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Messages - Agent86

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31
Monsterer,

I don't think you are crazy for thinking along these lines, nor do I think it is in opposition to the utility of crypto.
I proposed a similar concept here:  https://bitsharestalk.org/index.php?topic=5504.0 and added some permutations https://bitsharestalk.org/index.php?topic=5504.msg97744#msg97744

Basically, my thought was you allow an option for an account so that any transaction out of that account could be "burned" within a specified time frame (rather than reversible) and those funds must wait to fully "clear" (similar to bank transactions.)

With reversible transactions, if a hacker got your keys they could set up a script so even if you reverse the transaction to yourself they just keep sending it to themselves again and reverse any transactions you send to anyone else... so perhaps the result is pretty similar to just burning it and burning offers no incentive to the reverser to do it maliciously.  Even with burning the hacker gets nothing and wasted his time (therefore much less likely to bother in the first place) and maybe the community who already has the power to vote for dilution to create new funds could reimburse you because you can prove funds were burned so the community breaks even.  Maybe you could make it more complex with an offline master key that reverses transactions or something.  I haven't thought about it in awhile but I think these ideas are worth exploring.

32
You know there's no penalty for just letting it expire right?

Or is there?

1) We assume a trusted price feed exists
2) We assume an asset with no counter party and sufficient market liquidity at a market established price (Bitcoin, BTS)
3) Two parties enter a "contract for difference" on the price feed, the short-side puts up 2x and the long side puts up 1x for a total of 3x held as collateral for issuance of BitUSD
4) The short may cover (burn BitUSD) at any time to gain access to the 3x collateral.
5) The short is forced to cover after 30 days by accepting any and all orders at or above the price feed.
6) The short is forced to cover if the price feed results in the value of collateral being equal to 2x or less the value of the BitUSD.
7) Shorts can only execute at the price feed (no selling BitUSD to 0)
8) Margin calls only happen at the price feed (no manipulating the internal market to cause a short squeeze)
9) Shorts are matched prioritized by interest rate they are willing to pay.

If the expiring short is large enough, will it not force to buy above the price feed?

When Dan says "above the price feed"  I think he means below the price feed (He views the market inverse of most people).  As far as I know, right now expiring shorts just form a buy wall at the feed.  Regardless, I think it will be changed so that shorts really can be forced to cover above the price feed which I think is better.

33
The big difference between BTS and MMC is approval voting.  Real time approval voting on the blockchain solves the "group trap" problem and allows blockchains to hire workers (or use delegates as workers) that are motivated to act in the best interest of the system as a whole instead of a smaller group of supporters.  Without this realization, "Self-funding DACs" and blockchain hiring doesn't work.   Without approval voting MMC hadn't solved the problem, which is why it was a disaster.

I still don't really agree with how we are doing things though and I would much rather see us separate workers from delegates and require over 50% approval (of "active stake") for workers to be elected… For instance, you could say that any stake that isn't voting for at least one delegate isn't considered active for the purpose of worker elections (voting for at least one delegate would be considered a basic shareholder duty because delegates are required for the network to function).  You can say stake that hasn't moved in a year isn't active and people could also voluntarily abstain.  I think a 50% threshold approval of active stake is achievable and worth achieving.

34

Maybe I am off base but the exchange is issuing IOU's based on market pegged assets it receives.

Example

I send 100bitUSD to XYZ exchange.
XYZ Issues me XYZUSD its very own UIA.
XYZ likes to use its own UIA for the reasons stated above.
I go about trading XYZUSD on the XYZ's external exchange
The price of BTS suddenly and sharply falls
XYZ has the 100bitUSD I traded to them for their XYZUSD so that I can trade on their external exchange.


"A BitShares gateway does the exact same process, the only difference is that the database that tracks the users’ deposits to the exchange is the BitSharesBiItShares blockchain.   When a user transfers fiat dollars or bitcoin to a gateway, the gateway responds by tranIsferring an IOU asset issued by the gateway back to the user.    When the user returns the IOU to the gateway the gateway sends fiat dollars or bitcoin back to the user."

If I understand the above correctly XYZ is holding bit(fill in the blank) MPA's and issuing their UIA's. The exchange has more control because it can stop trading or choose not to honor their UIA but they are still exposed because they have the bit(fill in the blank).

So my question I guess becomes How sudden of a fall and how long of a drop?
The exchange/gateway is taking real USD (not bitUSD) and then issuing their "IOU USD" UIAs.

35
General Discussion / Re: You guys don't understand devshares.
« on: December 26, 2014, 09:29:33 pm »
Damage control is never fun and not as effective as avoiding the problems in the first place.  But I think the biggest danger right now is people just feel like they are not being heard; they feel like the devs can't seem to understand where they are coming from or don't care.  Some might feel disrespected.  This is a danger because that is when people give up on arguing and just sell (arguing is a lot of work).

So with that in mind, I think making a change now will be a net positive and shows a willingness to listen.  I think even considering that 100% BTS is a change of course for Devshares distribution, it would still have a lot of support.  I think there are other distributions that would have been fine if it was the original plan but I think at this point I would go for simplicity.

From an admittedly biased perspective:

* BTS source includes a ton of functionality that must be pruned out by 3rd parties
* BTS includes functionality that complicates sharedrops (market orders cannot currently be accounted for in a sharedrop).
* Do we want BTS devs spending time on these things, which have no direct benefit for BTS but are rather beneficial for 3rd parties (some of which will compete with BTS)?
* If you are arguing against hasty decision making and lack of consensus building, should we change the current longstanding consensus in favor of a group of people who have miscontsrued & misunderstood Dan's posts to create the FUD in this thread? Or are we better off not introducing yet another potentially harmful change, respecting the originally conveyed message and those who understood it correctly, and avoiding yet another another fallout?
* PTS is not in competition with BTS and serves an entirely different demographic. If Ethereum adopts DPoS they will most certainly not sharedrop to BTS. PTS would be an easier sell in this case.
* Separate nonoverlapping functions here: modular design principles should be used.

There are a million reasons why the social consensus should not be tampered with. A healthy PTS is a net benefit for DPoS and for BTS. Any claims to the contrary are just not supported by any historical precedent.
Dropping 100% of Devshares (BTS test network) onto BTS doesn't violate any interpretation of the "social consensus" that I ever had.  It was said very early on that new banking/exchange type chains might drop to BTSX rather than AGS/PTS and just honor them because they had a stake in BTSX.

36
General Discussion / Re: You guys don't understand devshares.
« on: December 26, 2014, 08:19:51 pm »

I certainly recognize that I did blame others for their response and that in general I have no one to blame but myself.   I appreciate that you recognize our INTENT is do do well by all and that we cannot possibly know others expect. 

One thing I have learned is that changing anything is bad and I am loath to do it even if the original decision was a mistake.   

I would much rather not be the one to make decisions because it is easy to critique but difficult to decide.   I also don't want to let the squeaky wheel rule the day just because they complain the loudest.   So it is a real challenge to determine where the AGGREGATE PUBLIC OPINION falls. 

If changing to a 100% BTS allocation would make everyone happy it would be a no brainer.  I am not in this to pick favorites. 

So is there any objection to a 100% BTS allocation, if so please speak up now.

I am actually thinking about allocating 10% to nullstreet leaders and 10% to Chinese community leaders and 10% to core developers and 10% AGS 10% PTS and 50% to BTS.   This way the key players all have something to work with.

My only fear in changing anything is that it will just result in a DIFFERENT PR mess.    Can you all prove to me that the PR would be better by changing it now than by letting it ride?

My prediction is that if we were to exclude AGS / PTS all together that many people will create just as much negative PR.
Damage control is never fun and not as effective as avoiding the problems in the first place.  But I think the biggest danger right now is people just feel like they are not being heard; they feel like the devs can't seem to understand where they are coming from or don't care.  Some might feel disrespected.  This is a danger because that is when people give up on arguing and just sell (arguing is a lot of work).

So with that in mind, I think making a change now will be a net positive and shows a willingness to listen.  I think even considering that 100% BTS is a change of course for Devshares distribution, it would still have a lot of support.  I think there are other distributions that would have been fine if it was the original plan but I think at this point I would go for simplicity.

37
General Discussion / Re: PTS - the insane gift that keeps on giving!
« on: December 24, 2014, 01:43:02 am »
You just hit on maybe the Very Best Reason (that is, if I had actually been the one to think of it.  :) )

Every time a sharedrop on PTS happens it jumps significantly higher on coinmarketcap.
Big assets with lots of market cap inertia can't do that.

It's like running up a flag on the CMC front page that something has been announced.
Free advertising - everyone on CMC checks to see what new DAC is being born.
And the developer who made the announcement has a chance to invest early and benefit from the bounce as a small vote of confidence - if she has a good case.

There is no better way in the world for her to get such an effect.
And that is probably why smart developers will consider PTS as a useful tool for a long time to come.

Disclaimer:  This is not a promotion of PTS.  This is me contributing to further development of BitShares Sharedrop Theory.    Gotta call it like I see it.
I don't know if I'm following this new "sharedrop theory" Stan.  I think the "advertisement" from a jump in PTS price is short-lived and devs are allowed to give themselves stake if they want, rather than buying into PTS and then sharedropping on PTS.

Reviewing sharedrop theory:

Allocations are not selected to be "fair", they are selected to attract the greatest amount of interest possible to a new offering.

You get share-dropped on in proportion to the perceived value of the demographic your coin represents.  It's the developer's choice.  It would be just as legitimate to do 10/10/10/10/10/10...10 and attract 10 diverse demographics, seven of which "deserve" nothing.

The simplest logic is to treat all three groups the same because they overlap anyway. This minimizes (obviously it does not eliminate) arguments about percentages.  All three groups get more than they "deserve".  :)

If you still want to argue, argue why your favorite demographic would give a bigger boost to the new DAC if its share of that DAC was somehow just a bit bigger.
I also have to disagree about "Allocations are not selected to be "fair""

I think fairness and/or perceived fairness are very important.  I think we need to do a better job of clearly communicating the logic behind these things, otherwise no one will take any sort of social consensus seriously.

If this was the Devshares distribution thought to "minimize arguing" then I think we are not paying close enough attention.  This push-back was not a surprise to me and I made the exact same arguments against a big AGS/PTS drop that matt608 has been making and I said that this would be the reaction.  I just think it's being "tone-deaf" to how people interpret things or sloppy communication.  I also think these decisions related to allocations seem to be "spur of the moment" when they are reasonably important decisions and can have a big affect on how people feel about a project.

38
Stakeholder Proposals / Re: Delegate Proposal: elmato
« on: December 20, 2014, 05:08:23 pm »
Thanks for your work!!  Let us know when your delegate is registered so I can vote for you.

39
General Discussion / Re: [Documents] Whitepapers & Broschures
« on: December 12, 2014, 07:18:31 pm »
Hey Cass, I updated the paper on github.  current version:

BitShares Market Pegged Assets

BitShares market pegged assets are a new type of freely traded digital asset whose value is meant to track the value of a conventional asset such as the U.S. dollar or gold.  BitShares uses an advanced decentralized consensus ledger that takes some cues from Bitcoin.  While Bitcoin has demonstrated many useful properties as a currency, its price volatility makes it risky to hold and difficult to use for everyday pricing and payments.  A currency with the properties and advantages of Bitcoin that maintains price parity with a globally adopted currency such as the US dollar has high utility for convenient and censorship resistant commerce.  This paper will explain how market pegged assets including "bitUSD" (intended to track the value of the US dollar) achieve price parity while minimizing risk to holders.

Price Stability

Bitcoin and similar crypto-currencies track transferrable digital tokens secured by private cryptographic keys over a decentralized computer network.  A consensus mechanism ensures tokens are not duplicated and all participants agree on the state of the system without need for a central validating authority.  This consensus is recorded on a decentralized shared ledger called a "block chain".  These systems have been found to enable value storage and exchange over the internet beyond the control or censorship of a centralized party.  Demand for this utility has driven up the price of crypto-currencies.  BitShares uses an analogous core token simply called BitShares that is traded with the abbreviation "BTS" on well-known crypto-currency exchanges.  Like Bitcoin, the exchange rate between BTS and major currencies remains volatile.

A BitShares market pegged asset can be viewed as a contract between an asset buyer seeking price stability and a "short seller" seeking greater exposure to BTS price movement.  The open source BitShares software program implements a decentralized marketplace for market pegged assets where all transactions are recorded on the shared block chain ledger and the software enforces the market rules.  This block chain based marketplace is referred to as the "internal market" to distinguish from "external markets" such as websites that facilitate the exchange of government issued currencies with crypto-currency.  A BTS holder may use her BTS to place a buy order on this internal market for her asset of choice.  Market pegged assets are created on the BitShares block chain when a buyer and short seller of an asset are matched at an agreed price.  In exchange for the BTS received from the asset buyer the short seller takes on the obligation of buying back the same quantity of assets in the future from the market.  BTS paid by the asset buyer and additional BTS contributed by the short seller are sequestered as "collateral".   This collateral is only returned to the short seller when assets are purchased back from the market and effectively destroyed to fulfill the contract.  This is referred to as "covering a short."  If the value of the collateral relative to the current price of the market pegged asset falls below a certain margin of safety the assets can be automatically repurchased from the market before collateral becomes insufficient.  These rules create systemic demand for market pegged assets while allowing them to remain fungible.

The rules considered thus far do not specifically restrict the internal exchange rate between bitUSD and BTS in a way that ensures it will track the external exchange rate between USD and BTS.  A first step toward this goal is to get reliable information about the external exchange rate into the internal market algorithm.  It is not immediately obvious how this is accomplished in a way that is resistant to control and manipulation by a central party.  Thankfully, the consensus mechanism used for BitShares utilizes a carefully considered real-time stake-weighted approval voting system to elect "delegates" who are motivated to act in the best interest of the system and its stakeholders.  These delegates run computers on the BitShares network that check and commit broadcasted transactions to the block chain ledger.  The trusted delegates can also be used to input external exchange rates into the block chain so that the software algorithm can incorporate this information into the market rules.  This external exchange rate information is called a "price feed."  Delegates typically combine price information from multiple sources, such as external exchanges, to generate a price feed and update it regularly.  The system takes a median of all price feeds so that manipulation of the price information would be very difficult by any single delegate or party without considerable collusion.  The price feed and other delegate behavior is publically auditable and delegates may be voted out by BTS holders at any time.

It is important to consider how the price feed can be used to regulate the internal market.  Both BTS and market pegged assets are freely transferrable tokens.  If the internal market restricted trading to occur only at the specific exchange rate determined by the median price feed, it would simply encourage anyone willing to trade at a different price to do so outside the system, such as on an external exchange.  However, if we consider that short selling is the mechanism by which new market pegged assets are created, then selectively restricting short selling controls the conditions under which supply is created.  Rather than allow short sellers to sell at any price, short sellers will only execute at a price above the median price feed.  This prevents short sellers from devaluing market pegged assets as new assets are only created when the market demand pushes the price equal to or above parity. 

The price feed functions to regulate creation and destruction of market pegged assets in a way that pushes the market price toward parity.  When a short seller buys back bitUSD and covers their position they are taking bitUSD out of circulation and reducing the total supply.  In fact, the current BitShares market rules force short sellers to cover their position within 30 days of opening the position.  This means that the full amount of outstanding bitUSD must be purchased off the market every 30 days.  Market pegged asset holders have no requirement to sell and therefore short sellers covering their positions are eventually forced to purchase from newly opened short positions at or above the exchange rate.   This is effectively a guarantee to any bitUSD holder that they can sell bitUSD for the dollar equivalent of BTS (determined by price feed) within any 30 day period.

The motivation to participate in the system is different for short sellers and market pegged asset buyers.  Market pegged asset holders are typically looking for predictable value coupled with the properties of a crypto-currency.  Short sellers are typically bullish on the price of BTS and wish to capitalize on increased exposure to market movement relative to the market pegged asset.  If the market value of BTS rises with respect to the asset, the short seller can buy back the asset for significantly less BTS and profit accordingly.  If BTS value falls in relation to the market pegged asset, the short seller faces a greater loss than if they were to have simply held BTS.  Ultimately a short seller may face a "margin call" where his collateral is automatically used repay the obligation.  A margin call is triggered in the current BitShares system whenever collateral contains less than 1.5 times the amount of BTS required to cover the obligation.  The system also charges an additional 5% fee to any short seller subject to a margin call and this fee is intended to motivate short sellers to maintain sufficient collateral.

Order Matching

Market orders and other signed transactions on the BitShares block chain are grouped into 10 second blocks by delegates.  When buy and sell orders on the internal BitShares' market are matched, the highest buy orders are matched with the lowest sell orders and any BTS contained in the overlap are destroyed so that each party gets exactly what they paid for.  The reason for this is twofold.  Firstly, it prevents high frequency trading that attempts to insert an order between two placed orders to profit from the overlap, this is sometimes called "front running".  It also makes it very costly for a large buyer or seller to quickly move the market by placing a large order far from the current market rate.  Doing so would require the buyer or seller to pay the more expensive rate and lose any overlap with all orders their order is matched with.  The destruction of BTS from the overlap of orders creates value for BTS holders as a whole by making the token more scarce.  When there is significant demand to short sell assets at the price feed rate, the current BitShares system allows short sellers to offer interest to asset holders in exchange for priority in order matching.  In this way, holders of market pegged assets can also collect an additional yield on their savings.

Risk

The current implementation of market pegged assets in the BitShares system is designed to minimize risk of loss to market pegged asset holders.  Short positions are opened with collateral worth three times the market value of the asset.  The initial collateral is comprised of the BTS paid by the buyer for the asset and twice this amount of BTS contributed by the short seller.   The collateral requirements and margin triggers were chosen conservatively to protect the holders of market pegged assets from volatility of the underlying collateral.   Forcing short positions to cover every 30 days provides additional assurance of short term liquidity.  Control over the price feed is distributed among over 50 separately elected delegates who compile information from multiple exchange sources.  Despite such precautions, it is important to carefully explore risks of using the system.  Risks can be broadly categorized as value risk, counterparty risk, or systemic risk.

Value Risk:

Market pegged assets maintain their price parity due to being backed by collateral that has an established real world value.  When the value of the collateral falls, the system is designed to react by driving the internal asset exchange to match the new real world exchange rate and trigger margin calls as necessary.  However, there exists a possibility that the underlying collateral (BTS) drops in value so quickly the market pegged assets become under-collateralized.  Often termed a "black swan event," a sudden crash of BTS value could prevent the system from adjusting in time.  In this event, the full amount of collateral is no longer sufficient to purchase the market pegged asset back at the new real exchange rate.  In such an event, assets may trade below their face value.  It is possible the market could recover if BTS regained value.  It is also possible the market would need to be "reset" and asset holders forced to settle for BTS collateral worth less than the intended face value of their assets.  Under normal conditions, short term market movements, spreads, and fees charged by exchanges may also affect the potential cost of conversion into and out of market pegged assets.

Counterparty risk:

Unlike many attempts to create a digital asset that tracks the dollar, market pegged asset are not an "I owe you" issued by any entity.  For this reason, it does not rely on a specific counterparty to honor its value.  Although manipulation risk occurs in any market, it is minimized by the open source and auditable nature of the BitShares system and carefully considered market rules.  Some counterparty risk exists when buying market pegged assets on an external exchange. The exchange must be trusted with customer funds for the time period they are deposited.  It is not recommended that digital assets are stored on an exchange long term.

Systemic risk:

Systemic risk is a catch-all for other risks required to utilize the system.  The primary risk is individuals are responsible for protecting the cryptographic private keys that sign transactions proving ownership of assets.  These keys must be protected from theft or loss.  This risk can be greatly reduced and virtually eliminated by following best practices.  Systemic risk also includes the possibility of an overlooked fatal flaw in the open source software or the possibility of large scale failure of global network infrastructure.

Outlook

BitShares market pegged assets are a viable open source alternative to the incumbent banking system.  Achieving price parity with a commonly used currency facilitates pricing and acceptance by merchants.  Additionally it reduces the need to calculate capital gains and losses on volatile assets to determine tax liability.  While certain risks of the system have been outlined, no system is without risk.  The current banking system allows private funds to be frozen or confiscated without consent, such as by court order or administrative actions.  Banks and financial institutions are susceptible to insolvency.  The availability and quality of banking service varies greatly throughout the world.  BitShares brings publically auditable open source banking to anyone with access to the internet.  Market pegged assets allow savers and spenders to choose preferred asset types.  This brings flexibility and ease of use to the open source banking experience.

40
Technical Support / Re: Give me immediately my BTSX back
« on: December 10, 2014, 08:41:20 pm »
i am feeling strange. Did you post it in the past? I have a huge deja vu experience here.
It's not just you.  I think this person posted this before and deleted the thread and re-posted.

41
Stakeholder Proposals / Re: Delegate Proposal: del0.cass
« on: December 10, 2014, 08:40:01 pm »
Congrats Cass!!  Thanks for all your hard work.

42
General Discussion / Re: Whitepapers & Broschures
« on: December 09, 2014, 09:30:20 pm »
There is no point to describing problems with original design it will only confuse readers.

It is updated below.

I agree with you that it could add confusion to new users.

I just added it because there are still knowledgeable people in the community who argue it never should have changed.  I also am not always sure how the paper will be used/ target audience.  Let me know if you are ok with this updated version (the rest of the paper is unchanged.)

BitShares Market Pegged Assets

BitShares market pegged assets are a new type of freely traded digital asset whose value is meant to track the value of a conventional asset such as the U.S. dollar or gold.  BitShares uses an advanced decentralized consensus ledger that takes some cues from Bitcoin.  While Bitcoin has demonstrated many useful properties as a currency, its price volatility makes it risky to hold and difficult to use for everyday pricing and payments.  A currency with the properties and advantages of Bitcoin that maintains price parity with a globally adopted currency such as the US dollar has high utility for convenient and censorship resistant commerce.  The purpose of this paper is to explain how this price parity is achieved.

Price Stability

Bitcoin and similar crypto-currencies track transferrable digital tokens secured by private cryptographic keys over a decentralized computer network.  A consensus mechanism ensures tokens are not duplicated and all participants agree on the state of the system without need for a central validating authority.  This consensus is recorded on a decentralized shared ledger called a "blockchain."  These systems have been found to enable value storage and exchange over the internet beyond the control or censorship of a centralized party.  Demand for this utility has driven up the price of crypto-currencies.  BitShares uses an analogous core token simply called BitShares that is traded with the abbreviation "BTS" on well-known crypto-currency exchanges.  Like Bitcoin, the exchange rate between BTS and major currencies remains volatile.

A BitShares market pegged asset can be viewed as a contract between an asset buyer seeking price stability and a "short seller" seeking greater exposure to BTS price movement.  The open source BitShares software program implements a decentralized marketplace for market pegged assets where all transactions are recorded on the shared blockchain ledger and the software enforces the market rules.  This blockchain based marketplace is referred to as the "internal market" to distinguish from "external markets" such as websites that facilitate the exchange of government issued currencies with crypto-currency.  A BTS holder may use her BTS to place a buy order on this internal market for her asset of choice.  Market pegged assets are created on the BitShares blockchain when a buyer and short seller of an asset are matched at an agreed price.  In exchange for the BTS received from the asset buyer the short seller takes on the obligation of buying back the same quantity of assets in the future from the market.  BTS paid by the asset buyer and additional BTS contributed by the short seller are sequestered as "collateral".   This collateral is only returned to the short seller when assets are purchased back from the market and effectively destroyed to fulfill the contract.  This is referred to as "covering a short."  If the value of the collateral relative to the current price of the market pegged asset falls below a certain margin of safety the assets can be automatically repurchased from the market before collateral becomes insufficient.  These rules create systemic demand for market pegged assets while allowing them to remain fungible.

To explore the market mechanism in greater depth we will consider the market pegged asset "bitUSD" intended to track the value of the US dollar.  The rules considered thus far do not specifically restrict the internal exchange rate between bitUSD and BTS in a way that ensures it will track the external exchange rate between USD and BTS.  A first step toward this goal is to get reliable information about the external exchange rate into the internal market algorithm.  It is not immediately obvious how this is accomplished in a way that is resistant to control and manipulation by a central party.  Thankfully, the consensus mechanism used for BitShares utilizes a carefully considered real-time stake-weighted approval voting system to elect "delegates" who are motivated to act in the best interest of the system and its stakeholders.  These delegates run computers on the BitShares network that check and commit broadcasted transactions to the blockchain ledger.  The trusted delegates can also be used to input external exchange rates into the blockchain so that the software algorithm can incorporate this information into the market rules.  This external exchange rate information is called a "price feed."  Delegates typically combine price information from multiple sources, such as external exchanges, to generate a price feed and update it regularly.  The system takes a median of all price feeds so that manipulation of the price information would be very difficult by any single delegate or party without considerable collusion.  The price feed and other delegate behavior is publically auditable and delegates may be voted out by BTS holders at any time.

The previously described implementation for market pegged assets was conceived and outlined by Daniel Larimer in June, 2013.  It was hypothesized at the time that with sufficient market depth, market pegged assets may track the value of their counterparts by virtue of self-reinforcing trading behavior.  For example, if market participants expect the most likely value of a market pegged asset called "bitUSD" is to track the US dollar then buying bitUSD when it is less than $1 and selling it when it is above $1 would be profitable so long as other market participants do the same.  Conversely, traders selling "underpriced" bitUSD or buying "overpriced" bitUSD would incur added cost as the broader market trades toward dollar parity.  However, It has more recently become clear that this market prediction mechanism is not sufficient.  In the absence of persistent demand for bitUSD, short sellers might push the bitUSD price lower and lower.  It would eventually be possible for a short seller to sell millions of bitUSD for the price of only $1 worth of BTS.  This newly abundant bitUSD would allow previous short positions to cover and no one would pay face value for bitUSD backed by insufficient collateral.  The idea there would always be buyers to buy "underpriced" bitUSD is replaced by the reality that another restriction is needed.

It is reasonable to question what additional mechanism, if any, will ensure that the internal market between bitUSD and BTS reliably tracks the external market between USD and BTS.  To achieve this reliable long term parity the BitShares' market algorithm will need access to reliable information about the real exchange rate between BTS and US dollars on external markets.  It is not immediately obvious how to get this external exchange rate information into the BitShares internal market in a way that is resistant to control and manipulation by a central party.  Thankfully, the consensus mechanism used for BitShares utilizes a carefully considered real-time stake weighted approval voting system to elect "delegates" who are motivated to act in the best interest of the system and its stakeholders.  These delegates are tasked with running the BitShares network and checking and committing broadcasted transactions to the blockchain ledger.  The trusted delegates can also be used to input external exchange rates into the blockchain so that the software algorithm can incorporate this information into the market rules.  This external exchange rate information is called a "price feed."  Delegates typically combine price information from multiple sources, such as external exchanges, to generate a price feed and update it regularly.  The system takes a median of all price feeds so that manipulation of the price information would be very difficult by any single delegate or party without considerable collusion.  The price feed and other delegate behavior is publically auditable and delegates may be voted out by BTS holders at any time.

It is important to consider how the price feed can be used to regulate the internal market.  Both BTS and market pegged assets are freely transferrable tokens.  If the internal market restricted trading to occur only at the specific exchange rate determined by the median price feed, it would simply encourage anyone willing to trade at a different price to do so outside the system, such as on an external exchange.  However, if we consider that short selling is the mechanism by which new market pegged assets are created, then selectively restricting short selling controls the conditions under which supply is created.  Rather than allow short sellers to sell at any price, short sellers will only execute at a price above the median price feed.  This prevents short sellers from devaluing market pegged assets as new assets are only created when the market demand pushes the price equal to or above parity. 

The price feed functions to regulate creation and destruction of market pegged assets in a way that pushes the market price toward parity.  When a short seller buys back bitUSD and covers their position they are taking bitUSD out of circulation and reducing the total supply.  In fact, the current BitShares market rules force short sellers to cover their position within 30 days of opening the position.  This means that the full amount of outstanding bitUSD must be purchased off the market every 30 days.  Market pegged asset holders have no requirement to sell and therefore short sellers covering their positions are eventually forced to purchase from newly opened short positions at or above the exchange rate.   This is effectively a guarantee to any bitUSD holder that they can sell bitUSD for the dollar equivalent of BTS (determined by price feed) within any 30 day period.

The motivation to participate in the system is different for short sellers and market pegged asset buyers.  Market pegged asset holders are typically looking for predictable value coupled with the properties of a crypto-currency.  Short sellers are typically bullish on the price of BTS and wish to capitalize on increased exposure to market movement relative to the market pegged asset.  If the market value of BTS rises with respect to the asset, the short seller can buy back the asset for significantly less BTS and profit accordingly.  If BTS value falls in relation to the market pegged asset, the short seller faces a greater loss than if they were to have simply held BTS.  Ultimately a short seller may face a "margin call" where his collateral is automatically used repay the obligation.  A margin call is triggered in the current BitShares system whenever collateral contains less than 1.5 times the amount of BTS required to cover the obligation.  The system also charges an additional 5% fee to any short seller subject to a margin call and this fee is intended to motivate short sellers to maintain sufficient collateral.

Order Matching ...

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General Discussion / Re: Whitepapers & Broschures
« on: December 06, 2014, 04:53:57 pm »
Updated:  (I think this may spell things out a bit more for the uninitiated.)

BitShares Market Pegged Assets

BitShares market pegged assets are a new type of freely traded digital asset whose value is meant to track the value of a conventional asset such as the U.S. dollar or gold.  BitShares uses an advanced decentralized consensus ledger that takes some cues from Bitcoin.  While Bitcoin has demonstrated many useful properties as a currency, its price volatility makes it risky to hold and difficult to use for everyday pricing and payments.  A currency with the properties and advantages of Bitcoin that maintains price parity with a globally adopted currency such as the US dollar has high utility for convenient and censorship resistant commerce.  The purpose of this paper is to explain how this price parity is achieved.

Price Stability

Bitcoin and similar crypto-currencies track transferrable digital tokens secured by private cryptographic keys over a decentralized computer network.  A consensus mechanism ensures tokens are not duplicated and all participants agree on the state of the system without need for a central validating authority.  This consensus is recorded on a decentralized shared ledger called a "blockchain."  These systems have been found to enable value storage and exchange over the internet beyond the control or censorship of a centralized party.  Demand for this utility has driven up the price of crypto-currencies.  BitShares uses an analogous core token simply called BitShares that is traded with the abbreviation "BTS" on well-known crypto-currency exchanges.  Like Bitcoin, the exchange rate between BTS and major currencies remains volatile.

A BitShares market pegged asset can be viewed as a contract between an asset buyer seeking price stability and a "short seller" seeking greater exposure to BTS price movement.  The open source BitShares software program implements a decentralized marketplace for market pegged assets where all transactions are recorded on the shared blockchain ledger and the software enforces the market rules.  This blockchain based marketplace is referred to as the "internal market" to distinguish from "external markets" such as websites that facilitate the exchange of government issued currencies with crypto-currency.  A BTS holder may use her BTS to place a buy order on this internal market for her asset of choice.  Market pegged assets are created on the BitShares blockchain when a buyer and short seller of an asset are matched at an agreed price.  In exchange for the BTS received from the asset buyer the short seller takes on the obligation of buying back the same quantity of assets in the future from the market.  BTS paid by the asset buyer and additional BTS contributed by the short seller are sequestered as "collateral".   This collateral is only returned to the short seller when assets are purchased back from the market and effectively destroyed to fulfill the contract.  This is referred to as "covering a short."  If the value of the collateral relative to the current price of the market pegged asset falls below a certain margin of safety the assets can be automatically repurchased from the market before collateral becomes insufficient.  These rules create systemic demand for market pegged assets while allowing them to remain fungible.

The previously described implementation for market pegged assets was conceived and outlined by Daniel Larimer in June, 2013.  It was hypothesized at the time that with sufficient market depth, market pegged assets may track the value of their counterparts by virtue of self-reinforcing trading behavior.  For example, if market participants expect the most likely value of a market pegged asset called "bitUSD" is to track the US dollar then buying bitUSD when it is less than $1 and selling it when it is above $1 would be profitable so long as other market participants do the same.  Conversely, traders selling "underpriced" bitUSD or buying "overpriced" bitUSD would incur added cost as the broader market trades toward dollar parity.  However, It has more recently become clear that this market prediction mechanism is not sufficient.  In the absence of persistent demand for bitUSD, short sellers might push the bitUSD price lower and lower.  It would eventually be possible for a short seller to sell millions of bitUSD for the price of only $1 worth of BTS.  This newly abundant bitUSD would allow previous short positions to cover and no one would pay face value for bitUSD backed by insufficient collateral.  The idea there would always be buyers to buy "underpriced" bitUSD is replaced by the reality that another restriction is needed.

It is reasonable to question what additional mechanism, if any, will ensure that the internal market between bitUSD and BTS reliably tracks the external market between USD and BTS.  To achieve this reliable long term parity the BitShares' market algorithm will need access to reliable information about the real exchange rate between BTS and US dollars on external markets.  It is not immediately obvious how to get this external exchange rate information into the BitShares internal market in a way that is resistant to control and manipulation by a central party.  Thankfully, the consensus mechanism used for BitShares utilizes a carefully considered real-time stake weighted approval voting system to elect "delegates" who are motivated to act in the best interest of the system and its stakeholders.  These delegates are tasked with running the BitShares network and checking and committing broadcasted transactions to the blockchain ledger.  The trusted delegates can also be used to input external exchange rates into the blockchain so that the software algorithm can incorporate this information into the market rules.  This external exchange rate information is called a "price feed."  Delegates typically combine price information from multiple sources, such as external exchanges, to generate a price feed and update it regularly.  The system takes a median of all price feeds so that manipulation of the price information would be very difficult by any single delegate or party without considerable collusion.  The price feed and other delegate behavior is publically auditable and delegates may be voted out by BTS holders at any time.

It is important to consider how the price feed can be used to regulate the internal market.  Both BTS and market pegged assets are freely transferrable tokens.  If the internal market restricted trading to occur only at the specific exchange rate determined by the median price feed, it would simply encourage anyone willing to trade at a different price to do so outside the system, such as on an external exchange.  However, if we consider that short selling is the mechanism by which new market pegged assets are created, then selectively restricting short selling controls the conditions under which supply is created.  Rather than allow short sellers to sell at any price, short sellers will only execute at a price above the median price feed.  This prevents short sellers from devaluing market pegged assets as new assets are only created when the market demand pushes the price equal to or above parity. 

The price feed functions to regulate creation and destruction of market pegged assets in a way that pushes the market price toward parity.  When a short seller buys back bitUSD and covers their position they are taking bitUSD out of circulation and reducing the total supply.  In fact, the current BitShares market rules force short sellers to cover their position within 30 days of opening the position.  This means that the full amount of outstanding bitUSD must be purchased off the market every 30 days.  Market pegged asset holders have no requirement to sell and therefore short sellers covering their positions are eventually forced to purchase from newly opened short positions at or above the exchange rate.   This is effectively a guarantee to any bitUSD holder that they can sell bitUSD for the dollar equivalent of BTS (determined by price feed) within any 30 day period.

The motivation to participate in the system is different for short sellers and market pegged asset buyers.  Market pegged asset holders are typically looking for predictable value coupled with the properties of a crypto-currency.  Short sellers are typically bullish on the price of BTS and wish to capitalize on increased exposure to market movement relative to the market pegged asset.  If the market value of BTS rises with respect to the asset, the short seller can buy back the asset for significantly less BTS and profit accordingly.  If BTS value falls in relation to the market pegged asset, the short seller faces a greater loss than if they were to have simply held BTS.  Ultimately a short seller may face a "margin call" where his collateral is automatically used repay the obligation.  A margin call is triggered in the current BitShares system whenever collateral contains less than 1.5 times the amount of BTS required to cover the obligation.  The system also charges an additional 5% fee to any short seller subject to a margin call and this fee is intended to motivate short sellers to maintain sufficient collateral.

Order Matching

Market orders and other signed transactions on the BitShares blockchain are grouped into 10 second blocks by delegates.  When buy and sell orders on the internal BitShares' market are matched, the highest buy orders are matched with the lowest sell orders and any BTS contained in the overlap are destroyed so that each party gets exactly what they paid for.  The reason for this is twofold.  Firstly, it prevents high frequency trading that attempts to insert an order between two placed orders to profit from the overlap, this is sometimes called "front running".  It also makes it very costly for a large buyer or seller to quickly move the market by placing a large order far from the current market rate.  Doing so would require the buyer or seller to pay the more expensive rate and lose any overlap with all orders their order is matched with.  The destruction of BTS from the overlap of orders creates value for BTS holders as a whole by making the token more scarce.  When there is significant demand to short sell assets at the price feed rate, the current BitShares system allows short sellers to offer interest to asset holders in exchange for priority in order matching.  In this way, holders of market pegged assets can also collect an additional yield on their savings.

Risk

The current implementation of market pegged assets in the BitShares system is designed to minimize risk of loss to market pegged asset holders.  Short positions are opened with collateral worth three times the market value of the asset.  The initial collateral is comprised of the BTS paid by the buyer for the asset and twice this amount of BTS contributed by the short seller.   The collateral requirements and margin triggers were chosen conservatively to protect the holders of market pegged assets from volatility of the underlying collateral.   Forcing short positions to cover every 30 days provides additional assurance of short term liquidity.  Control over the price feed is distributed among over 50 separately elected delegates who compile information from multiple exchange sources.  Despite such precautions, it is important to carefully explore risks of using the system.  Risks can be broadly categorized as value risk, counterparty risk, or systemic risk.

Value Risk:

Market pegged assets maintain their price parity due to being backed by collateral that has an established real world value.  When the value of the collateral falls, the system is designed to react by driving the internal asset exchange to match the new real world exchange rate and trigger margin calls as necessary.  However, there exists a possibility that the underlying collateral (BTS) drops in value so quickly the market pegged assets become under-collateralized.  Often termed a "black swan event," a sudden crash of BTS value could prevent the system from adjusting in time.  In this event, the full amount of collateral is no longer sufficient to purchase the market pegged asset back at the new real exchange rate.  In such an event, assets may trade below their face value.  It is possible the market could recover if BTS regained value.  It is also possible the market would need to be "reset" and asset holders forced to settle for BTS collateral worth less than the intended face value of their assets.  Short term market movements, spreads, and fees charged by exchanges may also affect the potential cost of conversion into and out of market pegged assets.

Counterparty risk:

Unlike many attempts to create a digital asset that tracks the dollar, market pegged asset are not an "I owe you" issued by any entity.  For this reason, it does not rely on a specific counterparty to honor its value.  Although manipulation risk occurs in any market, it is minimized by the open source and auditable nature of the BitShares system and carefully considered market rules.  Some counterparty risk exists when buying market pegged assets on an external exchange. The exchange must be trusted with customer funds for the time period they are deposited.  It is not recommended that digital assets are stored on an exchange long term.

Systemic risk:

Systemic risk is a catch-all for other risks required to utilize the system.  The primary risk is individuals are responsible for protecting the cryptographic private keys that sign transactions proving ownership of assets.  These keys must be protected from theft or loss.  This risk can be greatly reduced and virtually eliminated by following best practices.  Systemic risk also includes the possibility of an overlooked fatal flaw in the open source software or the possibility of large scale failure of global network infrastructure.

Outlook

BitShares market pegged assets are a viable open source alternative to the incumbent banking system.  Achieving price parity with a commonly used currency facilitates pricing and acceptance by merchants.  Additionally it reduces the need to calculate capital gains and losses on volatile assets to determine tax liability.  While certain risks of the system have been outlined, no system is without risk.  The current banking system allows private funds to be frozen or confiscated without consent, such as by court order or administrative actions.  Banks and financial institutions are susceptible to insolvency.  The availability and quality of banking service varies greatly throughout the world.  BitShares brings publically auditable open source banking to anyone with access to the internet.  Market pegged assets allow savers and spenders to choose preferred asset types.  This brings flexibility and ease of use to the open source banking experience.

44
I'm with you on this one Arhag.

45
General Discussion / Re: Proposal Voting for User Issued Assets
« on: December 05, 2014, 03:15:41 pm »
Just tossing around additional fun ideas...

- Allow the current asset holders to vote by majority approval to allow a new public key to be authorized to hold this asset (sort of like members of the club who must vote to let in a new member)

- Non-binding polls (don't need to be tracked by delegates) only open to those asset holders (maybe this is all you are saying with proposals?).

- Asset holders use approval voting to elect workers paid via dilution of the asset with new assets.  Or paid with a central fund controlled by the asset holders as a whole, like this: https://bitsharestalk.org/index.php?topic=5030.0

- If the asset holders exercise group control over a central fund, you could send money to the group as a whole instead of to any individual…

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