Author Topic: Introduction to BitShares - Video  (Read 13894 times)

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Offline bytemaster

Introduction to BitShares - Video
« on: November 03, 2013, 07:15:19 pm »
This is a youtube video I produced that describes BitShares. 

http://www.youtube.com/watch?v=5BV55IrZi7g
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Offline Winslow Strong

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Re: Introduction to BitShares - Video
« Reply #1 on: November 10, 2013, 09:19:50 pm »
I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?   
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Offline ruletheworld

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Re: Introduction to BitShares - Video
« Reply #2 on: November 11, 2013, 03:30:11 am »
I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?

The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.

Or perhaps Dan has a better explanation of all of this!
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Offline Stan

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Re: Introduction to BitShares - Video
« Reply #3 on: November 11, 2013, 04:49:32 am »
Couldn't have said it more succinctly myself.
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Offline Winslow Strong

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Re: Introduction to BitShares - Video
« Reply #4 on: November 11, 2013, 11:45:24 am »
I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?

The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.

Sorry, maybe I wasn't being clear enough. For the price to track the true USD price, its necessary that buyers would have incentive to buy when the price dips sufficiently below the true USD price.  What is that incentive? 

In a prediction market, the incentive is that eventually the share matures and is paid out, so there's a terminal value.  Similarly in futures markets.  With ETFs, there's no terminal date, but if the price of the ETF dips too low, theres an arbitrage opportunity for people to buy shares of the ETF and exchange it for a basket of the underlying.

It sounds to me like you're saying there is no such mechanism for bitUSD.  Then you are just relying on putting this idea out there that the prices should track, and hoping that others believe that others believe that others believe. . . that it should.  Without some type of redeemability, I don't see how anyone could believe this will actually work.
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Offline ruletheworld

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Re: Introduction to BitShares - Video
« Reply #5 on: November 12, 2013, 01:23:16 am »
I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?

The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.

Sorry, maybe I wasn't being clear enough. For the price to track the true USD price, its necessary that buyers would have incentive to buy when the price dips sufficiently below the true USD price.  What is that incentive? 

In a prediction market, the incentive is that eventually the share matures and is paid out, so there's a terminal value.  Similarly in futures markets.  With ETFs, there's no terminal date, but if the price of the ETF dips too low, theres an arbitrage opportunity for people to buy shares of the ETF and exchange it for a basket of the underlying.

It sounds to me like you're saying there is no such mechanism for bitUSD.  Then you are just relying on putting this idea out there that the prices should track, and hoping that others believe that others believe that others believe. . . that it should.  Without some type of redeemability, I don't see how anyone could believe this will actually work.

Here's how it would work out in this situation: Traders will see that bitUSD is undervalued, and therefore will go long bitUSD, waiting for the price to increase. Once it does, they will exit that position and get back their bitshares, but at a profit (i.e. more bitshares than they started off with) because of the increase in price. Similar situation will occur on the short side.

The mechanism is a little more tricky than ETFs that you mention above. The reason traders will go long bitUSD in the above situation is because they think the consensus will bring back the price to its 'true' value. When everyone thinks the same, the price indeed will be the true value. If there are (as it probably would be in the initial day or two, for instance) say just 4 players in the market, the equilibrium price will be harder to maintain. With more players looking for such opportunities, the system will track the true prices of things it represents. Or at least that's the hope.
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Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #6 on: November 12, 2013, 06:22:13 am »
I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?

The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.

Sorry, maybe I wasn't being clear enough. For the price to track the true USD price, its necessary that buyers would have incentive to buy when the price dips sufficiently below the true USD price.  What is that incentive? 

In a prediction market, the incentive is that eventually the share matures and is paid out, so there's a terminal value.  Similarly in futures markets.  With ETFs, there's no terminal date, but if the price of the ETF dips too low, theres an arbitrage opportunity for people to buy shares of the ETF and exchange it for a basket of the underlying.

It sounds to me like you're saying there is no such mechanism for bitUSD.  Then you are just relying on putting this idea out there that the prices should track, and hoping that others believe that others believe that others believe. . . that it should.  Without some type of redeemability, I don't see how anyone could believe this will actually work.


When the value of BitUSD falls below a dollar, SHORTS COVER.   When it goes above a dollar new shorts enter the market.   Margin calls force shorts to cover. 
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Offline Winslow Strong

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Re: Introduction to BitShares - Video
« Reply #7 on: November 12, 2013, 10:20:02 am »
When the value of BitUSD falls below a dollar, SHORTS COVER.   When it goes above a dollar new shorts enter the market.   Margin calls force shorts to cover.

Now I'm really confused.  First of all, I thought bitUSD was a price that we hope will track the price of 1 USD denominated in BTS. That's what it seems like from the video anyway, and would be in keeping with std exchange rate nomenclature.  If that's true, then the person on the short end profits from BitUSD falling, so there wouldn't be any margin call in that scenario. 

I think that margin calls unnecessarily complicate this discussion.  Supposing the penalty for a margin call is sufficiently high that nearly all traders keep sufficient margin nearly all the time, then we can ignore them (the calls, but not of course the need to maintain posted margin).

Another thing about your response that confuses me is that it implies the margin requirements depend on the BTS/USD rate, not merely the price of BitUSD.  In that case, the BTS/USD rate must be embedded in the blockchain from some reliable source.  Is this the case, or are margins requirements calculated completely based on the movements of bitUSD itself without reference to BTS/USD?

Regardless of your answer to the above, there is no issue whatsoever with margin when the short side is in profitable territory.  My question remains: what incentive do longs have to enter, and support the price of BitUSD if they find that it's trading more cheaply than BTS/USD?  The only answer that has been provided is that participants believe that participants believe that. . . the price will track. 

This would be an extreme reliance on herd behavior, and is not whatsoever analogous to a prediction market.  In prediction markets, there is a maturity date where it's decided who was right and wrong and the winning party receives payment.  The incentive to be correct is the expectation of future payment upon correctness.  That expectation is based on the type of social contract that Invictus discusses in their literature on protoshares redemption for DAC shares.  It's clearly in the interest of any well-established company sponsoring the prediction market to honor that social contract, so there exists a good incentive structure. 

In the case of BitUSD, the expectation is merely based on the predicted future behavior of the herd.  Anyone who has studied a bit of financial history knows that that can seem to work well for years, until it fails spectacularly.  The collapse of Long Term Capital Management would be a good case study to review.  And what's more, the positions that LTCM held did have terminal values that were highly likely to be (and ended up being) very profitable. There was huge incentive for other players in the market to snatch these up at discounted values.  However, there was even larger incentive for them to drive prices against LTCM forcing a liquidation at even more favorable prices.  And this all occurred with respect to assets that had terminal payouts.  You've proposed assets without such.

What makes you think that expectation alone will be sufficient to make the price track?  Has this been tried somewhere before in financial markets?
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Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #8 on: November 12, 2013, 05:07:53 pm »
Ok, those who own BitUSD are earning dividends at 2x the rate of those who own BTS. 
Those who are Short BitUSD are paying interest at 2x the value of BTS.

Shorts MUST buy back at some point if they ever want to use their collateral for anything else.   The only price at which someone holding BitUSD would be willing to sell is the BTS/USD exchange rate.   Otherwise, they sell the BitUSD to someone who wants a high yield investment backed by BTS.

So you apply game theory between the longs and the shorts.   The longs will hold out for a fair price, and it costs the shorts a lot of money to 'let it ride'.  Also, for someone who is short to maximize the return on their investment they need to cover, take a profit, and re-short at the new price.   As the value of BitUSD falls the collateral backing it goes from 2x to 3x to 10x to 100x... and thus the interest rate earned by those who hold BitUSD rises and the opportunity cost for the short also rises. 

As a result there is constant pressure for shorts to cover and and re-short at the new price.  The only way for them to cover is to convince the longs to give up their higher yield and thus agree to a price near BTS/USD.

Now the longs cannot hold out for ever either because at any time new shorts can enter the market if the longs try to push up the price by holding BitUSD off the market.
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Offline Winslow Strong

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Re: Introduction to BitShares - Video
« Reply #9 on: November 12, 2013, 09:13:37 pm »
Thanks for the response bytemaster;  I know you're busy today. 
Just to be clear on where I'm coming from, I think bitshares and DACs in general are very cool ideas, and want them to succeed.  I have much to say about what you've written, but can't reply until I get one thing straightened out.

Is the margin requirement based on the price of bitUSD or BTS/USD? 

E.g. bitUSD is .99 whereas BTS/USD is 1.00.  Is margin 1.98 or 2?

The latter would be more favorable for tracking, but since USD are not endogenous to the bitshares block chain, that info would need to be fed into the blockchain by a trusted source.  So the cost would be a bit of centralization, but it might be worth it.

Thanks.
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Re: Introduction to BitShares - Video
« Reply #10 on: November 12, 2013, 09:17:08 pm »
Thanks for the response bytemaster;  I know you're busy today. 
Just to be clear on where I'm coming from, I think bitshares and DACs in general are very cool ideas, and want them to succeed.  I have much to say about what you've written, but can't reply until I get one thing straightened out.

Is the margin requirement based on the price of bitUSD or BTS/USD? 

E.g. bitUSD is .99 whereas BTS/USD is 1.00.  Is margin 1.98 or 2?

The latter would be more favorable for tracking, but since USD are not endogenous to the bitshares block chain, that info would need to be fed into the blockchain by a trusted source.  So the cost would be a bit of centralization, but it might be worth it.

Thanks.

It tracks for the same reason a prediction market can track arbitrary ideas simply by specifying a name.   BitUSD Short margin requirements are based upon the highest unaccepted bid to buy BitUSD for BTS.   This price indicates that the entire market agrees the value of BitUSD is higher than that bid and so anyone with insufficient margin at that bid price is forced to buy into it to cover their position.
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Offline Winslow Strong

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Re: Introduction to BitShares - Video
« Reply #11 on: November 13, 2013, 12:09:51 pm »
Thanks again for your reply, bytemaster, during this busy time. In response to your previous points:

BitUSD Short margin requirements are based upon the highest unaccepted bid to buy BitUSD for BTS.

Shorts MUST buy back at some point if they ever want to use their collateral for anything else.   

So you apply game theory between the longs and the shorts.   The longs will hold out for a fair price, and it costs the shorts a lot of money to 'let it ride'.  Also, for someone who is short to maximize the return on their investment they need to cover, take a profit, and re-short at the new price.   As the value of BitUSD falls the collateral backing it goes from 2x to 3x to 10x to 100x... and thus the interest rate earned by those who hold BitUSD rises and the opportunity cost for the short also rises. 

As a result there is constant pressure for shorts to cover and and re-short at the new price.  The only way for them to cover is to convince the longs to give up their higher yield and thus agree to a price near BTS/USD.

Now the longs cannot hold out for ever either because at any time new shorts can enter the market if the longs try to push up the price by holding BitUSD off the market.

1.) So you're saying that you won't allow shorts to reduce their margin positions even if/when the bitUSD price has moved very much into the money for the shorts? 

This seems silly, as the shorts can still effectively reduce their margin by covering their previous position and initiating fresh positions at their desired level of exposure with new 2x margin, which would be lower than the previous 2x margin. It forces the shorts to needlessly make extra transactions to achieve the same position they could have had by just reducing their margin. Forcing shorts to cover in this way won't cause net long demand, hence won't cause the price to rise.


2.) Fungibility: If you don't allow shorts to reduce their margin when their positions are in the money, then the bitUSD contracts lose fungibility.  This is because the margin requirement of each would be contractually coded in at the time of creation, and would depend on the bitUSD price at that time.  I doubt that this is really the way you intend for things to operate.


Ok, those who own BitUSD are earning dividends at 2x the rate of those who own BTS. 
Those who are Short BitUSD are paying interest at 2x the value of BTS.

The only price at which someone holding BitUSD would be willing to sell is the BTS/USD exchange rate. Otherwise, they sell the BitUSD to someone who wants a high yield investment backed by BTS.

These dividends will scale down as margin scales down as shorts reduce their margin, which they will do even if you force them to cover their initial position and reenter a new one to do so. Since the margin requirements are based on the bitUSD price and not the BTS/USD exchange rate, then the goodness of the deal for the longs doesn't depend on the deviation of bitUSD from BTS/USD, so this is not a mechanism that keeps the prices tracking.

Furthermore, in panics yield-incentives typically are surpassed by fear of near/intermediate term price losses. Interest only accumulates linearly in time, whereas prices can change arbitrarily quickly. LTCMs positions had crazy yields at the market prices before they had to liquidate.  Still, buyers didn't enter and didn't cause their illiquid bonds to converge to the values of similar liquid ones.  Whereas in the setup you describe. . .

1.) Yields (dividends) won't effectively increase as bitUSD price drops, because shorts will reduce their margins - by exiting and reentering if you force this upon them.

2.) There's no terminal payout, so no implied yield (price appreciation) as there is for e.g. bonds.
 
I still see no incentive whatsoever for any market agent to buy and sell in such a way that e.g. the price of bitUSD will track the BTS/USD rate, other than the belief that it is common knowledge that they "should."  I still see this as a far fragiler incentive structure that has existed in many instances in financial history where instruments that were expected to track/converge had huge deviations and didn't.  On the plus side, I'll point out that your system requires far higher margin than is typical in financial markets, which should reduce the pro-cyclical feedback that occurs in financial panics.  Reducing this feedback is not, however, the same thing as incentivizing convergence.

I'm open to hearing new arguments or learning where I've misunderstood how the proposed system would work.
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Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #12 on: November 13, 2013, 02:47:29 pm »
Quote
1.) So you're saying that you won't allow shorts to reduce their margin positions even if/when the bitUSD price has moved very much into the money for the shorts? 

This seems silly, as the shorts can still effectively reduce their margin by covering their previous position and initiating fresh positions at their desired level of exposure with new 2x margin, which would be lower than the previous 2x margin. It forces the shorts to needlessly make extra transactions to achieve the same position they could have had by just reducing their margin. Forcing shorts to cover in this way won't cause net long demand, hence won't cause the price to rise.


2.) Fungibility: If you don't allow shorts to reduce their margin when their positions are in the money, then the bitUSD contracts lose fungibility.  This is because the margin requirement of each would be contractually coded in at the time of creation, and would depend on the bitUSD price at that time.  I doubt that this is really the way you intend for things to operate.

This is just an implementation detail.  Point 1 is how they would do it.   Selling a short position cannot be readily fungible because every short is at a different price.
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Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #13 on: November 13, 2013, 02:55:36 pm »
Quote
These dividends will scale down as margin scales down as shorts reduce their margin, which they will do even if you force them to cover their initial position and reenter a new one to do so. Since the margin requirements are based on the bitUSD price and not the BTS/USD exchange rate, then the goodness of the deal for the longs doesn't depend on the deviation of bitUSD from BTS/USD, so this is not a mechanism that keeps the prices tracking.

Furthermore, in panics yield-incentives typically are surpassed by fear of near/intermediate term price losses. Interest only accumulates linearly in time, whereas prices can change arbitrarily quickly. LTCMs positions had crazy yields at the market prices before they had to liquidate.  Still, buyers didn't enter and didn't cause their illiquid bonds to converge to the values of similar liquid ones.  Whereas in the setup you describe. . .

1.) Yields (dividends) won't effectively increase as bitUSD price drops, because shorts will reduce their margins - by exiting and reentering if you force this upon them.

2.) There's no terminal payout, so no implied yield (price appreciation) as there is for e.g. bonds.
 
I still see no incentive whatsoever for any market agent to buy and sell in such a way that e.g. the price of bitUSD will track the BTS/USD rate, other than the belief that it is common knowledge that they "should."  I still see this as a far fragiler incentive structure that has existed in many instances in financial history where instruments that were expected to track/converge had huge deviations and didn't.  On the plus side, I'll point out that your system requires far higher margin than is typical in financial markets, which should reduce the pro-cyclical feedback that occurs in financial panics.  Reducing this feedback is not, however, the same thing as incentivizing convergence.

I'm open to hearing new arguments or learning where I've misunderstood how the proposed system would work.

I could debate the tracking issue to great extent, but I think the ultimate proof will be when we launch the test network.  If my theory is wrong, then all that is needed to 'make it work', is an external price feed.   I base my 'price tracking' on the behavior of prediction markets that also have no ties to the real world and yet can track arbitrary ideas or concepts.   I can see that you are putting a lot of effort into understanding how it could work, and I encourage you to keep thinking it through until the key insight that you are missing hits.

Here is my challenge to you, role play longs and shorts against one another and see if you can manipulate the price without one side digging in.  Keep in mid that longs are competing against other longs and shorts against other shorts.   Then define the direction the market will move and why.
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Offline Winslow Strong

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Re: Introduction to BitShares - Video
« Reply #14 on: November 14, 2013, 11:57:37 am »
I appreciate your time in replying, again.

I could debate the tracking issue to great extent, but I think the ultimate proof will be when we launch the test network.

Indeed, it will be an interesting experiment.  However, BitShares, and by association Invictus, risk losing some credibility if it fails, so it's worthwhile to think it through carefully first.  I can tell that you are quite confident, although I'm still unable to fathom why from this conversation. 

If my theory is wrong, then all that is needed to 'make it work', is an external price feed.   

I don't agree.  I think this would help substantially, since it would give the yield incentive that you mentioned earlier.  However, as I pointed out, yield incentives are never sufficient to overcome fear of near-term losses in turbulent financial times.  That issue is further exacerbated by the fact that there is no guaranteed convergence of BitUSD at any terminal horizon (as there would be for bonds or futures), because there is no terminal horizon.  With typical financial derivatives, a buyer knows an upper bound on how much time he will have to bear price deviations before convergence.  With BitUSD, there is no such upper bound.

I base my 'price tracking' on the behavior of prediction markets that also have no ties to the real world and yet can track arbitrary ideas or concepts. 

Can you provide an example of what you mean?  The prediction markets that I'm familiar with have a terminal payout.  Do you know of ones that successfully track without a terminal payout?

Here is my challenge to you, role play longs and shorts against one another and see if you can manipulate the price without one side digging in.  Keep in mid that longs are competing against other longs and shorts against other shorts.   Then define the direction the market will move and why.
I'm not quite sure what you mean "longs are competing against other longs."  If I'm long, I'd very much like to see an increase in demand for new longs, as this pushes up the price, making my position more profitable. 

Furthermore, my argument isn't based on game theory, and game theory is superfluous in analyzing my argument.  If BitShares is successful, the market will be big, and typical players will be small.  This means they have negligible ability to manipulate the price.  (Of course in practice there are often big players that can manipulate prices at certain points.  That poses further vulnerabilities for BitShares, but my argument doesn't rely on price manipulation).  I'm only assuming agents will act out of their self-interest and/or emotions.  Crazy price fluctuations do not necessitate price manipulators.  They sometimes occur endogenously (black Monday, 1987), and sometimes are triggered by exogenous events such as the Japanese Tsunami and subsequent Fukushima fallout.  When abnormally large deviations in bitUSD vs BTS/USD occur, this creates some level of fear that tracking is failing.  When participants know that the only reason to believe tracking will succeed is if others believe that tracking will succeed, then this fear alone is sufficient to cause tracking to fail.  It has been so many many times in financial history, with assets that gave market participants more incentive to cause them to track than bitUSD vs BTS/USD gives. 

The main mitigating factor that I see with respect to my argument is that your margin requirements are much much higher than is typical in financial markets, so that should result in reduced feedback effects from selling inducing more selling due to solvency pressure.  As I said above though, reducing this feedback is not equivalent to incentivizing convergence.  When (not if) large deviations occur, it's essential that the market have high incentive to reverse the deviation if tracking is to occur.  I just haven't seen what that incentive might be.
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Offline Winslow Strong

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Re: Introduction to BitShares - Video
« Reply #15 on: November 14, 2013, 12:17:17 pm »
I'd also like to pose a question:  Have you stopped to consider why financial markets don't offer products like BitUSD?  I.e. a derivative without a terminal horizon, designed to track an underlying via a yield mechanism as the tracking incentivization?

Financial markets offer many flavors of tracking products - Futures, Forwards, contracts for a difference, etc.  All of these involve cash flows changing hands at points in time, where the amount scales linearly as a function of the change in price of the underlying.  Your BitUSD (if it were to use BTS/USD as the basis for margin requirement) incentivizes via the size of the yield changing as a function of the underlying.  The yield is a rate, i.e. BTS/time.  It's the first-derivative of a cash flow.  The difference between actual cash flows compensating for tracking deviation and changing the first derivative of cash flows to compensate is enormous.  The latter alone can never ever justify the risk in tracking deviation of an abrupt financial downturn, while the former does just fine, as long as margin remains sufficient (which you have ample protection for).

I don't know the exact reasons why products like Bit/USD aren't offered on exchanges, but I'd be highly suspicious that the above lack of risk-compensation is a relevant aspect.  I'd at least want to have investigated this issue by talking to professional traders / exchange operators before launching such a product.  Have you done so? What was their reaction?

Why haven't you simply chosen to implement an established form of financial contract, like futures or CFDs? Do you think it will help you to skirt regulation by doing it your way? 

I also had some impression that you wanted the system to be decentralized, which would prohibit even the incorporation of BTS/USD into BitShares, as it requires a trusted authority.  But if you are open to including that price feed, then you'd be a lot safer implementing CFDs that incentivize via actual cash flows tied to the actual underlying.  Your proposal seems like it's taking totally unnecessary risks in this regard.
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Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #16 on: November 14, 2013, 05:06:48 pm »
I'd also like to pose a question:  Have you stopped to consider why financial markets don't offer products like BitUSD?  I.e. a derivative without a terminal horizon, designed to track an underlying via a yield mechanism as the tracking incentivization?

Financial markets offer many flavors of tracking products - Futures, Forwards, contracts for a difference, etc.  All of these involve cash flows changing hands at points in time, where the amount scales linearly as a function of the change in price of the underlying.  Your BitUSD (if it were to use BTS/USD as the basis for margin requirement) incentivizes via the size of the yield changing as a function of the underlying.  The yield is a rate, i.e. BTS/time.  It's the first-derivative of a cash flow.  The difference between actual cash flows compensating for tracking deviation and changing the first derivative of cash flows to compensate is enormous.  The latter alone can never ever justify the risk in tracking deviation of an abrupt financial downturn, while the former does just fine, as long as margin remains sufficient (which you have ample protection for).

I don't know the exact reasons why products like Bit/USD aren't offered on exchanges, but I'd be highly suspicious that the above lack of risk-compensation is a relevant aspect.  I'd at least want to have investigated this issue by talking to professional traders / exchange operators before launching such a product.  Have you done so? What was their reaction?

Why haven't you simply chosen to implement an established form of financial contract, like futures or CFDs? Do you think it will help you to skirt regulation by doing it your way? 

I also had some impression that you wanted the system to be decentralized, which would prohibit even the incorporation of BTS/USD into BitShares, as it requires a trusted authority.  But if you are open to including that price feed, then you'd be a lot safer implementing CFDs that incentivize via actual cash flows tied to the actual underlying.  Your proposal seems like it's taking totally unnecessary risks in this regard.

This will be an experiment, like Bitcoin.  The closest thing to BitUSD is EuroDollars.   

Stan and I were discussing BitShares one evening and I tried to describe how BitShares is different from an altcoin.   I used an analogy that described bitshares as a crypto-equity in a decentralized bank and exchange called BitShares.  The shareholders of the bank are those who own bitshares.   I then went on to explain how this decentralized bank can lend dollars into existence just like their centralized counterparts.   I will review this analogy here for the benefit of others who would like to engineer their own DACs.

All banks these days operate on what I like to call a fictional reserve basis.  When you approach the bank for a loan to buy a house, the bank creates new dollars from thin air backed by your collateralized promise to pay back the loan.  In this case, your house is the collateral and the bank may call your loan and foreclose if you stop making the required payments or if the value of the house falls too much.   When you pay off your loan the dollars are destroyed and the bank keeps the interest payments and the lien is removed from your house.   The key thing to remember here is that these dollars are nothing more than an IOU from the bank.   People trust the value of the IOUs because they trust the bank to honor their promise to pay a dollars worth of value.

Gold Note

Lets step back one step further, and consider that a dollar use to be defined as  412.5 grains of 99.9% pure silver.   When you received a bank note it was a promise to pay one dollar worth of gold and the law defined the fixed ratio of gold to silver required to give the bank note a tie to the real world.

As you can see the promise to pay is denominated in dollars which are defined as a weight in silver, and yet what is paid out upon redemption is gold.   This example demonstrates that a dollar is just an arbitrary label assigned to a certain amount of value.  Just like you could have a dollar of silver or a dollar of gold, you could also have a dollar of corn, a dollar of oil, or a dollar of anything including a dollar of bitcoin!   When the United States left the gold standard entirely the dollar began to float against all other goods and services and now has value for its own sake even though it is no longer price-fixed against gold or silver.  The dollar is nothing more than an arbitrary measure of value and is still redeemable for $1 worth of silver at the current market price (not the price fixed 412.5 grains of silver).

Lets go back to the world of DACs and consider how a decentralized bank can lend dollars into existence just like their centralized counterparts.   First the bank must identify someone who would like to borrow dollars as it is the collateral behind the borrowers promise to repay that backs the value of the dollars.    Just like real banks,  BitShares requires collateral for the loan and the only collateral BitShares has the ability to foreclose upon is its own equity.    When you borrow money for a house the bank usually requires at least 20% down to protect the bank in the event your house loses value.   In the case of the BitShares DAC the bank requires a 50% downpayment.
Someone wishing to borrow $100 dollars from the BitShares DAC must find $200 worth of equity(bitshares) to back the loan.  Lets assume they have mined $200 worth of equity, they can mortgage this equity and receive 100 BitUSD in exchange for a lean on their equity that can only be cleared by paying back 100 BitUSD.   

BitUSD is the equivalent of the old bank notes that promised to pay $1 worth of value on demand.  In the case of the old bank notes, this value was denominated in gold or silver.  In the case of the BitShares DAC this value is $1 worth of equity, aka bitshares.   The BitShares DAC can almost always make good on this promise because when someone comes to redeem a note and is unable to sell it on the market directly the value of the BitUSD in terms of bitshares will rise until the decentralized bank has the authority to call a loan and repurchase the BitUSD. 

Most people understand why someone would borrow money to buy a house, but why would someone mortgage their BitShares for BitUSD?   The reason someone would borrow BitUSD is so they could sell it and take what is called a short position.  A short position is a speculative bet that BitUSD will go down in value relative to bitshares.  If the value does go down then the speculator can repurchase the BitUSD for fewer bitshares in the future and then pay off the loan while pocketing a nice profit.  This is how speculators on Wall Street make money when stocks go down: they borrow the stock, sell it for $100, and then repurchase it later for $50 and return the stock while making a $50 profit.

Dividends & Interest Payments
All banks attempt to operate for a profit and therefore charge interest on loans along with transaction fees and inactivity fees.  The bank profits are the distributed to the shareholders as dividends.  In the case of the BitShares DAC there are also transaction fees, inactivity fees, and margin-call fees and the profits that result from charging these fees are paid to the shareholders.

When someone wishes to borrow BitUSD from the bank they do not get to borrow this money interest-free.  Instead they pay interest equal to the dividends they would have received on their collateral.    Anyone holding a bank note is effectively lending value to the bank by not redeeming it and anyone holding a balance at a bank is traditionally paid interest.  Likewise, those who hold BitUSD are effectively lending the value of a dollar to the decentralized bank by not redeeming it.  In exchange for lending this dollar the bank pays them interest.  In the case of the BitShares DAC the bank does not take a cut of the spread between the interest paid by the borrower and interest paid to the lender.

It is through this explanation of BitShares that the concept of a DAC was born and a new take on the nature of Bitcoin as a decentralized autonomous corporation rather than just a crypto-currency came to be.
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Offline Winslow Strong

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Re: Introduction to BitShares - Video
« Reply #17 on: November 15, 2013, 01:53:19 pm »
This will be an experiment, like Bitcoin.  The closest thing to BitUSD is EuroDollars.   

Eurodollar deposits are redeemable for USD at the maturity of their deposit time.  This redeemability is backed by faith in the solvency of the bank that holds your deposit.  What we have been debating is why the bitshares market in BitUSD would actually track the BTS/USD rate, which would be necessary to redeem your bitUSD from the market for the value of 1 USD denominated in BTS.  So this is a bit tangent to our discussion, and again is a financial product where lump-sum cash flow changes hands at some point in time.  That contractual obligation (modulo trust) is sufficient to maintain a market value for Eurodollars that tracks dollars. 

I asked for an example of a financial derivative traded on a market that tracks an underlying merely via a mechanism of yield-adjustment, without lump-cash settlements that compensate directly and linearly for price changes of the underlying.  I've never heard of such a product, and it's premise seems to me to be ill-founded.

If I had to think of the closest product to bitUSD, I think it would be an equity.  Equities just pay dividends, as bitUSD does, and there's no notion of any terminal value of an equity.  However, equities give ownership in the net assets of a company, hence have backing in this sense.  They also don't track anything other than the value of the company (by definition), which in old-school finance was proposed to be the discounted expected value of the entire future stream of dividends from that company.  This makes sense as a way to value bitUSD also.  However, the future dividends of bitUSD depend directly and merely on its price (in the case where margin depends on bitUSD's price). There's no underlying net profits as there would be for a company to distribute as dividends.  But the price is valued from the dividends.  So we have a bit of a self-referential situation going on here, and it should be clear that in this valuation model there's no reason for the market price to converge to any particular value.

In the case where bitUSDs dividends are a function of an embedded BTS/USD price, then that price can be seen as analogous to something proportional to net earnings of a company.  In that case, we may expect some rational valuation model to work, but I don't see any reason why the value of the dividend stream from bitUSD would converge to a certain specific proportionality factor (the one needed to make the ratio of bitUSD/(BTS/USD) prices be 1) times its net income (BTS/USD price).  The price of bitUSD would be sensitive to all kinds of exogeneous things, first and foremost interest rates in the overall economy.
« Last Edit: November 15, 2013, 02:00:00 pm by Winslow Strong »
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Offline nanobit

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Re: Introduction to BitShares - Video
« Reply #18 on: November 18, 2013, 11:05:02 pm »
Why did Bytemaster stop replying to this thread? Is it just me or is this concept still unclear and needs a simple example?

Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #19 on: November 18, 2013, 11:07:37 pm »
Why did Bytemaster stop replying to this thread? Is it just me or is this concept still unclear and needs a simple example?

Sorry, I have just been busy and didn't realize I hadn't addressed a post here.
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Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #20 on: November 18, 2013, 11:31:06 pm »
This will be an experiment, like Bitcoin.  The closest thing to BitUSD is EuroDollars.   

Eurodollar deposits are redeemable for USD at the maturity of their deposit time.  This redeemability is backed by faith in the solvency of the bank that holds your deposit.  What we have been debating is why the bitshares market in BitUSD would actually track the BTS/USD rate, which would be necessary to redeem your bitUSD from the market for the value of 1 USD denominated in BTS.  So this is a bit tangent to our discussion, and again is a financial product where lump-sum cash flow changes hands at some point in time.  That contractual obligation (modulo trust) is sufficient to maintain a market value for Eurodollars that tracks dollars. 

I asked for an example of a financial derivative traded on a market that tracks an underlying merely via a mechanism of yield-adjustment, without lump-cash settlements that compensate directly and linearly for price changes of the underlying.  I've never heard of such a product, and it's premise seems to me to be ill-founded.

If I had to think of the closest product to bitUSD, I think it would be an equity.  Equities just pay dividends, as bitUSD does, and there's no notion of any terminal value of an equity.  However, equities give ownership in the net assets of a company, hence have backing in this sense.  They also don't track anything other than the value of the company (by definition), which in old-school finance was proposed to be the discounted expected value of the entire future stream of dividends from that company.  This makes sense as a way to value bitUSD also.  However, the future dividends of bitUSD depend directly and merely on its price (in the case where margin depends on bitUSD's price). There's no underlying net profits as there would be for a company to distribute as dividends.  But the price is valued from the dividends.  So we have a bit of a self-referential situation going on here, and it should be clear that in this valuation model there's no reason for the market price to converge to any particular value.

In the case where bitUSDs dividends are a function of an embedded BTS/USD price, then that price can be seen as analogous to something proportional to net earnings of a company.  In that case, we may expect some rational valuation model to work, but I don't see any reason why the value of the dividend stream from bitUSD would converge to a certain specific proportionality factor (the one needed to make the ratio of bitUSD/(BTS/USD) prices be 1) times its net income (BTS/USD price).  The price of bitUSD would be sensitive to all kinds of exogeneous things, first and foremost interest rates in the overall economy.

This is not tracking merely by yield-adjustment.   There are no known financial instruments that operate exactly how BitUSD does just like prior to Bitcoin there were no systems that operated how Bitcoin does.   It is the existence of Bitcoin and its ability to have 'value without contractual obligation' that opens the door to invent new financial assets.   

So let me ask you a question:  Suppose you wanted to buy something called BitUSD and expected it to have the value of a dollar?   How many BTS would you pay?    Clearly not much more than $1 worth of BTS.   Now when no BitUSD exists then it cannot be created without someone willing to borrow a BitUSD backed by collateral.   At what price would some one be willing to borrow BitUSD and sell it for BTS?   Clearly not anything less than $1 worth of BTS.   

Once these first two people Long and Short trade positions you have an agreement on the value of BTS vs USD at that point in time.

TIME PASSES

The only way for Long and Short to exit the position is to agree.    So the long attempts to sell their BitUSD and they ASK for 1 USD worth of BTS at todays price (in their opinion).  If they ask too much, no one else will accept.  If they ask less than 1 USD then there will be many buyers.   

The only thing it takes to shake a SHORT from their position is for someone to BID at 1.5x the strike price of the short position and for there to be no takers.    Once that happens the short is forced to buy.   Now if someone is willing to Bid 1.5x for BitUSD then someone who already has BitUSD could easily sell into it and get their dollar worth of BTS out.

So my question for you is this.... markets always price things based upon expected future value relative to past value.    BitUSD is either correlates with the dollar or is worth nothing.  I don't see any other way for the market to price it.
   
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Offline jimbobway

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Re: Introduction to BitShares - Video
« Reply #21 on: December 12, 2013, 03:22:45 am »
If I have MtGoxUSD then MtGox will allow me to withdraw it into my bank account into BankUSD.  MtGox basically guarantees this and this is why MtGoxUSD is "valuable".

If I have BitUSD who will allow me to withdraw BitUSD into BankUSD?  Is this a service that needs to be built?  Or is BitUSD only backed by BitShares?   It seems like if I own BitUSD no one will convert it directly to BankUSD without first converting it to BitShares.

Since I can convert MtGoxUSD into BankUSD easier than converting BitUSD to BankUSD, it seems like MtGoxUSD is more valuable than BitUSD.  Your thoughts?

« Last Edit: December 12, 2013, 03:33:56 am by jimbobway »

Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #22 on: December 13, 2013, 08:35:40 am »
If I have MtGoxUSD then MtGox will allow me to withdraw it into my bank account into BankUSD.  MtGox basically guarantees this and this is why MtGoxUSD is "valuable".

If I have BitUSD who will allow me to withdraw BitUSD into BankUSD?  Is this a service that needs to be built?  Or is BitUSD only backed by BitShares?   It seems like if I own BitUSD no one will convert it directly to BankUSD without first converting it to BitShares.

Since I can convert MtGoxUSD into BankUSD easier than converting BitUSD to BankUSD, it seems like MtGoxUSD is more valuable than BitUSD.  Your thoughts?

BankUSD is a promise to pay a USD worth of value in BTS at the time of withdraw.   So you convert BitUSD to USD like so....   BitUSD -> BTS -> BTC -> BitStamp -> BankUSD.   Now that process has many stages and fees, but you could just as easily sell anyone BitUSD for USD on the street corner.   As holding BitUSD pays you interest, this interest can cover most of your transaction fees provided you hold it for a while.

MtGoxUSD has counter-party risk, the funds could be stolen, and you still have wire-transfer costs *if* you are able to withdraw it in a timely manner.   There is also KYC and loss of privacy.   GoxUSD doesn't pay you interest and you have withdraw limits.  If Gox is hit with a DOS you lose access to your funds.... etc etc...
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Offline MrJeans

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Re: Introduction to BitShares - Video
« Reply #23 on: December 15, 2013, 10:43:10 am »
I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

The market will price the asset at what they believe it is worth and want to buy slightly below this value and/or sell slightly above.
In order to understand innovations such as Bitcoin and BitShares one needs to let go of allot of the old ways of thinking we have learnt growing up.
For example, Bitcoin has no assets backing it, so when I speak about it to conservative bankers they say no intrinsic value or assets backing it means no value (some just scream ponzi scheme). But Bitcoin has value because of the service it provides, a concept that takes a while to conceptualize the first time.

Take a look at Litecoin. It is said to be the silver to bitcoin (being gold). And as a result the relationship between bitcoin and litecoin is akin to that of gold and silver.

http://thegenesisblock.com/understanding-the-gold-silver-ratio-and-how-it-may-apply-to-bitcoin-and-litecoin/

http://thegenesisblock.com/bitcoin-litecoin-ratio-returns-historic-norm-peercoin-climbs-200/

Having said that I believe litcoin is massively undervalued as a silver to bitcoin because of its faster transaction times. That being said it still tracks Bitcoin in a silver to gold fashion simply because its developers suggested that its silver to bitcoins gold. Cant even find that suggestion on the litcoin site anymore.

In a system such as BitShares, where a bitasset is brought into existence with the tangible asset price in mind, the tracking of the tangible asset price will be much more precise.

Offline santaclause102

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Re: Introduction to BitShares - Video
« Reply #24 on: January 11, 2014, 04:28:21 pm »
Just found this http://www.youtube.com/watch?v=-8ZJ3xTDwbI
I think it is more credible when the person that knows the system best speaks of it. Better than a random women that is not bad at presenting it but doesn't shine either....
« Last Edit: January 11, 2014, 04:30:44 pm by delulo »

Offline Yui Xie

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Re: Introduction to BitShares - Video
« Reply #25 on: January 21, 2014, 07:20:39 pm »
I'd also like to pose a question:  Have you stopped to consider why financial markets don't offer products like BitUSD?  I.e. a derivative without a terminal horizon, designed to track an underlying via a yield mechanism as the tracking incentivization?

I asked for an example of a financial derivative traded on a market that tracks an underlying merely via a mechanism of yield-adjustment, without lump-cash settlements that compensate directly and linearly for price changes of the underlying.  I've never heard of such a product, and it's premise seems to me to be ill-founded.

Winslow Strong raises a compelling question here.  The concept of a predictive market has been around for over half a century.  BitShares, however, adds key new components: temporally unlimited with no commodity delivery required.  But this is not a difficult extrapolation.  Surely financial entrepreneurs would have considered such a construction at some point in the past.  I can't imagine why it wouldn't have been implemented on a conventional exchange.  Is there any example of this being done before?  If not, it suggests that the idea has not held up to market scrutiny.  And I don't see why having it de-centralized is the crucial missing piece.

Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #26 on: January 21, 2014, 07:32:45 pm »
I'd also like to pose a question:  Have you stopped to consider why financial markets don't offer products like BitUSD?  I.e. a derivative without a terminal horizon, designed to track an underlying via a yield mechanism as the tracking incentivization?

I asked for an example of a financial derivative traded on a market that tracks an underlying merely via a mechanism of yield-adjustment, without lump-cash settlements that compensate directly and linearly for price changes of the underlying.  I've never heard of such a product, and it's premise seems to me to be ill-founded.

Winslow Strong raises a compelling question here.  The concept of a predictive market has been around for over half a century.  BitShares, however, adds key new components: temporally unlimited with no commodity delivery required.  But this is not a difficult extrapolation.  Surely financial entrepreneurs would have considered such a construction at some point in the past.  I can't imagine why it wouldn't have been implemented on a conventional exchange.  Is there any example of this being done before?  If not, it suggests that the idea has not held up to market scrutiny.  And I don't see why having it de-centralized is the crucial missing piece.

It has held up to market scrutiny if you look at all of the 'futures markets' that trade in debt contracts backed by fiat.  What didn't exist before was a decentralized store of value (Bitcoin).    Even our so-called futures markets in Gold and Silver *settle* in fiat (sometimes forced even when taking physical delivery is requested).

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Offline Yui Xie

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Re: Introduction to BitShares - Video
« Reply #27 on: January 21, 2014, 09:08:11 pm »
i) But all futures/options markets have a terminal date. 

ii) Even though the overwhelming majority of derivative traders don't take physical possession of the commodity, there's still the fact that some sort of tangible commodity/cash is delivered to somebody at the time of termination. 

BitShares don't have these two points and they may indeed be critical.  Not saying the idea won't work and you've already conceded it's an experiment.  We are simply asking if it (a prediction market with infinite time and no deliverable) has been tried on a centralized exchange.

Offline santaclause102

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Re: Introduction to BitShares - Video
« Reply #28 on: January 21, 2014, 09:10:21 pm »
Quote
I'd also like to pose a question:  Have you stopped to consider why financial markets don't offer products like BitUSD?  I.e. a derivative without a terminal horizon, designed to track an underlying via a yield mechanism as the tracking incentivization?

Isn't a short position limited to 50% of its own value and a long position actually infinite (meaning when the respective bitasset get less and less valuable against bts its value falls logarithmically)?

Quote
i) But all futures/options markets have a terminal date.
Why would it be an advantage to have terminal dates? As I understand it you could always give up you short/long position and make a new one. I think of bitshares as a decentralized exchange for everything.
Would they be hard to implement terminal dates in bitshares if necessary?
« Last Edit: January 21, 2014, 09:17:44 pm by delulo »

Offline Yui Xie

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Re: Introduction to BitShares - Video
« Reply #29 on: January 21, 2014, 09:24:18 pm »
Why would it be an advantage to have terminal dates?

Because at that point some party has to deliver a real asset.  The market must converge to a true price since a physical commodity is changing hands.

Offline santaclause102

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Re: Introduction to BitShares - Video
« Reply #30 on: January 21, 2014, 09:46:54 pm »
Why would it be an advantage to have terminal dates?

Because at that point some party has to deliver a real asset.  The market must converge to a true price since a physical commodity is changing hands.

Are you sure you are getting oil or gold when you are betting on it with a centralized system? :)

I think changing physical things is not necessary and not done in existing betting markets. But what they have is an index that represents the market where the real physical assets are exchanged. 

Correct me if I am wrong: In a system without an index given by a central authority you rely on everyone's assumption that everyone will follow the price of the underlying asset (must be precisely defined) so that it makes sense to bet on where the asset's price will be in the near future. Near future here is defined for short positions as up to the point where their asset looses 50% and for long positions there is no termination (I dont see a problem in the latter).
There are two assumptions/implications for this to work:
(1) The asset is exactly defined (for example 1 barrel of WTI brand; or whatever is traded physically).
(2) It is habitual behavior where the shared understanding to follow the price of the underlying asset is reinforced the more people do it. And you win when you predict the future price that deviates from the current price right as long as no short squeeze takes place (when you are short and your asset looses 50%) -> What is therefore needed or at least helpful is reputation which creates mass / herd behavior. If a big bank puts out such a system the mass would easily rely on that everyone is following the underlying asset price

*I used the word "underlying asset price" as the price that is actually paid for a good when it is physically exchanged.
« Last Edit: January 21, 2014, 10:25:14 pm by delulo »

Offline Yui Xie

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Re: Introduction to BitShares - Video
« Reply #31 on: January 21, 2014, 11:38:00 pm »
I can't get my mind around the notion that a prediction market will converge to a correct value if there is no causal link to the delivery of a real commodity at some point in the equation.  Without it, it just looks like a collective herd mentality.  This sure seems like a system that could be manipulated, as indicated in earlier posts by Winslow Strong and by others in different threads.

I'm not saying it won't work, I'm just skeptical.  My skepticism would be greatly diminished if someone could point me (us) to an example of where this has worked successfully in the past.  It would be easy enough to implement in a centralized exchange, there's nothing special about it being decentralized in the BitShares model.  And no, I will not accept that successively opening and closing positions in the futures market is the same thing.  I need an example of a predictive market that is non-terminating with no deliverables.  If you insist that this is just an extrapolation of the futures market, we'll just have to agree to disagree.

Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #32 on: January 21, 2014, 11:55:27 pm »
I can't get my mind around the notion that a prediction market will converge to a correct value if there is no causal link to the delivery of a real commodity at some point in the equation.  Without it, it just looks like a collective herd mentality.  This sure seems like a system that could be manipulated, as indicated in earlier posts by Winslow Strong and by others in different threads.

I'm not saying it won't work, I'm just skeptical.  My skepticism would be greatly diminished if someone could point me (us) to an example of where this has worked successfully in the past.  It would be easy enough to implement in a centralized exchange, there's nothing special about it being decentralized in the BitShares model.  And no, I will not accept that successively opening and closing positions in the futures market is the same thing.  I need an example of a predictive market that is non-terminating with no deliverables.  If you insist that this is just an extrapolation of the futures market, we'll just have to agree to disagree.

This price of PTS and AGS is reflective of the markets current assessment of the likely success.  We have no need to convince you, the market will prove it one way or another soon enough.
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Offline Yui Xie

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Re: Introduction to BitShares - Video
« Reply #33 on: February 19, 2014, 02:19:48 pm »
Agreed -- the overwhelming number of futures traders do not take delivery.  But somebody does.  There is a clearly defined settlement date and an actual product changes hands.  If not, there is absolutely no point in having a futures market.  For this reason, Bitshares is NOT the same thing.  It is an extrapolation of the futures market that lets time -> infinity, with no deliverable and no price pegs.  Relaxing these parameters is not trivial.  Since this has never been implemented before on either a de-centralized or centralized exchange, you are making some crucial assumptions about market behavior.  As such, it should be viewed as a risky and still unproven experiment.


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Re: Introduction to BitShares - Video
« Reply #34 on: February 19, 2014, 03:42:04 pm »
If you simply do research on prediction markets you will see why this works. All markets are driven by psychology more than underlying "value" and fundamentals, particularly in the short term. Prediction markets don't require and underlying asset, but their efficacy is not experimental, it is academically proven, which is why you have professors at Princeton attempting to create prediction market using bitcoin. Bitshares X essentially does this on the network and through the block-chain in order to cut out any potential intermediaries. 

Offline Yui Xie

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Re: Introduction to BitShares - Video
« Reply #35 on: February 19, 2014, 04:35:44 pm »
Prediction markets have been around for 50 years and there are plenty of examples that show how effective they can be.  The crucial difference with Bitshares is the lack of a termination or settlement date when the winners and losers are known with certainty.  I (and Winslow Strong earlier in this thread) asked for an example of a successful non-terminating prediction market that had been implemented in the past.  Since there was no satisfactory response (opening and closing positions in a terminating futures market is not valid, in my opinion) I started researching it.  The only thing I could come up with was the simExchange:

http://en.wikipedia.org/wiki/The_simExchange

that used prediction markets for video game sales.  Players used virtual money and the exchange was composed of both terminating (futures) and non-terminating (stocks) trading entities.  Futures trading was shut down in 2010 leaving only the non-terminating component.  The site then fell into disuse (see Current Status in the above link).   

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Re: Introduction to BitShares - Video
« Reply #36 on: February 19, 2014, 05:58:32 pm »
The price within a market represents the current public consensus on the value of a given asset. Does the notion of termination enter into the stock market or for that matter the cryptocurrency markets. The price of these assets are reflective of both fundamental value as well as the prediction of increases or decreases in value. Its the same idea within bitshares. As long as any of the assets from which bitAssets are derived remain in existence there will not be a termination of that market for a given bitAsset, as participants in the market will always be altering and adjusting their positions based on newly formed predictions for the market given changing information pertaining to the market. The notion that markets need to have a termination date is inherently illogical.

You say that "the crucial difference with Bitshares" and prediction markets "is the lack of a termination or settlement date when the winners and losers are know with certainty." The assumption that winners and losers are know with certainty is probably where you are confused. In a fluid market such as the stock market there are not certain winners and losers, as the price on a given day can change direction on following days. The losers on one day can become the winners on another.

Offline Yui Xie

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Re: Introduction to BitShares - Video
« Reply #37 on: February 19, 2014, 07:11:28 pm »
Does the notion of termination enter into the stock market or for that matter the cryptocurrency markets.

Bitshares is not being explained as a de-centralized stock market, FOREX, or crypto-currency exchange, where real assets change hands.  We are being told to think of it as a non-terminating futures market. I (and others) are expressing concerns about the validity of this analogy.  In Bitshares, there is no causal link to a real asset, i.e. there is no method to quickly and efficiently convert a bitAsset into a real asset.  If there was, you'd have problems with centralization and trust, just like at the NYSE, CBOE, and Mt Gox.  Bitshares insists on being completely decentralized, eschewing even an external price feed as is proposed in Mastershares.  In Bitshares, one must have a belief/faith/trust that an appropriately named bitAsset -- with no causal connection to the real asset other than its name -- will track its price via a non-terminating prediction market.

I can't prove that it won't work.  It may.  But the notion that some sort of collective herd behavior will converge to the real-world price strikes me as significant a leap of faith.  The classic prediction market with an agreed settlement time is known to work.  Bitshares is extrapolating this concept by removing the settlement time.  But you don't need decentralization or a blockchain to implement a non-terminating prediction market.  Surely others must have considered this in the last half century.  Why are there no examples of it working elsewhere?

Offline toast

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Re: Introduction to BitShares - Video
« Reply #38 on: February 19, 2014, 07:24:12 pm »
I think it's just that only crypto-equity makes the cut for an asset collateral that can be called arbitrarily far in the future
Technically bitcoin also just provides an information service that could easily be centralized...
What's the best centralized implementation of this? Would you be ok loaning dollars against future stock in JPM on NYSE's ticker? That's two trust points, then you have the jurisdiction it's in and the fact that humans are running it
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Offline santaclause102

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Re: Introduction to BitShares - Video
« Reply #39 on: February 19, 2014, 07:29:16 pm »
The only necessity from my point of view in this respect is that any BitAsset is based on a clearly defined unit of account. You would have to define the exact Oil brand and how much a barell is etc. if you issue BitOil/BitBrentOil to peg the price that is actually traded somewhere physically. My assumption is that anything can be peged that is somewhere and sometimes actually/physically and publicly traded.

Self doubt: What about the fact that you get a different price, in real world physical exchange, if you are a bulk seller/buyer?

Bytemaster sometimes talked about the possibility of betting on the value of an idea. That would make sense to me if the bet is on an exactly defined outcome of the idea (for example betting on the market cap of the next company that is created by person xy who is having the respective idea). Any other way to bet on things without a unit of account like ideas?
« Last Edit: February 19, 2014, 07:41:58 pm by delulo »

Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #40 on: February 19, 2014, 09:10:51 pm »
It doesn't really matter how fuzzy the idea is... the resulting price will be the mean interpretation of the concept.   So if you say BitOil... without specifying a type of Oil it will probably track an average of all types of Oil unless most people come to the consensus that it should track Brent.

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Offline santaclause102

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Re: Introduction to BitShares - Video
« Reply #41 on: February 19, 2014, 09:31:35 pm »
It doesn't really matter how fuzzy the idea is... the resulting price will be the mean interpretation of the concept.   So if you say BitOil... without specifying a type of Oil it will probably track an average of all types of Oil unless most people come to the consensus that it should track Brent.

Ok. So you also suggest that there is no unit of account? For example: BitOil would give a ratio between one barell of oil and 1 bts? 

Offline vikram

Re: Introduction to BitShares - Video
« Reply #42 on: February 20, 2014, 11:23:22 pm »
It doesn't really matter how fuzzy the idea is... the resulting price will be the mean interpretation of the concept.   So if you say BitOil... without specifying a type of Oil it will probably track an average of all types of Oil unless most people come to the consensus that it should track Brent.

Ok. So you also suggest that there is no unit of account? For example: BitOil would give a ratio between one barell of oil and 1 bts?

Curious about this also!

Offline pariah99

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Re: Introduction to BitShares - Video
« Reply #43 on: February 27, 2014, 12:29:09 am »
Under the current paradigm, the dollar (or any currency) serves as an intermediary to determine the relative price of goods.  It's like asking how much gold you could get for a barrel of oil.

Say you want to exchange 1 barrel of oil for a certain amount of gold.   You know how much gold you can get because oil is valued at a certain amount of dollars per barrel, and gold is valued at a certain amount of dollars per ounce.  The dollar doesn't have any inherent value (it used to until we went to a fiat money system) - it just serves as a common denomination.

This might be an oversimplification, but this is how I think about it: Think of BTS-X as a currency like the dollar.  Now think of a dollar as a commodity (just like Oil)

1 BitUSD will be equivalent to a certain amount of BTS-X
1 BitOil will be equivalent to a certain amount of BTS-X
It won't be set in stone to begin with, but by the action of many parties trading both BitUSD to BTS-X and BitOil to BTS-X, there will be an equilbrium reached between BitUSD and BitOil via BTS-X.

If there's a difference between the (PRICE OF OIL) and the (BitUSD to BitOil ratio), that would present an arbitrage gap which traders could take advantage of to make a profit.  Eventually, the gap would close as more trades were made; hence, the price would tend towards the real-world equilibrium.

Edit: This was in response to both delulo and unlimited_power.  I just realized that what they were asking was regarding what the unit of BitOil was, which I'm guessing is in barrels.
« Last Edit: February 27, 2014, 12:32:21 am by pariah99 »

Offline Markus

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Re: Introduction to BitShares - Video
« Reply #44 on: February 27, 2014, 01:47:41 am »
If there's a difference between the (PRICE OF OIL) and the (BitUSD to BitOil ratio), that would present an arbitrage gap which traders could take advantage of to make a profit.  Eventually, the gap would close as more trades were made; hence, the price would tend towards the real-world equilibrium.
If the kind of asset the BitAsset is to track is defined fuzzy ("Oil" instead of "Brent Crude as traded on the IntercontinentalExchange") then arbitrageurs and other market participants can not provide a narrow tracking as they don't always know if it is over- or undervalued. Spreads will widen and the BitAsset market will be less liquid.


Quote
Edit: This was in response to both delulo and unlimited_power.  I just realized that what they were asking was regarding what the unit of BitOil was, which I'm guessing is in barrels.
Of course it will have to be exactly defined how much of the asset one BitAsset equals. I don't think it will be any good to let the market agree on a consensus whether BitOil is one barrel, one tonne or one litre of oil.

Which leads to the question, will BitShares use American (troy ounces, blue barrels, bushels, short tons, US gallons, British thermal units etc.) or International (grammes, kilogrammes, tonnes, cubic metres, joules) units?

Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #45 on: February 27, 2014, 02:21:55 am »
The unit and seed 'idea' behind each asset is in the hands of the individuals who create and launch a chain.  I highly recommend they be a specific as possible so the market can operate as efficiently as possible.
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Offline pariah99

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Re: Introduction to BitShares - Video
« Reply #46 on: February 27, 2014, 02:29:13 am »
If the kind of asset the BitAsset is to track is defined fuzzy ("Oil" instead of "Brent Crude as traded on the IntercontinentalExchange") then arbitrageurs and other market participants can not provide a narrow tracking as they don't always know if it is over- or undervalued. Spreads will widen and the BitAsset market will be less liquid.

I'm sure that they will be very specific, since the creators of the chain will have to create some mechanism by which shareholders can redeem their shares for physical assets.  In the case of perfectly fungible assets like stocks and currency, the specificity will already be built in.

e;fb

Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #47 on: February 27, 2014, 02:45:56 am »
If the kind of asset the BitAsset is to track is defined fuzzy ("Oil" instead of "Brent Crude as traded on the IntercontinentalExchange") then arbitrageurs and other market participants can not provide a narrow tracking as they don't always know if it is over- or undervalued. Spreads will widen and the BitAsset market will be less liquid.

I'm sure that they will be very specific, since the creators of the chain will have to create some mechanism by which shareholders can redeem their shares for physical assets.  In the case of perfectly fungible assets like stocks and currency, the specificity will already be built in.

e;fb

No, creators of the chain do not have to create any kind of redemption because a BitAsset could track Unobtainum just fine:
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Offline pariah99

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Re: Introduction to BitShares - Video
« Reply #48 on: February 27, 2014, 03:54:34 am »
Okay, I guess we're splitting hairs here, but tracking would imply that somebody would value it relative to the other assets on the market.  I understand you could theoretically generate a chain for ANYTHING, but I'd wager that unobtainium's value in BTS-X would remain precisely zero (unless you were referring to the cryptocurrency)

That's an interesting experiment.  I should generate a chain of shares in "pariah99's pity/beer fund" and hope for the best... speaking of which, I have to go to a bar now :D

Offline yellowecho

Re: Introduction to BitShares - Video
« Reply #49 on: February 27, 2014, 04:14:59 am »
I should generate a chain of shares in "pariah99's pity/beer fund" and hope for the best... speaking of which, I have to go to a bar now :D

Sure glad I have PTS and AGS so I can get 20% of that action!
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Offline dddddre

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Re: Introduction to BitShares - Video
« Reply #50 on: February 27, 2014, 12:48:12 pm »
BitUSD is the equivalent of the old bank notes that promised to pay $1 worth of value on demand.  In the case of the old bank notes, this value was denominated in gold or silver.  In the case of the BitShares DAC this value is $1 worth of equity, aka bitshares.   The BitShares DAC can almost always make good on this promise because when someone comes to redeem a note and is unable to sell it on the market directly the value of the BitUSD in terms of bitshares will rise until the decentralized bank has the authority to call a loan and repurchase the BitUSD. 


Why will the value of bitusd in terms of bitshares rise rather than go down when someone comes to redeem a note and is unable to sell it on the market directly?

Will the Bitshares system freeze 2 usd value of BTS as collateral or 2 bitusd value of BTS as collateral when i borrow 1 bitusd from the system?
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Offline bytemaster

Re: Introduction to BitShares - Video
« Reply #51 on: February 27, 2014, 09:44:33 pm »
BitUSD is the equivalent of the old bank notes that promised to pay $1 worth of value on demand.  In the case of the old bank notes, this value was denominated in gold or silver.  In the case of the BitShares DAC this value is $1 worth of equity, aka bitshares.   The BitShares DAC can almost always make good on this promise because when someone comes to redeem a note and is unable to sell it on the market directly the value of the BitUSD in terms of bitshares will rise until the decentralized bank has the authority to call a loan and repurchase the BitUSD. 


Why will the value of bitusd in terms of bitshares rise rather than go down when someone comes to redeem a note and is unable to sell it on the market directly?

Will the Bitshares system freeze 2 usd value of BTS as collateral or 2 bitusd value of BTS as collateral when i borrow 1 bitusd from the system?

Yes the collateral is frozen, and if the price rises in terms of BTS then a margin call is executed and forces the liquidation of the collateral to buy your BitUSD back.
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