Author Topic: [Whitepaper v1] – Yield Market System for Pegged Block-chain Currencies  (Read 8209 times)

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Offline monsterer

I've always had this positive/negative yield idea bubbling away in the back of my mind... I just wondered if you'd done any further analysis on the amount of negative yield you could expect under the current bitshares climate? I.e. fairly persistent down trend, with around $3k daily volume in bitUSD (can't recall if your design supplimented yeild with transaction fees)
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Offline starspirit

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Yes its possible, but it couldn't be funded by the market. BTS owners may be willing to fund it if they see the effective operation of the currency as being valuable to the entire system. I've toyed a little with the idea that stakeholders could vote in the required number of delegates at any time (from zero upwards) to provide such incentive and keep the currency operating effectively in such situations, although there would be a long lag effect.

When you say it couldn't be funded by the market, are you concerned that such action could be exploited to cause infinite dilution? I'm wondering if the gains made by the market (fees and profit from any spread the market provides) could compensate.
Market making is definitely an important source of income for issuers/shorts. I don't think it should directly relate to the level of yield though, and its an active rather than passive activity, requiring work. So there's no guarantee that this would adequately compensate in all situations. But maybe you're right, it might be enough in all reasonably conceivable situations, because there ought to be some political constraint on how negative external interest rates can get anyway. I'll think on this more.

Offline monsterer

Yes its possible, but it couldn't be funded by the market. BTS owners may be willing to fund it if they see the effective operation of the currency as being valuable to the entire system. I've toyed a little with the idea that stakeholders could vote in the required number of delegates at any time (from zero upwards) to provide such incentive and keep the currency operating effectively in such situations, although there would be a long lag effect.

When you say it couldn't be funded by the market, are you concerned that such action could be exploited to cause infinite dilution? I'm wondering if the gains made by the market (fees and profit from any spread the market provides) could compensate.
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Offline starspirit

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i) reduce the supply of the pegged currency, perhaps dramatically or completely in some extreme situations where shorts demand compensation to participate, and
ii) the peg would break and a large premium develop.

This may not be the end of the world if these situations are rare, but its bound to be an issue of debate also.

Sorry for the long post - but its a complex issue, and not one that is black and white.

If there was some way to replace the disincentive of forced supply reduction by negative yield with a positive reward for voluntarily selling off the pegged asset (and reducing the supply), this would be a much easier sell for users.
Yes its possible, but it couldn't be funded by the market. BTS owners may be willing to fund it if they see the effective operation of the currency as being valuable to the entire system. I've toyed a little with the idea that stakeholders could vote in the required number of delegates at any time (from zero upwards) to provide such incentive and keep the currency operating effectively in such situations, although there would be a long lag effect.

BTW, I will be updating this draft white-paper soon with a version 2 to cover a number of bitAsset issues raised recently in the forums, and hopefully keep progressing toward the best solution. Feel free to contribute any further thoughts or ideas.

Offline monsterer

i) reduce the supply of the pegged currency, perhaps dramatically or completely in some extreme situations where shorts demand compensation to participate, and
ii) the peg would break and a large premium develop.

This may not be the end of the world if these situations are rare, but its bound to be an issue of debate also.

Sorry for the long post - but its a complex issue, and not one that is black and white.

If there was some way to replace the disincentive of forced supply reduction by negative yield with a positive reward for voluntarily selling off the pegged asset (and reducing the supply), this would be a much easier sell for users.
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Offline starspirit

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starspirit, do I understand this correctly: the proposed way to balance supply and demand to create a peg equilibrium is to allow a negative yield? (as well as a positive yield)

Doesn't that mean that if you hold bitUSD while there is negative yield you are essentially getting charged a negative interest rate? Won't this be a hard sell for the general public?
Well, that's a good question monsterer, that I've been debating with myself for a while, and have not reached an absolutely firm view on yet - i.e. is the possibility of negative yield needed at all? Here's some food for thought...

The yield is determined by the free market as the level that equates a pegged currency at parity with its real equivalent for the marginal buyer and seller. So by definition, it must be acceptable to all the current holders of the pegged currency.

Forcing any other yield on the market creates a situation where either supply falls (forcing a higher than natural rate), or demand falls (forcing a lower than natural rate), either of which means that the quantity on issue and in use would be less than if the free market had determined the rate. That's the advantage of flexible yield - in that in maximises and stabilises the quantity on issue as yields can adjust for supply or demand shocks.

Now why would the free market choose a negative yield? Its important to note that this is likely to be very rare. But it is a far more likely situation in the current global environment of suppressed interest rates.

The yield on a pegged currency is normally going to move with external interest rates due to arbitrage. But it would move around that depending on relative supply and demand. For example, it could be higher if issuers/shorts are positively motivated (e.g. crypto bull markets) or lag if they are negatively motivated (e.g. crypto bear markets). In any case, the current environment of zero to negative external rates (after fees) in some currencies like USD or EUR could well lead to a free-market yield in the pegged currency that might calibrate at zero or below.

While bond markets can reflect negative yields very easily by trading above par, negative rates in an at-call market require an actual payment from longs. Cash holders will seek to avoid this if they can. That's exactly why some economists have been recently calling to ban cash, and force people into deposits where they cannot avoid such charges (a proposal I'm against BTW).

Although negative rates are theoretically possible, it's a profound question as to whether negative interest rates on a pegged currency should be allowed or not, even if that's where the free market would calibrate. On the one hand, if external interest rates can go negative after fees, why not for the pegged currency? But its possible for example that even if rates were positive, the mere possibility that they might be allowed to go negative, could be seen as a controversial or negative feature by the market, reducing demand at all times. Like I said, I can see both sides of an argument here.

If we decided we did not want to cross the zero bound, it would not "break" this or any other pegging system. It could still operate. The result of forcing the rate to remain at zero when the natural rate is negative, would be to:

i) reduce the supply of the pegged currency, perhaps dramatically or completely in some extreme situations where shorts demand compensation to participate, and
ii) the peg would break and a large premium develop.

This may not be the end of the world if these situations are rare, but its bound to be an issue of debate also.

Sorry for the long post - but its a complex issue, and not one that is black and white.
« Last Edit: May 26, 2015, 11:44:25 am by starspirit »

Offline monsterer

starspirit, do I understand this correctly: the proposed way to balance supply and demand to create a peg equilibrium is to allow a negative yield? (as well as a positive yield)

Doesn't that mean that if you hold bitUSD while there is negative yield you are essentially getting charged a negative interest rate? Won't this be a hard sell for the general public?
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Offline monsterer

Sorry for delayed response, have been away. monsterer, my impression is that the yield harvest problem in the existing structure related to being able to self-create a short with 0% interest on the short, while earning a yield on the long, giving risk-free yield. If this is a mis-interpretation let me know. In the system I propose here, there is a single market-determined interest rate that at any time all shorts pay and all longs receive. Holding a simultaneous long and short position results in a neutral yield position - i.e. there is no possible net profit or loss.

I understand, thanks.
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Offline starspirit

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Yes. There is no yield harvesting problem, because all shorts pay the same rate in the Currency Creation Market.

I'm not sure I see how that prevents yield harvesting - can you explain?
Sorry for delayed response, have been away. monsterer, my impression is that the yield harvest problem in the existing structure related to being able to self-create a short with 0% interest on the short, while earning a yield on the long, giving risk-free yield. If this is a mis-interpretation let me know. In the system I propose here, there is a single market-determined interest rate that at any time all shorts pay and all longs receive. Holding a simultaneous long and short position results in a neutral yield position - i.e. there is no possible net profit or loss.

Offline monsterer

Yes. There is no yield harvesting problem, because all shorts pay the same rate in the Currency Creation Market.

I'm not sure I see how that prevents yield harvesting - can you explain?
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Offline starspirit

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Does this proposal deal with the yield harvesting problem?
Yes. There is no yield harvesting problem, because all shorts pay the same rate in the Currency Creation Market.

Offline monsterer

Does this proposal deal with the yield harvesting problem?
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Offline starspirit

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How does this system transition in the as the feed price starts out entirely exogenous and tends toward entirely endogenous as market liquidity increases? i.e can it cope with a environment where the feed price is dominated by internal market forces?

Monsterer, good question, but do we even know that endogenous price feeds are possible? To believe this is more than just BitShares folklore, somebody needs to put forward for review a coherent plan for the mechanics of such a system, and then show how it would apply to the proposed BitAsset 3.0, which on reflection is just as reliant on the price feed as the Market Yield System.

The price feed is a ratio. The ratio is the unit of account. Today this unit of account is generated exogenously to the blockchain. If sufficient fiat IOUs are traded on the internal exchange, then the same unit of account can be created internally through the free market. The bitAssets and any other blockchain endogenous contract can then use it as a datapoint.

The only thing wrong with bytemaster's original no-feed hypothesis is that the ratio cannot start with BTS shorting/longing but needs external IOU tokens to trade against. Otherwise it would be like a self-chained bike.
Thanks bitsapphire. If this is possible, it would be really appreciated if you could explain the mechanics of this approach. What are the fiat IOU's, how would the feed price be determined etc. I set up a special thread for that here so it does not side-track this one too far... https://bitsharestalk.org/index.php/topic,15903.msg204000.html#msg204000

Offline bitsapphire

How does this system transition in the as the feed price starts out entirely exogenous and tends toward entirely endogenous as market liquidity increases? i.e can it cope with a environment where the feed price is dominated by internal market forces?

Monsterer, good question, but do we even know that endogenous price feeds are possible? To believe this is more than just BitShares folklore, somebody needs to put forward for review a coherent plan for the mechanics of such a system, and then show how it would apply to the proposed BitAsset 3.0, which on reflection is just as reliant on the price feed as the Market Yield System.

The price feed is a ratio. The ratio is the unit of account. Today this unit of account is generated exogenously to the blockchain. If sufficient fiat IOUs are traded on the internal exchange, then the same unit of account can be created internally through the free market. The bitAssets and any other blockchain endogenous contract can then use it as a datapoint.

The only thing wrong with bytemaster's original no-feed hypothesis is that the ratio cannot start with BTS shorting/longing but needs external IOU tokens to trade against. Otherwise it would be like a self-chained bike.
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Offline starspirit

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It seems not many have read through this white-paper (understandable given length, but I think worth it), but I've added some edits covering:

- Considers how BitAsset 3.0, if warranted, could fit into the approach
- Considers the implications of the Bill Market being settled in currency rather than native tokens, being a one block delay in setting leverage
- Introduces the potential for a Flexible Collateral System, where shorts can choose and switch the form of their underlying collateral amongst native tokens, currency tokens, and shorter dated bill tokens
- Notes potential for feed price manipulation, without a resolution given at this stage
- Introduces the possibility that the collateral token need not be the native BTS token