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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

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: . -  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:

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:

Reference image 5:

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.

Stakeholder Proposals / Re: Witness Report for for-one
« on: August 29, 2018, 03:30:40 am »
Witnesses hold great power over the health of the BitShares network.  It seems you have the resources to bring value on this front.  As mentioned above, perhaps some blocks produced in a testnet environment (and accepting feedback and peer-review) will go a long way towards improving your candidacy for witness.


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

Thank you all for the amazing support.  At the moment I am out of the USA and will be more available after the upcoming week.  I look forward to solidifying relationships with the global BTS community and constantly learning in order to serve all stakeholders effectively.

Kind regards,

Stakeholder Proposals / Re: [Proxy] kimchi-king - Journal
« on: August 01, 2018, 03:53:16 pm »
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?

As an otherwise well-rounded individual, I do not know a ton about programming.  But I am immediately drawn to this phrase in OP

   - instead of developing/fixing existing React based UI, did complete from scratch build of new library for BitShares under the Vue Framework from original

It was not a fork, it was a fresh new Framework and library to be used by other developers, given to the blockchain as open-source

This is not just a building app on existing long-lasting tools but enabling new framework to utilize bitshares and enable more developers to join the eco-system. If nothing, it should be forked to BitShares, to properly advertise Vue support we have for our technology.


This is an excellent example of the value proposition of free (open) software.  Permission-less creativity.  BitShares deserves constant updates on the back-end technology front.  I also believe BTS does not need a UI makeover as much as it needs more options.  The fact that most service providers / gateways on BitShares use a clone of the original UI shows the lack of creativity that can set in when we, as a community, don't voice our intents to keep things fresh.

These mock-ups look very nice I must admit - although the aesthetics are up to the individual user.  What I can say for sure is that mobile usage is critical.  For myself, I would not be that interested in entering limit orders on a mobile device.  That being said I can see mobile is many people's only interaction with the DEX.  And I use Trusty's android wallet regularly - so I can vouch for the team's product delivery.  I look forward to this proposal's success and a prosperous partnership between BTS and the Trusty team.

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.

This infrastructure production has been in the works for a few months now and DL has put in a lot of work getting things just right.  All while operating in a transparent manner and soliciting feedback from community and node admins along the way.

I see this as a very potent upgrade/addition to the BitShares network that will support the continued expansion of the DAC into more territories and users.  Investment in infrastructure aids every other initiative we discuss here.  I have full confidence in DL's ability to manage this architecture in the most professional manner.

To a more resilient distributed network and BitShares' future prosperity.

General Discussion / Re: Internalizing the Hero
« on: July 22, 2018, 03:11:19 am »
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.

I am sure the other committee members, proxies, and large stakeholders who have not voiced an opinion already are beyond busy carrying out their efforts for the general welfare of the blockchain and all constituents. 

That being said I do sincerely hope to engage more people in an honest discussion about the matters discussed already in this thread as well as my continued earnest candidacy for committee membership.

We are entering a phase of legitimacy for distributed enterprise (including BitShares) and I am encouraged by the professionalism being displayed by key community members already.  And I know the future holds more promise of the same.


As far as trading fees are concerned. Network fees for trading are WAY too low. Market fees (on gateway assets as well as bitAssets) are too high.

I agree with this completely.  The main point I'm trying to get across is that bts:bitUSD & bts:bitCNY are by FAR the most actively traded pairs.  If we want to a have an impact we should focus on variable/marginal fees there.  Since there is already a market fee, already within committee (community) control it seems intuitive to me to start there.  Note the network fee is a flat fee, and since the overwhelming majority of exchange trading pairs have low order creation I'm not sure it will have a huge impact.  Clockwork has a lot of experience here (not to mention put a lot of energy/thought into the matter) so I do support raising network fees while we consider how best to use bitasset market fees.  I can understand not wanting to formally apply some of the current market fee to network integrity (reserve pool).  I'm indifferent between that and simply raising network fees/lowering bitasset fees. 

I do not want to subsidize private gateways either.  I don't immediately see how charging low network fees is bailing out private gateways.  They are basically CEXs leveraging the BTS infrastructure.  In that sense I do see your point - although 'free-riding' is probably the more accurate term.  Probably a longer conversation about how we can better align the incentives there.

One cool thing about increasing the network's cut on transaction fees is .... wait for it ... the users are not affected. They pay 100% anyways. The only ones impacted are basically
* openledger, who claimed that referral fees are not their business
* cryptobridge, who seems to make money by listing fees and trading
* other frontends that may come with their own assets just like OL and CB
* bitshares europe, which sofar only has referral fees as income (as it's owner, I would rather see BitShares grow than hold back rational business decisions out of pure and stupid greed)

I am glad we all seem to agree on this.  A more equitable split between the network and the referrer will make all of our efforts more effective.

Xeroc I think 50/50 makes sense as a starting point.  That would more than double the income from network fees and referrers still retain a strong incentive to splash their ref links and bring on new users.

Your point of concern about trading fees I think is on everyone's mind here.  That's why I suggest leveraging some of the current asset variable fee towards maintaining the network.  I understand the original intent of the asset fee was to increase liquidity on those two asset in a neutral way, managed by committee.  That's a good objective.  But is it worth 10x the capital flow than accrues to the network?  Put more simply: is committee offered liquidity on two bitassets worth ten times more than all witness and worker proposal pay which power the entire platform?  To me it is clearly not worth the discrepancy.

Paliboy, are you suggesting unwinding prior accounts or making account names renewable on a going-forward basis?


The equivalent result could be had by apportioning some of the 0.1% variable fee from committee trading to reserve pool.  I agree that network fees are very low.  At the same time I would like to see trading across many assets and not concentrated in a few UIA gateways.  My concern is crowding out some of the more obscure/low volume tokens when we are already charging more than 10x the network fee on a couple trading pairs.  Does that make sense?

If you disagree, or think that's too complex I understand.  It sits a little strange with me to debate raising network fees when net fees are already rather high on our most prized trading pairs.

Regarding 2, yes I know some accounts have a lot at stake there so I would like to see a community discussion.

I would like to build on the solid research already published by Clockwork ( and Abit (

I was interested with Clockwork’s observation that the BitShares reserve pool is running at a chronic deficit.  So far as the community desires fiscal balance and sustainability, it’s clear we must decrease expenses (witness/worker proposals) or increase income (revenue from fees).  Decreasing expenses significantly is short-sighted because BitShares has a lot of growth ahead and doing so would be akin to cutting the legs from under ourselves.  So naturally we should have a conversation about increasing network operations and or the fees associated with those operations.

I am against raising networks across the board before considering how the bitUSD/CNY variable fee can be used to support the health of the network (witness/worker proposals).  As shown below, fees are already rather high, even by centralized exchange standards.  For some of the more popular trading pairs, users face fees over 0.3% in total.  With only a small fraction of that actually going to support the core infrastructure of the platform.

Fees in context:
Hypothetical fees incurred on 100 bitUSD round-trip trade for BTC and back         
              BTS Network Fee  bitUSD Variable Fee     Private Gateway Fee
OpenLedger   0.01156           $0.10                  $0.20
GDEX            0.01156           $0.10                  $0.10
RuDex           0.01156           $0.10                  $0.05

The private gateway fees are off the table for this discussion.  What is immediately noticeable is how much greater the bitUSD variable fee is than the network fee.  Of course, the difference is less on smaller orders and greater on larger orders.  Still, considering bitUSD/CNY have shown robust trading activity this is a data point that the market can bear significantly higher fees than the flat network fee.

When the bitUSD/bitCNY variable fees were originally introduced I was against them.  Notwithstanding the results of the liquidity market operations (the explicit intention of the additional fee) I have come around to realize a much bigger point.  The demand for trading bitUSD has proven rather inelastic with respect to the transaction fees. 

Elasticity is a short-hand economics term meaning how much market participants will alter their behavior in response to a given change.  E.g. alcohol and cigarette taxes are considered the most efficient taxes because they do not alter behavior significantly – people who smoke will likely continue to smoke whether the cost of a pack amounts to two USD or three.  The upshot here is that bitUSD is a unique token and the market demand for trading remains robust despite the increased fee.  If we want to increase the reserve pool, we should consider tapping some of the current fees levied on bitUSD/CNY or increasing network fees slightly on those assets alone.

A second observation is the 20/80% referral vesting mechanism.  Even a strong increase in network activity/revenue will have a muted effect so long as only 1/5 of the revenues are actually returning to the reserve pool.  I understand the original reasoning for such lucrative referral structures.  I also think it’s worth having a discussion whether this structure has yielded the results the community feels is worthy of such a high price to pay.  This is the most immediate way to increase the force multiplier of network activity.  At the same time I recognize this may be a sensitive topic because people may have planned according to this current 20/80 program.

So my calls for discussion are:
1) What do you think of augmenting the fee structure on bitCNY/USD to increase the flow to the reserve pool from the trading of those assets? 
2) What do you think of slightly modifying the ratio between referrer vesting and reserve pool income?

Thank you abit.  That means a great deal coming from such a public and respected individual as yourself.

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