Author Topic: Introduction to BitShares - Video  (Read 13897 times)

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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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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

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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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

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...
For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

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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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

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.