[Documents] Whitepapers & Broschures

[Agent86]

When are margin calls triggered? The first version posted by BM says 33%, the second version by Agent says nothing about percentages and the wiki says 25% (http://wiki.bitshares.org/index.php/BitShares/Short#Market_Rules_for_Shorts).

My paper says a margin call is triggered when the collateral drops below 2x the value of the bitAssets it is backing.  Implicit in this statement is that a fall of 33% from an initial collateral amount of 3x will trigger a margin call.

25% was the old system and corresponds to a drop from initial collateral of 2x to a margin call trigger of 1.5x.

Hmm .. "good" to know .. let's update the wiki

would this be o.k.?

 

Short orders are forced to cover when 66% of their collateral is required to cover, leaving the short with 33% of the collateral minus a 5% fee.

No, the way you are wording it is not correct.  Short orders are forced to cover when 50% of their collateral is required to cover but this happens when their BTS is worth 66% of what it was was worth when they took out the position (in relation to the bitasset).  In any case I think the way these things have been worded makes it confusing.  That's why I prefer to not use percentages that reference the initial value of the collateral when the position was opened.  I would just focus on what triggers the margin call, i.e. A margin call is triggered when the value of the collateral falls below 2x what is needed to cover.

[xeroc]

When are margin calls triggered? The first version posted by BM says 33%, the second version by Agent says nothing about percentages and the wiki says 25% (http://wiki.bitshares.org/index.php/BitShares/Short#Market_Rules_for_Shorts).

My paper says a margin call is triggered when the collateral drops below 2x the value of the bitAssets it is backing.  Implicit in this statement is that a fall of 33% from an initial collateral amount of 3x will trigger a margin call.

25% was the old system and corresponds to a drop from initial collateral of 2x to a margin call trigger of 1.5x.

Hmm .. "good" to know .. let's update the wiki

would this be o.k.?

 

Short orders are forced to cover when 66% of their collateral is required to cover, leaving the short with 33% of the collateral minus a 5% fee.

[santaclause102]

When are margin calls triggered? The first version posted by BM says 33%, the second version by Agent says nothing about percentages and the wiki says 25% (http://wiki.bitshares.org/index.php/BitShares/Short#Market_Rules_for_Shorts).

My paper says a margin call is triggered when the collateral drops below 2x the value of the bitAssets it is backing.  Implicit in this statement is that a fall of 33% from an initial collateral amount of 3x will trigger a margin call.

25% was the old system and corresponds to a drop from initial collateral of 2x to a margin call trigger of 1.5x.

Great thanks.

I have written an article about BitAssets (lees extensive and more simplified than this whitepaper) https://docs.google.com/document/d/1u7Pxdcub9YUxCs6Q7pi106svXjmD9anlAN_i5e1cZNE/edit

Here is the part about who it works:

There is no central party that issues BitUSD so there is no counterparty risk where a centralized issuer could default on his promise to exchange the BitAsset for the real world asset. Instead a decentralized prediction market ensures that 1 BitUSD is always worth 1 USD.

I will illustrate the mechanics of BitAssets with BitUSD as an example: Users can take two sides of a bet, comparable to a well known finanical instrument called "contracts for difference". If one predicts that the price of the USD compared to BTS will go up they buy BitUSD which can always be exchanged for 1 USD. If someone predicts that BTS will go up in price compared to the USD she can short sell BitUSD, meaning she lends BitUSD into existence by giving up collateral in BTS worth 2 times the value of the BitUSD that are lent into existence. The BitUSD short seller can make a profit (measured in USD) by buying back the BitUSD for less BTS  for less BTS in case BTS has risen in price, close her position and get her collateral back. The BitUSD buyer on the other side gets the price stability of the dollar. We can also look at it differently and measure the relative gains and losses of the BitUSD holder in BTS, then the BitUSD holder is making a loss (measured in BTS) if the price of BTS rises compared to the USD.

The 300% collateralization (2x from the short seller plus 1x from the buyer of the BitUSD created by the short sell) guarentees that there is enough collateral even if the value of the collateral falls quickly. Margin calls are triggered if BTS (the collateral) falls by 33% meaning that the BitShares software automatically buys back BitUSD from the client's internal market and closes the short position taking the bought back BitUSD out of circulation.

BitUSD can only be shorted into existence at or above the exchange rate of USD to BTS which is fed into the system via a price feed1. The price feed is compiled from at least 51 different feeds provided by BitShares delegates (for more info on delegates see http://wiki.bitshares.org/index.php/DPOS_or_Delegated_Proof_of_Stake#Role_of_Delegates). This guarentees that the value of BitUSD does not decrease in case there is a big demand for shorting BitUSD.

Short sellers have to cover their position at or above the price feed at least every 30 days after opening a short position. This is effectively a guarantee to any BitUSD holder that they can sell bitUSD for the dollar equivalent of BTS within a 30 day period.

For a more detailed explanation of how BitAssets work see [Link to Whitepaper on bitshares.org]

The plan is to publish it on the blog. Your feedback is much appreciated.

[Agent86]

When are margin calls triggered? The first version posted by BM says 33%, the second version by Agent says nothing about percentages and the wiki says 25% (http://wiki.bitshares.org/index.php/BitShares/Short#Market_Rules_for_Shorts).

My paper says a margin call is triggered when the collateral drops below 2x the value of the bitAssets it is backing.  Implicit in this statement is that a fall of 33% from an initial collateral amount of 3x will trigger a margin call.

25% was the old system and corresponds to a drop from initial collateral of 2x to a margin call trigger of 1.5x.

[santaclause102]

When are margin calls triggered? The first version posted by BM says 33%, the second version by Agent says nothing about percentages and the wiki says 25% (http://wiki.bitshares.org/index.php/BitShares/Short#Market_Rules_for_Shorts).

[starspirit]

Third step - the short already has the 2 BTS at hand to place his order. If he really liked BTS so much to leverage it, it would be completely irrational to just be waiting on the sidelines to buy his 2 BTS once the long comes to the market.

Bingo. Said more verbosely here.

But what isn't irrational is that he wants to short BitUSD (thus increasing his exposure to BTS without putting any additional fiat into the blockchain) but doesn't until the long comes to market. The reason that is rational is because the market rules prevent him from shorting below the price feed (priced in BTS/BitUSD) on the decentralized exchange and so he has to wait until a BitUSD long comes along to bid at or above the price feed. The reality is that these superbulls would like to short BitUSD down to a small price (priced in BTS/BitUSD) but they cannot because of the price feed; so there is a lot of latent demand there that is not being realized. This is for good reason, because otherwise the peg might break and BitUSD would become worthless. The price feed puts the brakes on the shorting process to keep it in line with reality (keeps it pegged to the BTS/USD price in outside exchanges).

However, when the price of BTS (in USD) goes up because of the increasing demand for BitUSD in outside exchanges (discussed here under the assumption that there is a large short sell wall at the price feed), the price feed adjusts to a lower price (in BTS/BitUSD). That means the same amount of BTS (the exposure of the superbulls need not increase) can now support the larger (growing) BitAsset supply. This means the large short sell wall can be maintained at the price feed even as the feed price gets smaller and smaller and smaller (again in BTS/BitUSD). Therefore the same process of $X buy pressure of BitUSD with USD in outside exchanges leading to $X upward price pressure of BTS (in USD) can repeat over and over and over again without bound.

At least, that is my hypothesis. I would love to get your opinion on it starspirit.

arhag, I've read your arguments in this and the other linked thread. I don't have time right now to give them the attention they deserve, but I will follow up further with you.

[arhag]

Third step - the short already has the 2 BTS at hand to place his order. If he really liked BTS so much to leverage it, it would be completely irrational to just be waiting on the sidelines to buy his 2 BTS once the long comes to the market.

Bingo. Said more verbosely here.

But what isn't irrational is that he wants to short BitUSD (thus increasing his exposure to BTS without putting any additional fiat into the blockchain) but doesn't until the long comes to market. The reason that is rational is because the market rules prevent him from shorting below the price feed (priced in BTS/BitUSD) on the decentralized exchange and so he has to wait until a BitUSD long comes along to bid at or above the price feed. The reality is that these superbulls would like to short BitUSD down to a small price (priced in BTS/BitUSD) but they cannot because of the price feed; so there is a lot of latent demand there that is not being realized. This is for good reason, because otherwise the peg might break and BitUSD would become worthless. The price feed puts the brakes on the shorting process to keep it in line with reality (keeps it pegged to the BTS/USD price in outside exchanges).

However, when the price of BTS (in USD) goes up because of the increasing demand for BitUSD in outside exchanges (discussed here under the assumption that there is a large short sell wall at the price feed), the price feed adjusts to a lower price (in BTS/BitUSD). That means the same amount of BTS (the exposure of the superbulls need not increase) can now support the larger (growing) BitAsset supply. This means the large short sell wall can be maintained at the price feed even as the feed price gets smaller and smaller and smaller (again in BTS/BitUSD). Therefore the same process of $X buy pressure of BitUSD with USD in outside exchanges leading to $X upward price pressure of BTS (in USD) can repeat over and over and over again without bound.

At least, that is my hypothesis. I would love to get your opinion on it starspirit.

[starspirit]

A related question:

For normal stocks, does buying options create demand for the underlying stock? 
If so, does it matter whether they are close to the current price, well in the money, or well out of the money?

Ander, yes if its coming from fiat, it does create an immediate demand, for a fractional amount - see my response to jsidhu.

Its a complex calculation to determine how significant this is for a bitAsset. You previously mentioned my description of bitAsset buyers effectively selling a deep out-of-the-money put option on BTS as part of the package, which gives them a fractional long exposure to BTS. The nature of this option is quite exotic, because the strike is not fixed. BitAsset owners are only exposed if the BTS price loses 2/3rd in price in so fast a time that margin calls on shorts cannot be covered quickly enough to prevent under-collateralisation. Market liquidity and volatility will both be factors in this. Possibly the only way to determine these probabilities, and the fractional delta in the options, is through computer simulation, as they cannot be expressed through standard option-pricing formulae.

If the demand is coming from BTS (in the internal market), then the bitAsset buyer is relinquishing a full BTS exposure for a fractional one, so their bitAsset demand is actually creating an immediate supply of BTS that needs to be absorbed by other participants.

Can you explain the bold part, please. My first thought response is - the whole of this supply is immediately locked in collateral and effectively removed. But I suspect you mean something else.

I mean that somebody else needs to be willing to take up the BTS supply, or the BTS price needs to decline until somebody is willing to accept it. In the situation where we have a group of unsatisfied bitAsset sellers or unfilled shorts waiting in the queue, they will absorb the supply, because they want greater exposure to BTS. However, where this is thin, the bitAsset price will keep rising until it gets interest from other shorts or outright bitAsset sellers (they get a better entry price for their BTS as a result). If the bitAsset price on the internal market is then higher than on the external market as a result of this pressure, arbitragers will sell BTS to buy bitAsset (via fiat) on the external market and sell bitAsset on the internal market to lock in a profit. This also transfers sell pressure on BTS to the external market.

Other than not quite getting what do you mean by "...will sell BTS to buy bitAsset (via fiat)" and assuming you mean "sell BTS to buy bitAsset  on the external market "

Yes, but said sell pressure is offset by 3x the buy pressure that the newly opened shorts provide...

It is actually quite simple:
Someone wants bitUSD. The usual way is:
-Buy BTS on external exchange (up pressure on BTS); + 1
-Sell BTS for bitUSD on the internal exchange for bitUSD (down pressure on BTS)  - 1 ,but
- Simultaneously from the shorter (up pressure on BTS, 2x the force btw).  + 2

The same happens if this new customer buys bitUSD directly, just somebody else is performing the first 2 steps for him/her.

I was dealing with a situation where the person owns BTS, then buys bitUSD on the internal exchange.
So the first step in your sequence is not relevant.
Second step is fine.
Third step - the short already has the 2 BTS at hand to place his order. If he really liked BTS so much to leverage it, it would be completely irrational to just be waiting on the sidelines to buy his 2 BTS once the long comes to the market.

[zerosum]

A related question:

For normal stocks, does buying options create demand for the underlying stock? 
If so, does it matter whether they are close to the current price, well in the money, or well out of the money?

Ander, yes if its coming from fiat, it does create an immediate demand, for a fractional amount - see my response to jsidhu.

Its a complex calculation to determine how significant this is for a bitAsset. You previously mentioned my description of bitAsset buyers effectively selling a deep out-of-the-money put option on BTS as part of the package, which gives them a fractional long exposure to BTS. The nature of this option is quite exotic, because the strike is not fixed. BitAsset owners are only exposed if the BTS price loses 2/3rd in price in so fast a time that margin calls on shorts cannot be covered quickly enough to prevent under-collateralisation. Market liquidity and volatility will both be factors in this. Possibly the only way to determine these probabilities, and the fractional delta in the options, is through computer simulation, as they cannot be expressed through standard option-pricing formulae.

If the demand is coming from BTS (in the internal market), then the bitAsset buyer is relinquishing a full BTS exposure for a fractional one, so their bitAsset demand is actually creating an immediate supply of BTS that needs to be absorbed by other participants.

Can you explain the bold part, please. My first thought response is - the whole of this supply is immediately locked in collateral and effectively removed. But I suspect you mean something else.

I mean that somebody else needs to be willing to take up the BTS supply, or the BTS price needs to decline until somebody is willing to accept it. In the situation where we have a group of unsatisfied bitAsset sellers or unfilled shorts waiting in the queue, they will absorb the supply, because they want greater exposure to BTS. However, where this is thin, the bitAsset price will keep rising until it gets interest from other shorts or outright bitAsset sellers (they get a better entry price for their BTS as a result). If the bitAsset price on the internal market is then higher than on the external market as a result of this pressure, arbitragers will sell BTS to buy bitAsset (via fiat) on the external market and sell bitAsset on the internal market to lock in a profit. This also transfers sell pressure on BTS to the external market.

Other than not quite getting what do you mean by "...will sell BTS to buy bitAsset (via fiat)" and assuming you mean "sell BTS to buy bitAsset  on the external market "

Yes, but said sell pressure is offset by 3x the buy pressure that the newly opened shorts provide...

It is actually quite simple:
Someone wants bitUSD. The usual way is:
-Buy BTS on external exchange (up pressure on BTS); + 1
-Sell BTS for bitUSD on the internal exchange for bitUSD (down pressure on BTS)  - 1 ,but
- Simultaneously from the shorter (up pressure on BTS, 2x the force btw).  + 2

The same happens if this new customer buys bitUSD directly, just somebody else is performing the first 2 steps for him/her.

[starspirit]

A related question:

For normal stocks, does buying options create demand for the underlying stock? 
If so, does it matter whether they are close to the current price, well in the money, or well out of the money?

Ander, yes if its coming from fiat, it does create an immediate demand, for a fractional amount - see my response to jsidhu.

Its a complex calculation to determine how significant this is for a bitAsset. You previously mentioned my description of bitAsset buyers effectively selling a deep out-of-the-money put option on BTS as part of the package, which gives them a fractional long exposure to BTS. The nature of this option is quite exotic, because the strike is not fixed. BitAsset owners are only exposed if the BTS price loses 2/3rd in price in so fast a time that margin calls on shorts cannot be covered quickly enough to prevent under-collateralisation. Market liquidity and volatility will both be factors in this. Possibly the only way to determine these probabilities, and the fractional delta in the options, is through computer simulation, as they cannot be expressed through standard option-pricing formulae.

If the demand is coming from BTS (in the internal market), then the bitAsset buyer is relinquishing a full BTS exposure for a fractional one, so their bitAsset demand is actually creating an immediate supply of BTS that needs to be absorbed by other participants.

Can you explain the bold part, please. My first thought response is - the whole of this supply is immediately locked in collateral and effectively removed. But I suspect you mean something else.

I mean that somebody else needs to be willing to take up the BTS supply, or the BTS price needs to decline until somebody is willing to accept it. In the situation where we have a group of unsatisfied bitAsset sellers or unfilled shorts waiting in the queue, they will absorb the supply, because they want greater exposure to BTS. However, where this is thin, the bitAsset price will keep rising until it gets interest from other shorts or outright bitAsset sellers (they get a better entry price for their BTS as a result). If the bitAsset price on the internal market is then higher than on the external market as a result of this pressure, arbitragers will sell BTS to buy bitAsset (via fiat) on the external market and sell bitAsset on the internal market to lock in a profit. This also transfers sell pressure on BTS to the external market.

[zerosum]

A related question:

For normal stocks, does buying options create demand for the underlying stock? 
If so, does it matter whether they are close to the current price, well in the money, or well out of the money?

Ander, yes if its coming from fiat, it does create an immediate demand, for a fractional amount - see my response to jsidhu.

Its a complex calculation to determine how significant this is for a bitAsset. You previously mentioned my description of bitAsset buyers effectively selling a deep out-of-the-money put option on BTS as part of the package, which gives them a fractional long exposure to BTS. The nature of this option is quite exotic, because the strike is not fixed. BitAsset owners are only exposed if the BTS price loses 2/3rd in price in so fast a time that margin calls on shorts cannot be covered quickly enough to prevent under-collateralisation. Market liquidity and volatility will both be factors in this. Possibly the only way to determine these probabilities, and the fractional delta in the options, is through computer simulation, as they cannot be expressed through standard option-pricing formulae.

If the demand is coming from BTS (in the internal market), then the bitAsset buyer is relinquishing a full BTS exposure for a fractional one, so their bitAsset demand is actually creating an immediate supply of BTS that needs to be absorbed by other participants.

Can you explain the bold part, please. My first thought response is - the whole of this supply is immediately locked in collateral and effectively removed. But I suspect you mean something else.

[starspirit]

Now, what is the connection between bitAssets and options?

BitAsset holder is exposed to sudden and deep decline in BTS (black-swan). See my response to Ander further back in thread.

[zerosum]

A related question:

For normal stocks, does buying options create demand for the underlying stock? 
If so, does it matter whether they are close to the current price, well in the money, or well out of the money?

Buying a call is a straight demand for the underlying stock in my view. The demand is for the options delta-as in 50 delta (0.5 to be exact) will be a demand for 50% of 100 shares, or 50 shares.  The Delta in this case thought as the % chance for the option to finish in the money i.e. close to 100% for deep in the money call; 50% (disregarding the interest) for at the money one; and going down to almost 0% for way out of the money calls.

Now, what is the connection between bitAssets and options?

[Ander]

A question:  How do money market funds that are pegged to a price of $1.00 work? 

I remember back in the 2008 crash, there was a big deal made out of the possibility of 'breaking the buck', and having these funds be worth less than a dollar.  I think a few of them briefly traded under $1.00.


Is bitUSD similar to these at all?

I don't know any of these... not sure any link?

This is what I am talking about:
http://www.investopedia.com/university/moneymarket/
http://www.investopedia.com/articles/mutualfund/08/money-market-break-buck.asp

[jsidhu]

A related question:

For normal stocks, does buying options create demand for the underlying stock? 
If so, does it matter whether they are close to the current price, well in the money, or well out of the money?

I think the underwriter has to ensure the underlying stock is available if you choose to exercise the option to buy the stock... if you are well in the money this makes sense. Thus I think the underwriter will hedge their risk by buying the stock at the time the option is purchased.. and then it is in their best interest to ensure the options are out of money so if they are a big enough whale.. well incentive to manipulate is there....the sheep are always slaughtered

That's close, but usually the underwriter only needs to buy a fractional amount of the stock, depending on how far in- or out-of-the-money the option is (or the probability they need to deliver). As this probability changes, they adjust their position - selling whenever the price (and probability) falls, and buying whenever the price (and probability) rises. This is known as "delta-hedging" because they only hedge the delta, or equivalent fractional exposure, of the option at any time. Buying high and selling low costs them money over time, the expectation of which they build into the initial option premium with a profit margin. As long as they forecast the volatility reasonably, they collect the profit margin, there is no need for them to manipulate prices for a better outcome.

Oh ok.. I was just using common sense.. but I think it does make sense to hedge based on the delta because there is a higher chance they won't have to cover the closer it is to expiration and its out of money... etc etc.. ideally the safest is to hedge all of it but then they are less leverages and we all know banks love leverage.