates the supply side problem.
3) The biggest problem with assuming the premium will incentivize sellers to help market reach equilibrium is that with the structural issues still in place that risk (premium) simply transfers to the new short.  True arbitrage is hard to find - and it's definitely not likely in the most liquid markets on BitShares.

A Microeconomic Introduction to Market-Pegged Assets on BitShares
Active Committee Member: JohnR

For the economic analysis skip to section 2.

1. My Background with BitShares and the explanation for this post.
When I first discovered BitShares and its decentralized exchange I was only moderately interested.  When I discovered that its core asset: BTS functions as collateral for dynamic stable coins I became addicted to learning how it worked.  I am interested in understanding how the operate and their infinite applications.  As a nice bonus I started to realize the cryptoasset itself (BTS) had a strong price sensitivity to the usage of smartcoins.  In simple terms, every dollar demanded in smartcoins puts a lot of demand pressure on BTS itself (this means price will have a tendency to increase).  Not only is this good for holders looking to see appreciation, but I appreciate the mathematical elegance of such a relationship.  When I was a BitShares novice it seemed simple: clearly the demand for USD is huge.  There are billions of them floating around the world.  Also people in the crypto world seemed to be obsessed with stable coins and the front runner at the time: Tether, was facing a lot of scrutiny for being unbacked.  I felt that it was only a matter of time before the market realized this and BTS went to the moon.  The truth, as I am closer to understanding now, is more mixed and definitely more interesting.

1.0.  A special thanks to bitcrab for showing me the scalability risks associated with a loose peg to the USD (exchanges will think critically of bitUSD if it consistently trades above one USD).  And additional thanks to xeroc and clockwork for refining my understanding of smart-coin technical operations.

1.1 Background: bitUSD
One of the most practical use cases for BitShares are market-pegged assets.  Two of the most practical MPAs are bitCNY (Chinese Yuan) and bitUSD (United States Dollar).  These are cryptoassets which attempt to track the real-world value of their nominal counterparts.  The first challenge is quite obvious: the real-world currencies are backed by nothing but the ‘full faith and credit of each sovereign nation (or at least the respective central banks thereof).  The crypto-corollaries are backed by our native asset: BTS.  Currently one bitUSD mandates 1.75 x (n BTS = 1 USD).

Reference image 1: bitUSD https://i.imgur.com/HcyqBKf.png

BitUSD has value because it is collateralized by BTS.  Users can exchange bitUSD for any cryptoasset on the BitShares exchange.  They can post limit orders for whatever exchange rate they choose.  But where bitUSD technically gets its value, the backstop in an illiquid market, is from the settlement feature which allows a holder to exchange bitUSD for 100% of the feed price (after a 24 hour waiting grace period). 

2: Stimulus: bitUSD market price is “inefficient”.

Reference image 2: https://i.imgur.com/CrXsoTR.png . -  Notice something? 

Why does bitUSD trade at a premium for fiat USD?  Anything above or below that one USD mark is technically ‘inefficient’.

2.1 Explanation 1: Risk Premium
So now we know what the holder of bitUSD gets for holding, but what does the other side of the equation get out of this?  The user who created that bitUSD and puts it into the market (the bitUSD ‘short’) has a future liability.  He sacrifices the free use of some BTS for the present right to exchange the bitUSD.  Now the short would of course prefer that bitUSD never gets settled – an unanticipated forced swap may come at an inconvenient time.  Yet this risk is ever-present.  In financial theory, market participants are compensated for taking on risk.  Investors in highly distressed companies negotiate for higher premiums or returns.  In BitShares this demand for premium may take the form of an unwillingness to sell the bitUSD at par value – a reservation price of 1.02 or 1.03 may satisfy the short’s incurred risk for keeping the position.

2.2 Explanation 2: Cost of Capital
There is only one way for bitUSD shorts to minimize the risk of being called on a settlement: maintaining a high collateral ratio.  As the network currently functions, a call for settlement exchanges with the least collateralized position.  It is entirely possible that the least collateralized position may in fact be 2x collateralized.  This leads to the second potential explanation for a higher bitUSD price.  Notice in the first chart that perfect collateralization of BitUSD with BTS is 1:1.  Anything above this amount is categorized as ‘overcollateralization’.  Many critics of conventional private banking focus on the fractional reserve lending system: wherein a single bank will take in one dollar of deposits then proceed to issue ten dollars worth of loans on the same dollar.  BitUSD is the opposite of this: for one dollar worth of ‘deposits’ with the network, the network will issue ~ .5 USD worth of bitUSD (the true number depends on the average collateral ratio for all bitUSD but this simplification is sufficient to prove the point).  While the conventional monetary system is awash with digital dollars, the BitShares network suffers a lack of supply. 

Similar to the risk premium mentioned above, bitUSD shorts may seek to be compensated for the excess capital sitting idly in the position.  That individual could deploy his capital in various activities more productive than earning zero percent return.  If he has to put up so much capital it is rational to expect him to be reluctant to sell for close to par value (1 usd).  Here the motivation is slightly different than the risk premium, but the result is the same: a reluctance to sell one bitUSD for one usd. 


3 Supply/Demand/Equilibrium Models

A note.  Typically the models below are used to analyze discrete shifts in demand or supply.  I will bend the rules here.  I am not examining the impact of a shift in demand/supply for BitShares.  Rather I am seeking to prove that the reason bitUSD has shifted from its equilibrium price of 1 USD is driven by supply side forces rather than demand side forces.

Perfect Harmony a.k.a. Equilibrium.  When the quantity demanded equals the quantity supplied the price and quantity are considered “efficient”.

Reference image 3: https://i.imgur.com/jhKnkoE.png

This is a theoretical situation that serves as a starting point for modeling the outcome we seek to achieve. 

When a good or service is undersupplied on the market, prices will increase and quantities exchanged at the market price will decrease.  The distinctive characteristic of an under-supply is that quantity exchanged is depressed from equilibrium.

When a good or service is overdemanded on the market, prices will increase and quantities exchanged at the market price will increase.  The distinctive characteristic of an over-demand is that a higher quantity are exchanged at the market price than would be exchanged at equilibrium.

Reference image 4: https://i.imgur.com/1kXua58.png

Reference image 5: https://i.imgur.com/GqdrU9l.png

4 Model Conclusion. 

Without perfect information we cannot know precisely what is causing the inefficiency (increase in demand or decrease in optimal supply).  But the key is to notice the difference in quantity; this supports a supply side problem rather than a demand side problem.  If bitUSD were facing a lack of demand we would expect to see a lower price and not a higher price.  More often than not, bitUSD trades above it’s par value.  Further I believe there is a sub-optimal amount of circulating bitUSD (compare Tether to bitUSD/CNY) and the inference is that the network faces a supply-side problem rather than a demand side.

The value in this exercise is to identify the most appropriate method for addressing a problem.  Supply side problems should be solved with supply side solutions.  Demand side problems should be addressed with demand side solutions.  Observing the charts above should give some intuition why mismatching problem and solution type will further exacerbate price/quantity dislocations.

5. Exploring solutions with members

Does the above analysis make sense to you?  We can concentrate our collective efforts on supply side solutions if so.

Thank you for the comment.  I had some recent conversations that enlightened me about the community demand for bitCNY and bitUSD to track their fiat counterparts more closely.  The committee is hard at work considering how to make this a reality.

     


              I hope you can work hard for 1BITCNY=1cny.    and   work hard for  1bitusd=1usd

Kevin, I share this concern.

I have decided to remove my support for the Committee Controlled Open Market Operations WP. Even though the funds are used to support the bitCNY and bitUSD markets I feel they absorb way too much of the daily BTS funding.

I fear that this WP will hamper further funding of WPs designed to benefit the community.

Additionally, I'm concerned of a potential conflict of interest with the new SPRING Fund managed by bitcrab, but it's still too early to say for sure just yet. It just seems like this new SPRING Fund is being indirectly supported by the RP through the Open Market Operations WP. The Open Market WP adds buying pressure and stability to the bitCNY market then the SPRING Fund profits from that buying pressure.

Am I crazy or does this make any sense?

If you have a different point of view then please share it with me.

I do remember when the committee open market proposal came up for election and was passed without a lot of discussion or conceptual support.  I appreciate liquidity on bitUSD/CNY as much as the next guy but I also wonder at what cost this comes.

People I respect do support this operation; including presently on the committee.  Due to that I generically support this operation's continued existence but think it's critical to get some more transparency / discussion from the folks calling the shots here.  Have you every spoken with bitcrab?

I'm glad to see all the community engagement regarding this project.  Clearly there are a lot of hardworking and intelligent people on this platform and it's starting to show with the new blood coming to worker proposals.  I agree we do have a great opportunity here to create a positive feedback loop.  Valuable and productive workers --> network expansion to greater audience --> fine tuning fee structure and earning more for community treasury --> even more productive workers.

I look forward to seeing this particular proposal live on chain and supported.  Not to mention Digital Lucifer getting the recognition and validation for all of his hard work.

I agree with Digital Lucifer here.  It seems like there were some wires crossed and appropriate conversation/formal requests were not made.  I think both sides have some information to share with the community on the matter.  There are many critical projects coming to release/launch as we speak and no one should shy away from controversy on any matter whatsoever.

I will say from a legal perspective, the analysis for Hero as security (at least in the USA) is not cut-and-dry.  We should, of course, err on the side of caution with these things and anything pertaining to the formal association with BitShares formal executive committee.  We can make an articulate and persuasive argument for Hero as not a security but then again depending on the jurisdiction, regulators may simply reach the conclusion they wish.

I think on this matter, both sides can shed some light on their position.  I look forward to hearing Xeroc's opinion as well.  Few are as long veterans on these matters as Stan and Fabian.