How to prevent yield harvesting?

[klosure]

I think variable coupon rate and fungibility are mutually exclusive and pooling to try to fix that is just asking for abuse.  Interest rate should be fixed and unique at any point in time and decided globally by delegates based on market trend and liquidity. So holding a bitasset would be kind of like holding a structured product made of a fixed rate bond with fixed-to-variable interest swap where the network is counterpart of the swap.

Btw does anyone know where the current peg and interest management behavior are documented. I tried seaching the forum but keep on finding old proposals that where rejected or amended. The wiki is horribly outdated and still has BitSharesX in it...

[Bitcoinfan]

Id like to throw in an idea just for the sake of entertaining it.  Consider this: 

Any collateralized short can be swapped out with another bidders short when and only if the bidders interest rate is higher.  The bidders short will effectively dethrone the same position as the collateralized short (while the orginal short will be liquidated). What you get is still a collateralized bitusd but with a higher interest rate shorter backing it.  I think ultimately this would be unfair to shorters as they are asked to take as many more risks.it would solve our low interest rate problem.  Yet shorters may be de incentives to short hurting the ask side of the transaction.    But I just wanted to throw it out there in case it spurred more creative thiughts amongst  you all.

[klosure]

So what if we slightly alter the system so that in a bearish market shorters can require being payed interest instead of paying interest? When the blockchain has active shorters with positive as well as negative interest, negative shorters will be payed the interest they asked for FIRST until there is no more positive interest remaining.

In this way self-shorting at 0% becomes less profitable (possibly 0 profit) because that actor knows that in a bear market that the interest will not be going to his new BitUSD that he self-shorted, it will be payed to the shorters who managed to charge interest.

This idea even has other benefits in that it increases liquidity in a bear market.

Negative interests, that's a good idea

[speedy]

Here is another idea, which might partially solve the problem:

In a bull market, everyone wants to short BitUSD so will offer a high interest.

Currently we are in a bearish market so no shorters are offering any interest, and according to game theory everyone should be self-shorting all their BTS and harvesting all the yield.

So what if we slightly alter the system so that in a bearish market shorters can require being payed interest instead of paying interest? When the blockchain has active shorters with positive as well as negative interest, negative shorters will be payed the interest they asked for FIRST until there is no more positive interest remaining.

In this way self-shorting at 0% becomes less profitable (possibly 0 profit) because that actor knows that in a bear market that the interest will not be going to his new BitUSD that he self-shorted, it will be payed to the shorters who managed to charge interest.

This idea even has other benefits in that it increases liquidity in a bear market. As long as the bear market does not last more than 30 days, there will still be positive shorters to pay new negative shorters.

[ag]

yield is low because of the terms of the loan. if you could borrow bitUSD that comes due in 1 year, there would be more competition for that type loan, and thus higher interest/yield. But the problem having shorts that expire indefinitely, or in 12 months, is that BitUSD becomes less redeemable. And the point of BitUSD is that it can be redeemed for $1 worth of bitshares any time..

[speedy]

Rune is a genius. The system is broken.

[Rune]

Edit: I do realize that if short sellers start to outbid each other on price instead of interest rate, then there will be sell orders below the feed and self-shorting becomes impossible. This shouldn't incentivize them to offer shorts with interest, though, instead it should incentivize them to wait until the sell orders are cleared and then do the self-shorting of all their holdings at that time.

But you are assuming that those sell orders below the feed will be cleared along with all the short sell orders at the price feed, which is what is required for someone to do self-shorting at 0% interest. What if many people expect BTS price to go up and so there is a short sell wall at the price feed. Now BitUSD buy orders will clear up any of these BitUSD sell orders (either ones that people purchased by trading BTS or other assets, or ones that someone self-shorted into existence) and eat into the sell wall at the price feed (but not clear it out fully). Then over time more short sells will appear at the wall replenishing those that were matched. In this case, anyone who wants to do the self-shorting thing again isn't able to (at least not without offering the market interest rate).

Basically, what you are describing as a problem is only an issue in a BTS bear market where there isnt a short sell wall at the price feed. In that case yields should be zero.

Hmm, right, this does makes sense. So in an efficient market we can still expect to see yield and interest rates if there is an unbroken bull run for more than 30 days during which short sellers are constantly competing on interest to go long BTS. However as soon as this bull run ends and there is no one willing to short at the feed, we should assume that every BTS holder does a self-short with all their BTS bringing yield in all bitassets close to 0, and this will only end if there is another bull run that lasts more than 30 days. Is it really realistic to expect the market to have open shorts at the feed for this long, even in bull runs? Since the feed tracks the last price of the asset I'd assume that generally there should not be any open orders exactly at the feed, since these orders should already have been matched.

[arhag]

Edit: I do realize that if short sellers start to outbid each other on price instead of interest rate, then there will be sell orders below the feed and self-shorting becomes impossible. This shouldn't incentivize them to offer shorts with interest, though, instead it should incentivize them to wait until the sell orders are cleared and then do the self-shorting of all their holdings at that time.

But you are assuming that those sell orders below the feed will be cleared along with all the short sell orders at the price feed, which is what is required for someone to do self-shorting at 0% interest. What if many people expect BTS price to go up and so there is a short sell wall at the price feed. Now BitUSD buy orders will clear up any of these BitUSD sell orders (either ones that people purchased by trading BTS or other assets, or ones that someone self-shorted into existence) and eat into the sell wall at the price feed (but not clear it out fully). Then over time more short sells will appear at the wall replenishing those that were matched. In this case, anyone who wants to do the self-shorting thing again isn't able to (at least not without offering the market interest rate).

Basically, what you are describing as a problem is only an issue in a BTS bear market where there isnt a short sell wall at the price feed. In that case yields should be zero.

[Rune]

Ultimately anyone who wants to do bitasset/bts trading in any serious capacity will be running bots to do these tricks (self-shorting everything in the bitasset that currently has the highest yield with 0% interest rates and rolling over their own shorts whenever there are 0% interest rates and more than 24 hours have elapsed). The more people do these self-shorting tricks, the less traders will be shorting with interest. It seems to me like this should always equilibrate towards 0% interest rates and 0% yield.

I think ultimately the problem is that single actors decide the interest rate they pay for their shorts, and pay the cost individually, but the reward is divided among everyone who hold bitassets. This discrepancy makes the economic incentives misaligned, and what happens instead is that traders who wish to go long will self-short and then sell their bitassets with regular sell orders, so they can outbid each other on price instead of on interest rate (because this way they can offer the reward in form of a better price directly to the counterparty to the trade, rather than having to spread the reward as yield among everyone, giving them a better deal).

Edit: I do realize that if short sellers start to outbid each other on price instead of interest rate, then there will be sell orders below the feed and self-shorting becomes impossible. This shouldn't incentivize them to offer shorts with interest, though, instead it should incentivize them to wait until the sell orders are cleared and then do the self-shorting of all their holdings at that time.

[arhag]

I kind of wonder about that too. In the non-blockchain world, yield is the benefit paid in return for the opportunity to convert money into capital assets that improve a firm's productivity in the real economy. For example, a company issues a bond, and uses those funds to purchase tractors/computers/plant etc which increase revenue or reduce costs and enable the firm to pay back the capital with interest. Unless the money can be re-directed into the real economy to be productive, then I don't know how well the yield analogy holds.

Yield still makes sense with BitAssets even though the money isn't being redirected into the real economy for productive purposes. It comes from short interest which is paid by the short because it enables them to take one side of the bet on how the price of BTS will change with respect to the underlying asset of the BitAsset. If someone really believes that the price of BTS in USD is going to go up soon, they will want some way to profit off of that speculation. But they may not have any other assets that they want to reduce their exposure to by selling to buy more BTS. Nevertheless, the BitUSD buyer allows them to profit (assuming their gamble was correct) because they can short sell that BitUSD to them (that profit comes from the opportunity cost of the BitUSD buyer who could have gotten a part of that profit if he had kept BTS instead). It makes sense that the short seller might be willing to pay the BitUSD buyer some money for the privilege of being able to profit off the price speculation.

Of course, the BitUSD short seller isn't going to pay any money to the buyer if he doesn't have to. If the BitUSD buyer is willing to buy the short sell order even with 0% interest offered, then the short seller gets to keep more of his profits. But if the BitUSD buyer refuses to buy perhaps because he also expects BTS price to go up and the current yield offered on BitUSD isn't high enough to compensate for the opportunity cost of giving up the BTS despite the fact that he gets volatility protection, then the short seller must motivate the BitUSD buyer by offering interest. Essentially the short seller is sharing the profits with the buyers that make his profits possible in the first place. Where are these profits coming from if none of this capital is being directed towards productive purposes in the real economy? It is coming from the growth in the price of BTS due to the buying pressure from outside demand for BTS. And this is of course the reason why yield on BitAssets isn't that great right now; there isn't much buying pressure for BTS pushing its price up currently (quite the opposite unfortunately).

[arhag]

Yield harvesting doesn't create more short orders. At any moment there are no active short orders it's possible for everyone who holds BTS to short 100% of their BTS holdings to themselves in an instant. If everyone were rational actors almost all BTS would be held this way since there are always moments where shorting to yourself becomes possible, and as long as there is any yield it's profitable to do. This is also the best way to go long BTS, since you can just sell the bitasset you shorted to yourself at times where there are other shorts competing on interest, so you order will get matched first and you won't have to pay interest. Ultimately once people learn how to do this there shouldn't be any reason to short bitassets at an interest.

It isn't always so perfect though. It is possible (even if unlikely) that your bid and short do not match if someone else also places a bid or short at the same time. If I place a short sell order at 0% interest at the price feed (assuming no BitUSD sell orders currently exist at the price feed, or below, in BTS/BitAsset) and also place a bid order at the price feed for the same amount of BitUSD that I am shorting, it is possible that someone else's bid at the same time will match my short or my bid will match someone else's short placed at the same time. If it is the former, I will have increased my exposure to BTS (by owing BitUSD) and will have BTS left over in an unmatched BitUSD buy order. If it is the latter, I will have decreased my exposure to BTS and instead increased my exposure to BitUSD and will have a unmatched short sell order with my other BTS held as the collateral. If I am lucky these unmatched orders will get matched at their current price and restore balance, but if this doesn't happen then I am stuck in a position that I do not want to be in and might end up losing money in the process of trying to go back to the exposure I wanted.

We can further make it less desirable to buy your own short, if we do not allow covering shorts with BitUSD you may have. We could require all shorts to be manually covered only with an explicit cover order (basically a special BitUSD buy order) placed in the order book. This means to cover your short you now have to simultaneously sell the BitUSD you have at a price lower than other BitUSD sell orders and buy the BitUSD at that price with the explicit cover order. Again, if you are not able to match your own order because someone happens to get their order in at the same time which matches with one of your two orders, then you could end up in a position where fully covering your short ends up causing you to lose more BTS than you gain through exploiting the yield.

Also, regarding the interest loophole you mentioned. Yes, the system does allow you to effectively capture favorable interest rates even if you actually sell the BitUSD (thus increasing your exposure to BTS) later when the interest rate is higher (since more people want to short BitUSD at that time). But you have a time limit in which you can do this. Let us say you want to short BitUSD when the time is right. Right now, the time isn't right, but you short BitUSD to yourself anyway because it doesn't change your exposure, it allows you to potentially claim some yield, and it allows you to short sell later when you want to with higher priority than other people at the time and at 0% interest. However, your short expiration will be in less than 30 days from the point you actually change your exposure. You can maximize your time by rolling over your short every day as long as the interest rate is still 0% and there isn't anyone else selling BitUSD at or below the feed (in BTS/BItAsset) or short selling BitUSD at the feed. Once this is no longer true, you either have to decide to change your exposure at that point, or if the time isn't right you can just hold for longer hoping conditions will change. If they do not and in fact get worse (short sellers start offering interest) you might be forced into a position where you must decide whether you want to change your exposure now when the time is finally right (but with only say 15 days before your short expires) or to cover your short with the BitUSD you have and short the normal way (meaning pay interest) but with the benefit of having 30 days until your short expires. So again, things aren't as clear cut and obviously better as it may initially seem.

[Rune]

It's natural to have less shorts in a bearish market, which would allow 0% shorts.
When it turns bullish the only way to get your short in is to raise your interest.

Even in bullish markets there will be periods where there are no active short orders at the price feed, just a moment of this will enable everyone to short to themselves at 0% interest (at which point there will be no more shorts at all, because anyone wanting to go long will just sell the bitasset they shorted to themselves). The markets will always equilibrate towards a point where there will be no open orders at all directly on the price feed, but only around the feed at a spread.

[julian1]

First find the reasons why the yield is so low. And no, it is not because of ''yield harvesting".

Yield is too low because there isnt any real reason to actually provide a yield

I kind of wonder about that too. In the non-blockchain world, yield is the benefit paid in return for the opportunity to convert money into capital assets that improve a firm's productivity in the real economy. For example, a company issues a bond, and uses those funds to purchase tractors/computers/plant etc which increase revenue or reduce costs and enable the firm to pay back the capital with interest. Unless the money can be re-directed into the real economy to be productive, then I don't know how well the yield analogy holds.

[zerosum]

My solution - 2x collateral (1x from short 1x from buyer) + very tight margin call -> as little as 15% price drop in BTS compared to the BitAsset can trigger the  margin call.

This isn't too different than what I have been proposing although mine is a little bit less friendly to shorts than your proposal (at the benefit of lower black swan risk).

So, I take 15% drop to trigger a margin call to mean that if the price at which the short was matched was p1 (in BitAsset/BTS), then if the price becomes p2 = 0.85*p1 or lower, the short is margin called. If the initial amount of collateral is 2x, then that means the amount of BTS needed to cover a debt of X BitAsset is 2*X/p1 BTS. If the price feed then becomes p2, the collateral will be worth 2*X*p2/p1 BitAsset, which corresponds to a margin call limit of m = 2*p2/p1 = 2*0.85 = 1.7 = 170%. So to recap your proposal, you think the initial collateral requirement should be 200% (100% for buyer and 100% margin from shorter) and the margin call limit should be 170%.

My proposal is that the margin call limit should be 200% and there should be no initial collateral requirement other than it being larger than the margin call limit. So someone can put up 101% margin, which combined with 100% from the buyer gives them an initial collateral of 201%. But then in that case if the price of BTS (in BitAsset/BTS) goes down by 0.5% or more, the short would be margin called. Since shorters would want more volatility protection than that, they will naturally put up more collateral. The short sellers would get to decide not only the quantity of BitAssets to short sell and the price limit (as they can now) but also the initial collateral ratio. Someone might go with 220% (protection from a 9% drop in price) and monitor the price frequently to add more collateral as necessary. Someone else may not want to deal with the hassle of frequently checking up on their shorts and would instead simply short with 300% collateral to begin with.

Yours is even better. My main point is - 'Get rid of the 300% required collateral. The rest is just a way to keep the system secure enough.

Edit: Also, what I would really like is for anyone to create a new BitAsset where they define the description, price feed authority, collateral asset type, and margin call limit (among other things; read more about this proposal here). That way you could create your own BitUSD variant that had a margin call limit of 150% and utilized the same USD/BTS price feeds currently available. Then you could short that BitUSD variant with an initial collateral ratio above the margin call limit (so say 200%). That of course assumes someone will be willing to bid on this BitUSD variant given that it would have a larger undercollateralization risk than the more conservative BitUSD with the 200% margin call limit. But this way we could let the free market decide what level of undercollateralization risk is appropriate.

That will be cool. And I have read that proposal before. (I do read the forum even when I do not post. And you are one of the people on my 'check recent posts' list)
My thinking is let's dream smaller and lets fix a truly broken part of our system before striving for awesome.

[graffenwalder]

It's natural to have less shorts in a bearish market, which would allow 0% shorts.
When it turns bullish the only way to get your short in is to raise your interest.