Author Topic: [Documents] Whitepapers & Broschures  (Read 24687 times)

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Offline Agent86

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I think you have something backward... if a short seller sells bitUSD at the feed price and buys it above the feed price they have lost money, not made money.
Ops, I confused that...

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If bitUSD is priced above the feed on the internal market, it motivates short sellers to short on the assumption the exchange rate will eventually go back down so they will be able to cover later for less.  But it is not specifically an immediate arbitrage situation in and of itself.
Is that enough to create the necessary BitUSD if there is a big demand for it? Why should the price of bitusd go down? It's not a clear decision for potential shorters to short on that assumption even if the demand for bitusd is big signaled by the high price of bitusd.
No other mechanism is needed to make the bitUSD price go back down simply because (above parity) there's no limit to the supply.
There is a limiting factor on the supply, being the market's appraisal of the value of BTS (BTS market cap). Once nearly all the BTS are in the collateral pool, there is no scope left for traders to create more bitAsset. BTS are traded in a free market, so there is no way to guarantee that the BTS market cap will remain far above 3x bitAssets. In such a situation a bitAsset premium could be sustained indefinitely. There is no mechanism in this situation that can force the bitUSD price down, except possible that potential bitUSD buyers realise that bitUSD is suddenly more risky.
There's no practical limit to the supply of bitAssets in part because there's no specific limit on the marketcap of BTS.  The marketcap of BTS will be driven upward long before "all the BTS are in the collateral pool" and people will cover and re-short to free collateral.

I'm only saying that users of shorts (e.g. arbitragers) do not need to be bullishly motivated. The easiest example is where the trader has an existing inventory of BTS, enters a short on 1 unit of bitAsset... then sells an equivalent value of his BTS for fiat to ensure his total BTS exposure is unchanged at the end. You can call this an arbitrage, although its not really risk-free

BTW your above explanation for why shortselling isn't bullish makes no sense at all.  You say if someone sells some stake but uses remaining stake to short bitUSD it isn't bullish on the direction of BTS vs the bitassets as I stated in my paper.  But no one would do that unless they thought BTS would go up in value relative to bitUSD so it's still bullish.  This just describes someone who is bullish but also needs money for something else; it also isn't "arbitrage".

Offline toast

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I'm trying to picture the scenario you describe and I can't. I understand it's not "enforced" using any on-chain mechanism, and I'm not sure I could prove it can't happen. I think it's just the exact same systemic failure mode as a sudden collapse of BTS value which isn't based on any fundamentals (like a bug prints a bunch of BTS or something).

If my bitasset is overvalued I will sell it. Who will hold when they just made 10% instant returns on something that is only ever supposed to give them 1% APR? On the other side, if all the BTS is in collateral then its price will skyrocket.
Do not use this post as information for making any important decisions. The only agreements I ever make are informal and non-binding. Take the same precautions as when dealing with a compromised account, scammer, sockpuppet, etc.

Offline starspirit

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I think you have something backward... if a short seller sells bitUSD at the feed price and buys it above the feed price they have lost money, not made money.
Ops, I confused that...

Quote
If bitUSD is priced above the feed on the internal market, it motivates short sellers to short on the assumption the exchange rate will eventually go back down so they will be able to cover later for less.  But it is not specifically an immediate arbitrage situation in and of itself.
Is that enough to create the necessary BitUSD if there is a big demand for it? Why should the price of bitusd go down? It's not a clear decision for potential shorters to short on that assumption even if the demand for bitusd is big signaled by the high price of bitusd.
No other mechanism is needed to make the bitUSD price go back down simply because (above parity) there's no limit to the supply.
There is a limiting factor on the supply, being the market's appraisal of the value of BTS (BTS market cap). Once nearly all the BTS are in the collateral pool, there is no scope left for traders to create more bitAsset. BTS are traded in a free market, so there is no way to guarantee that the BTS market cap will remain far above 3x bitAssets. In such a situation a bitAsset premium could be sustained indefinitely. There is no mechanism in this situation that can force the bitUSD price down, except possible that potential bitUSD buyers realise that bitUSD is suddenly more risky.

Offline santaclause102

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there's no limit to the supply
what do you mean by that? The supply of bitUSD I guess?

Offline Agent86

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I think you have something backward... if a short seller sells bitUSD at the feed price and buys it above the feed price they have lost money, not made money.
Ops, I confused that...

Quote
If bitUSD is priced above the feed on the internal market, it motivates short sellers to short on the assumption the exchange rate will eventually go back down so they will be able to cover later for less.  But it is not specifically an immediate arbitrage situation in and of itself.
Is that enough to create the necessary BitUSD if there is a big demand for it? Why should the price of bitusd go down? It's not a clear decision for potential shorters to short on that assumption even if the demand for bitusd is big signaled by the high price of bitusd.
No other mechanism is needed to make the bitUSD price go back down simply because (above parity) there's no limit to the supply.

Offline santaclause102

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I think you have something backward... if a short seller sells bitUSD at the feed price and buys it above the feed price they have lost money, not made money.
Ops, I confused that...

Quote
If bitUSD is priced above the feed on the internal market, it motivates short sellers to short on the assumption the exchange rate will eventually go back down so they will be able to cover later for less.  But it is not specifically an immediate arbitrage situation in and of itself.
Is that enough to create the necessary BitUSD if there is a big demand for it? Why should the price of bitusd go down? It's not a clear decision for potential shorters to short on that assumption even if the demand for bitusd is big signaled by the high price of bitusd.
 

Offline starspirit

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You're right in that if there is a surge in demand for bitAssets against fiat, pushing the price on the external exchange to a premium over the internal exchange, the first traders to step in are arbitragers who buy bitAsset internally with BTS, sell externally for fiat, then buy back BTS. However, this very quickly leads to a situation where both the internal and external exchange equilibrate at a premium to the peg, until the supply of bitAssets is increased to meet the demand. This can be facilitated at the lowest risk by traders who enter the market to take advantage of the premium, while hedging their change in BTS exposure. There 2 easiest ways to do this are a simultaneous long and short, and selling the bitAsset at a premium against fiat, or by taking a short and selling BTS against fiat. In either case the trader taking the short is not bullish, just trying to take advantage of the excess demand for bitAssets across the markets.
Again I think you are confusing the issue, at first you said the "simultaneous short and long" was for arbitrage and now it seems you are saying it is for something else.

You have to understand you don't get to decide to "short to yourself."  In any given moment, deciding the best use of your BTS is to short sell bitAssets is independent from deciding the best use of your BTS is rather to buy bitAssets.


You are right that I am overanalysing!!, so its for you to decide how relevant this is. I'm only saying that users of shorts (e.g. arbitragers) do not need to be bullishly motivated. The easiest example is where the trader has an existing inventory of BTS, enters a short on 1 unit of bitAsset to take advantage of the premium (increasing his BTS exposure by the value of the bitAsset), then sells an equivalent value of his BTS for fiat to ensure his total BTS exposure is unchanged at the end. You can call this an arbitrage, although its not really risk-free (there is risk of loss at the end of the trade). But you can see at least from this example that the user of the short (and creator of bitAssets) is not required to take a more bullish overall position.

The simultaneous long/short is a way to achieve the same final outcome (see below for trade construction**). I'll come back to your point on matching the trades in the market. But if we assume you can do this closely, it means that there is only one moving market price to worry about (bitUSD/fiat, which should be fairly stable) as opposed to two moving prices to deal with (bitUSD/BTS and BTS/fiat, both of which are less stable). So it could be a preferred implementation when the BTS/fiat market is unstable or illiquid. Now I know traders don't get to choose to sell to themselves in the simultaneous long/short, there is the risk that someone else beats them to one side of the order and their prices mismatch. In a liquid bitAsset market trading at a premium they should hopefully not be too far off, but it is a risk as you point out.

On the issue of manipulations, I've found a few scenarios when thinking about the arbitrages. I will outline the possibilities in a new thread as soon as I find more time.

** The sequence is (1) The trader starts with an existing inventory of BTS worth 3x the bitAsset. (2) They simultaneously enter a long and short position on 1 unit of Bitasset, which shifts their 3x BTS from their own hand into the collateral pool. (3) They sell their bitAsset for fiat at a premium (let's say they receive $1.02). (4) Should the bitAsset trade narrower or below the peg in future, they unwind by buying the bitAsset back for fiat (say at $0.98) placing a sell order against BTS, and covering their short into that.

Offline Agent86

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Am I right about the following?

When there is a big demand for BitUSD the price of BitUSD will rise and if it rises above the level of the price feed BitUSD shorters can make a profit from shorting BitUSD and buying the BitUSD that are above the feed price and exchanging those for the collateral again?
Unless I'm misunderstanding you, this is not correct.  Shorting bitUSD and then buying bitUSD back and covering would just leave you where you started unless the exchange rate changed.
The scenario I was coming from was: How does the market regulate the amount of BitUSD available when there is a huge demand for it that excees the supply.
Say someone with a lot of cash flow sees a lot of value in BitUSD and wants to do all his/her banking with it. Then that person would buy up all BitUSD below and at the price feed and eventually push the price of BitUSD above the feed price. Then a short seller can buy those BitUSD that trade above the feed price and short BitUSD at the price feed (I assumed that shorting always happens exactly at the price feed, is that correct?) at the same time and make a profit by covering with the BitUSD he bought above the feed price.
I think you have something backward... if a short seller sells bitUSD at the feed price and buys it above the feed price they have lost money, not made money.

The assumption that short selling always happens at the feed is also not correct.  Shorts that have a floor price above the feed could match above the feed.  (I've also been trying to convince BM to make a fixed offset option for short sellers who want to short above the feed but track the feed price).

If bitUSD is priced above the feed on the internal market, it motivates short sellers to short on the assumption the exchange rate will eventually go back down so they will be able to cover later for less.  But it is not specifically an immediate arbitrage situation in and of itself.

Offline santaclause102

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Am I right about the following?

When there is a big demand for BitUSD the price of BitUSD will rise and if it rises above the level of the price feed BitUSD shorters can make a profit from shorting BitUSD and buying the BitUSD that are above the feed price and exchanging those for the collateral again?
Unless I'm misunderstanding you, this is not correct.  Shorting bitUSD and then buying bitUSD back and covering would just leave you where you started unless the exchange rate changed.
The scenario I was coming from was: How does the market regulate the amount of BitUSD available when there is a huge demand for it that excees the supply.
Say someone with a lot of cash flow sees a lot of value in BitUSD and wants to do all his/her banking with it. Then that person would buy up all BitUSD below and at the price feed and eventually push the price of BitUSD above the feed price. Then a short seller can buy those BitUSD that trade above the feed price and short BitUSD at the price feed (I assumed that shorting always happens exactly at the price feed, is that correct?) at the same time and make a profit by covering with the BitUSD he bought above the feed price.

Offline Agent86

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Am I right about the following?

When there is a big demand for BitUSD the price of BitUSD will rise and if it rises above the level of the price feed BitUSD shorters can make a profit from shorting BitUSD and buying the BitUSD that are above the feed price and exchanging those for the collateral again?
Unless I'm misunderstanding you, this is not correct.  Shorting bitUSD and then buying bitUSD back and covering would just leave you where you started unless the exchange rate changed.

If BTS falls too fast the margin calls can not automatically buy back enough BitUSD since there just might not be enough new BitUSD shorts or normal BitUSD sellers. Correct?
Yes, this is basically correct.  (I would change "can not" to "may not") but I'm just being picky.

Offline santaclause102

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Am I right about the following?

When there is a big demand for BitUSD the price of BitUSD will rise and if it rises above the level of the price feed BitUSD shorters can make a profit from shorting BitUSD and buying the BitUSD that are above the feed price and exchanging those for the collateral again?

If BTS falls too fast the margin calls can not automatically buy back enough BitUSD since there just might not be enough new BitUSD shorts or normal BitUSD sellers. Correct?
« Last Edit: November 28, 2014, 07:43:03 pm by delulo »

Offline Agent86

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I feel like you're over-analyzing here. I also don't know what the advantage of a "simultaneous long and short" is in this context.  If people are paying more for bitAssets with fiat than the internal exchange would indicate then just buy bitAssets on the internal exchange and sell them, why go short at the same time?  makes no sense.
You're right in that if there is a surge in demand for bitAssets against fiat, pushing the price on the external exchange to a premium over the internal exchange, the first traders to step in are arbitragers who buy bitAsset internally with BTS, sell externally for fiat, then buy back BTS. However, this very quickly leads to a situation where both the internal and external exchange equilibrate at a premium to the peg, until the supply of bitAssets is increased to meet the demand. This can be facilitated at the lowest risk by traders who enter the market to take advantage of the premium, while hedging their change in BTS exposure. There 2 easiest ways to do this are a simultaneous long and short, and selling the bitAsset at a premium against fiat, or by taking a short and selling BTS against fiat. In either case the trader taking the short is not bullish, just trying to take advantage of the excess demand for bitAssets across the markets.
Again I think you are confusing the issue, at first you said the "simultaneous short and long" was for arbitrage and now it seems you are saying it is for something else.

You have to understand you don't get to decide to "short to yourself."  In any given moment, deciding the best use of your BTS is to short sell bitAssets is independent from deciding the best use of your BTS is rather to buy bitAssets.

What do you mean risk of "imperfect pegging"?

I explained that if the asset became under-collateralized it can cause the peg to not track.  I also explained that the price feed doesn't dictate the exchange rate at any instant and that the exchange rate tends toward parity in the long run.  I could probably stress that short term market movements, spreads, and fees charged by exchanges all effect the potential cost of conversion into and out of market pegged assets.

Yes, I think the last sentence covers it. I am talking about general deviation from the peg due to supply and demand, unrelated to the level of collateral.

"affect certain outcomes" what outcomes? and how do those outcomes affect bitAsset holders?

I stated market manipulation is possible but other than if it causes a quick revaluation of BTS that left bitAssets under-collateralized (black swan event, already discussed) how else would it affect market pegged asset holders?

I was being deliberately coy here. Would you like me to PM you, or would it be better to openly toss around the possibilities?
I would be happy if you openly tossed the possibilities.  I think a public discussion would be good as you are not the first to bring up the impact of pushing the outside market around.  You can feel free to PM me if you prefer, but I would reserve the right to publish so people don't think there is some hidden attack that is being kept secret.

Offline Agent86

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Great text, thanks for your effort.

I believe some numbers in this paragraph might be wrong:

A margin call is triggered in the current BitShares system whenever the collateral contains less than 1.5 times the amount of BTS required to cover the obligation.  Stated another way, if the value of BTS falls by 33% from the time the short position is entered, then a margin call will occur.  The value of BTS would have to fall by 66% before the collateral would be insufficient.


A margin call is triggered in the current BitShares system whenever the value of the collateral falls to less than two times what is required to cover the obligation.

The initial collateral is 3x (2x from the short and 1x from the long) so the correct figures should be:

A margin call is triggered in the current BitShares system whenever the collateral contains less than 1.5 times the amount of BTS required to cover the obligation.  Stated another way, if the value of BTS falls by 50% from the time the short position is entered, then a margin call will occur.  The value of BTS would have to fall by 66% before the collateral would be insufficient.

I agree that my original statement of 1.5x in the first version and the explanation bytemaster added were inconsistent, but I think bytemaster had it right because I think we changed the margin call level to 2x as in the updated version.

Offline Markus

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Great text, thanks for your effort.

I believe some numbers in this paragraph might be wrong:

A margin call is triggered in the current BitShares system whenever the collateral contains less than 1.5 times the amount of BTS required to cover the obligation.  Stated another way, if the value of BTS falls by 33% from the time the short position is entered, then a margin call will occur.  The value of BTS would have to fall by 66% before the collateral would be insufficient.


A margin call is triggered in the current BitShares system whenever the value of the collateral falls to less than two times what is required to cover the obligation.

The initial collateral is 3x (2x from the short and 1x from the long) so the correct figures should be:

A margin call is triggered in the current BitShares system whenever the collateral contains less than 1.5 times the amount of BTS required to cover the obligation.  Stated another way, if the value of BTS falls by 50% from the time the short position is entered, then a margin call will occur.  The value of BTS would have to fall by 66% before the collateral would be insufficient.

Offline starspirit

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I feel like you're over-analyzing here. I also don't know what the advantage of a "simultaneous long and short" is in this context.  If people are paying more for bitAssets with fiat than the internal exchange would indicate then just buy bitAssets on the internal exchange and sell them, why go short at the same time?  makes no sense.
You're right in that if there is a surge in demand for bitAssets against fiat, pushing the price on the external exchange to a premium over the internal exchange, the first traders to step in are arbitragers who buy bitAsset internally with BTS, sell externally for fiat, then buy back BTS. However, this very quickly leads to a situation where both the internal and external exchange equilibrate at a premium to the peg, until the supply of bitAssets is increased to meet the demand. This can be facilitated at the lowest risk by traders who enter the market to take advantage of the premium, while hedging their change in BTS exposure. There 2 easiest ways to do this are a simultaneous long and short, and selling the bitAsset at a premium against fiat, or by taking a short and selling BTS against fiat. In either case the trader taking the short is not bullish, just trying to take advantage of the excess demand for bitAssets across the markets.

What do you mean risk of "imperfect pegging"?

I explained that if the asset became under-collateralized it can cause the peg to not track.  I also explained that the price feed doesn't dictate the exchange rate at any instant and that the exchange rate tends toward parity in the long run.  I could probably stress that short term market movements, spreads, and fees charged by exchanges all effect the potential cost of conversion into and out of market pegged assets.

Yes, I think the last sentence covers it. I am talking about general deviation from the peg due to supply and demand, unrelated to the level of collateral.

"affect certain outcomes" what outcomes? and how do those outcomes affect bitAsset holders?

I stated market manipulation is possible but other than if it causes a quick revaluation of BTS that left bitAssets under-collateralized (black swan event, already discussed) how else would it affect market pegged asset holders?

I was being deliberately coy here. Would you like me to PM you, or would it be better to openly toss around the possibilities?