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.
Topic: [Documents] Whitepapers & Broschures (Read 36592 times)
