I am all for this proposal.

10% increase in shares. Of this 10%, make 2% immediately available. Release the other 8%, say in one year. Something like that. Even making 10% immediately available is not a big issue, as long as funds usage is 100% transparent.

Market-making does not change the peg, it only tightens the spread. We do not need more complicated rules muffling short supply. Already BitUSD prices are not made by shorts but by asks (those on the same side of the orderbook as shorts). Accept that for now BitAssets will trade at around 95% and have a ±5% trading range. This will improve over time.

What is needed most to reduce volatility:
Arbitrage possibilities between inside BitShares and outside. The internal BTSX/BitUSD market alone is too one-sided for market-making to be viable and that is because the bid side (those buying BitUSD) is too shallow, not the short side too deep.
I am thinking of a bot that trades BTSX/BitUSD inside and BTSX/CNY on btc38 or bter maintaining constant exposure to BTSX and fiat (ignoring fluctuations in the USD/CNY ratio), but setting one up with my programming skills will consume more time than I have.

What we need most to tighten the peg:
Utility and trust. Both cannot be gained by market engine rule re-design.

Inside mechanism->Market peg->Utility->Merchant adoption. Not the other way around.

This proposal is adding to a "big book of rules" to scare people off, and for little gain in my humble opinion.

It is completely unnecessary to attract BTSX-bulls as market-makers. It is stated that BTSX-bulls can't easily be market-makers because in the absence of being able to cost-effectively open shorts they are forced to be long BitUSD. But why can't they just buy extra BTSX with other funds to compensate for the exposure lost in buying BitUSD. Simple! They can be long BTSX elsewhere and earn spreads as a market-maker on BitUSD. No complicated market rules are necessary!

Second, market-making does not ensure the peg. A market-maker does not in fact care whether the market is at the peg or not. They make money from the spread. If the market price is not near the feed price, market-makers can still make money but make no contribution whatsoever to whether the market trades near the peg or not. It is flawed to believe market-makers will help pegging. They will simply follow the market liquidity, wherever it is. You may be able to set up a bot to make money by "trading around the peg", but it is only theoretical if the market is not already at the peg - you will never trade any volume if the market wants to be somewhere else.

Is there a strong reason why the numerous and simpler ideas already around about a floating incentive between shorts and longs are being rejected?

Agreed. In a one-side market as of now, the market makers would end up drawing all of their funds into BitUSD, if they ever dare to try 1:1 peg.

Quote from: gulu on September 17, 2014, 06:38:58 pm

I cannot agree more with Vitalik that BitUSD will either be 1 or 0. To extend the theory, BitUSD20 will either be 1 or infinity, providing that 20% of interest is higher than most shorts willing to pay.

A market-adjusted interest rate is the best tool I can think of so far. The goal is to let the market determine the right interest rate in an unmanned way, meaning there needs feedback from the market. The feedback would better not be based on price feed. Let us think about what the market would do when the interest rate is too high. And let that characteristic be the feedback.

Thing is fear is always a stronger driver than greed (that is why the market always falls faster than it rises). So imagine if the incentive was even there, increasing as bitUSD fell. Confidence would also fall inline with an increase of interest rates (fees at which shorts have to pay increase)... thus we could have a case where people are "willing" to take a cut for an extended period of time because they beleive the system is broken and place a higher value in the system returning them any funds rather than a lucrative interest rate. If fees tend towards infinity as price tends towards 0, it will never get to 0. But it may stay away from 1 for a long time, and that it what will help people realize that the peg is here to stay and works. You need those incidences which make people have that fear and greed and we come out just fine... thats what drives market confidence up through the roof. Over time the spread will narrow and confidence rises, the black swans will happen but confidence curve will have higher lows every time, subsequently higher btsx prices. In fact you can probably draw a parallel between the decrease of spreads and the increase in btsx long term. They should be inverse of each other. Don't try to artificially fix what naturally should occur.

Im not sure about bitUSD above 1 and what incentive you can place to bring it back to 1, maybe long's pay fees to shorts?

Who would pay the fees to short on bitusd20? Why would someone use this and pay more when bitusd would have the liqudity they need?

Yes, the longs would pay to the shorts when interest rate is negative. The key here is that the rate needs to be floating and self-adjustable.

I cannot agree more with Vitalik that BitUSD will either be 1 or 0. To extend the theory, BitUSD20 will either be 1 or infinity, providing that 20% of interest is higher than most shorts willing to pay.

A market-adjusted interest rate is the best tool I can think of so far. The goal is to let the market determine the right interest rate in an unmanned way, meaning there needs feedback from the market. The feedback would better not be based on price feed. Let us think about what the market would do when the interest rate is too high. And let that characteristic be the feedback.

Quote from: gulu on September 17, 2014, 05:23:03 pm

I do not think this proposal would achieve the goal of 1:1 peg.

The reason why there lacks liquidity is because the peg does not work well. The reason why the peg does not work well is because there are imbalanced demands from two sides of the market. Right now, there is not much incentive to hold BitCNY or BitUSD. Sometime in the future, there might be too much incentive to hold BTAs, if much forced coverage occurs, which makes the interest of holding BTAs high enough. That is to say, the demands from two sides of the market will fluctuate, and we need a self-adjustable tool to compensate the demand difference. There will be ALWAYS uneven demands from the two sides.

Under this proposal, even if the collateral multiple is raised, as a BTSX bull, I personally do not have the incentive to hold BitUSD/BitCNY and be a market maker. I don't care as much for the collateral as for how much interest I would receive for holding BTAs. Take BitCNY for example, why would I want to hold BitCNY while I can earn higher interest holding real CNY outside?

What is our goal? 1:1 peg for BTAs, right? Only when this occurs, will there be exchange agents that honors 1:1 exchange. Then merchants are willing to take BitUSD/BitCNY as payment, because they know they can exchange for real USD/CNY anytime.

Market makers want to earn the spread. This is their only goal. Simple as that. In a one-sided market, no one dares to be the market makers, because they would end up holding most of the BitUSD/BitCNY while no one else wants to hold. Higher/adjustable collateral would not solve the problem of one-sided market.

Open to discussion, and ready to be persuaded.

The purpose of this proposal is to address exactly what you said:  market makers shouldn't have to hold BitUSD *EVER* because who wants BitUSD in an experimental system unless they really believe in the peg *and* believe BTSX is currently overvalued *or* they are using BitUSD as a merchant who doesn't want volatility.

The early adopters, the bulls, are the ones who want the peg to work and they should be able to provide a peg and "make the market" without being stuck holding BitUSD.

So as a market maker if you "short" 100% of the BitUSD you sell... then you you buy BitUSD you go from being "leveraged BTSX" to just "BTSX".   You make the spread without exposure to USD.

There is demand for checking accounts that don't pay interest or "trading accounts" which don't pay interest as high as available elsewhere.  If there is a dollar crisis and banks start paying 50% interest then no one will want to hold USD for long (due to hyper-inflation) but that is an issue with the USD and not BTSX.

A little confused. Are you saying someone can short with less than X1 collateral? Could you give an example, please?

I do not think this proposal would achieve the goal of 1:1 peg.

The reason why there lacks liquidity is because the peg does not work well. The reason why the peg does not work well is because there are imbalanced demands from two sides of the market. Right now, there is not much incentive to hold BitCNY or BitUSD. Sometime in the future, there might be too much incentive to hold BTAs, if much forced coverage occurs, which makes the interest of holding BTAs high enough. That is to say, the demands from two sides of the market will fluctuate, and we need a self-adjustable tool to compensate the demand difference. There will be ALWAYS uneven demands from the two sides.

Under this proposal, even if the collateral multiple is raised, as a BTSX bull, I personally do not have the incentive to hold BitUSD/BitCNY and be a market maker. I don't care as much for the collateral as for how much interest I would receive for holding BTAs. Take BitCNY for example, why would I want to hold BitCNY while I can earn higher interest holding real CNY outside?

What is our goal? 1:1 peg for BTAs, right? Only when this occurs, will there be exchange agents that honors 1:1 exchange. Then merchants are willing to take BitUSD/BitCNY as payment, because they know they can exchange for real USD/CNY anytime.

Market makers want to earn the spread. This is their only goal. Simple as that. In a one-sided market, no one dares to be the market makers, because they would end up holding most of the BitUSD/BitCNY while no one else wants to hold. Higher/adjustable collateral would not solve the problem of one-sided market.

Open to discussion, and ready to be persuaded.