BitAsset 2.0 Requirements & Implied Design

[xiahui135]

BM I agree with your thoughts on the meaning of a  'peg'.

re: BitUSD.  I think the forced settlement is too much in favor of bitUSD holders because there are no limits and you can have massive settlement without moving prices.  With the unlimited force-settle design a lot of people will not create bitUSD even if they're BTS bulls.   They will just accumulate bitUSD and on occasion mass settle at good BTS prices.

My preference would be just to force settle anything below 100% collateral, but if not what about place limits to forced settlement based on collateral (ie. anyone with 150% or 200% collateral won't be required to settle)  At least those bitUSD creators will have less unpredictability if they keep their collateral above a certain level. 

I look forward to hearing more about Privatized BitAssets.  With Privatized BitAssets, can you:
1) place limits on force-settlement (or remove it all together?)
2) adjust collateral requirements?
3) automate collateral adjustments based on an algorithm (ie. 100% when ratio of BTS market cap to avg annual transaction fees is 5 or below... 120% when ratio is 10... up until 200% when ratio is 25)  This is just to a dampen effects of extreme bull & bear markets. 
4) make rule changes in the future? (The fewer rules the better, but just curious if there is flexibility to make tweaks later on.)

Thx!

I support your idea. The two side of market should be equal. (Even a little advantage for shorter. )
We should garantee the shorters' interest, as long as the bts price hold, the BTA will be well backed. And the value of BTA is garanteed from a market make action called peg.
Any way, The simple rule, the better.

[merivercap]

BM I agree with your thoughts on the meaning of a  'peg'.

re: BitUSD.  I think the forced settlement is too much in favor of bitUSD holders because there are no limits and you can have massive settlement without moving prices.  With the unlimited force-settle design a lot of people will not create bitUSD even if they're BTS bulls.   They will just accumulate bitUSD and on occasion mass settle at good BTS prices.

My preference would be just to force settle anything below 100% collateral, but if not what about place limits to forced settlement based on collateral (ie. anyone with 150% or 200% collateral won't be required to settle)  At least those bitUSD creators will have less unpredictability if they keep their collateral above a certain level. 

I look forward to hearing more about Privatized BitAssets.  With Privatized BitAssets, can you:
1) place limits on force-settlement (or remove it all together?)
2) adjust collateral requirements?
3) automate collateral adjustments based on an algorithm (ie. 100% when ratio of BTS market cap to avg annual transaction fees is 5 or below... 120% when ratio is 10... up until 200% when ratio is 25)  This is just to a dampen effects of extreme bull & bear markets. 
4) make rule changes in the future? (The fewer rules the better, but just curious if there is flexibility to make tweaks later on.)

Thx!

[bytemaster]

I think this discussion would be helped dramatically if we all stopped to consider the "meaning" of a peg when you have two assets.   The first thing you must consider is how "stable" and "well defined" the value is of the things you are trying to peg.    In the case of a crypto-currency, the current market price represents an instantaneous measurement of the value of BTS that has error bars of +/- 15% or more.    Each day we gather more measurements and with enough measurements and time we will be lucky if the error bars drop to +/- 5%.   

In other words the perceived value isn't crisp in the minds of the market.  It is in constant flux and "no one knows" what it should be.   So there needs to be enough flexibility in pricing to allow at least a 10% range.  If you attempt to maintain a peg closer than that it would bankrupt the system.   

The suggestions to use interest rates to regulate the peg and keep it "perfect" only make sense if the interest is at all meaningful or interesting to traders when the hourly volatility exceeds the annual interest. 

The existence of a bond market will allow people to short without fear of being force settled and also give people a way to earn a yield on both BTS and BitUSD.   

Attempting to create a "one market rule to fit every traders needs" is the problem.   

For starters, BitUSD could disable forced settlement except for 1 day per month.   On that "one day" market manipulators will try to push it both ways... "For every whale, there is an equal and opposite whale".  The ying/yang of market manipulators if you will.   

So with Privatized BitAssets we have the tools to try various markets at the same time and see which ones traders prefer.   

[starspirit]

You can short to yourself and buy BTS on an exchange, but all that does is place a bet that you think the BTA:BTS price will return to the feed. There is no arbitrage and thus you are not helping the market become efficient. One can just as easily bet that it will move away from the feed. Why would one strategy be preferred over the other?

Answering my own question, if BTS are expected to be more valuable tomorrow than they are today (measured in real USD), I will want to leverage as much bitUSD as possible to get them. That force continues until I hit the feed and people can start calling me. That is the restoring force that was missing, and will fix this model. bitUSD:realUSD spread is now defined and is a function of the rate of growth of BTS, volatility, and exchange risk.

It's a catch-22: BTS needs the feed to be enforced to be profitable, but in order for the feed to be enforced BTS must be profitable. I think that's fine, if more BTS are destroyed in fees than are given to block producers/developers, then it is "profitable"

Yes there will be BTS bulls who want to leverage themselves and hence create bitUSD.  However in a stock market, assuming information symmetry, the current price is supposed to reflect all future considerations.  Hence in general the chances that any stock or BTS will go up or down is considered to be 50/50 when considering volatility risk.  (Random walk & efficient market theory..Note: I'm not a big fan of efficient market theory, but it provides some guidance)  The desire to create bitUSD may not be that strong in a neutral market and most may opt to just buy more BTS instead.

In bull markets, I can see demand to create bitUSD increase significantly due to market psychology.  In bear markets, the available bitUSD will shrink significantly for the same reason.  You can see what happened with the current system: http://coinmarketcap.com/assets/bitusd/

In Nov '14 the bitUSD float started at $1 million...went down below $500k in Feb '15, and in April '15 it went below $200k, and now it's around $150k with bitUSD selling at a premium.   A bear market exacerbates bitUSD creation.  Also increased consumer/merchant adoption of bitUSD will generally compound the downward pressure.  Sure in the long run, BTS should go up with more transaction fees and adoption, but in the short run the added pressure to buy bitUSD may keep downward pressure on BTS prices. Just a theory.  I think that may be what was happening with bitCNY.  There was good adoption and a premium for bitCNY, but less & less availability especially with fewer incentives to create bitCNY. 

In a neutral market with expectations of volatility, I think the forced settlement feature makes it disadvantageous to create bitUSD.  It creates an imbalance in the CFD contract.  The owners of bitUSD can call for an unlimited amount of BTS at the price feed without affecting the market pricing.  I even think there could be manipulation as I mentioned earlier.  It seems bitUSD shorts are at the beckon call of the longs and can be squeezed out at any time.  Over time I think the bitUSD shorts will learn the advantages bitUSD longs have (just like the current design) and be reluctant to short.  While the system may seem to work well in bull markets, in neutral or bear markets the flaws may show up. 

My preference would be to just settle all short bitUSD positions at the bid that fall below 100% collateral.  Hence there would be a natural flow of settlement rather than calculated, abrupt, potentially massive forced settlement maneuvers from bitUSD longs. 

(Note: I may even prefer a daily settle of the entire bitUSD float at the price feed rather than an option of unlimited forced settlement at the price feed at anytime, but I would have to think about it more and it would probably be too much of a burden on the market engine anyways.)

BTW for those BTS bulls this past year, what has been your experience with creating bitUSD?   Do you care about forced settlement?

Thoughts in general?

merivercap & others, since BM first suggested it, I have been open to the view that removing the yield from bitAssets might be feasible. But the more I consider the issues you raise, the more I am leaning back to the view that the ideal would be to have a two-way payment mechanism (positive or negative "yield") between longs and shorts, that would allow any supply-demand imbalances in any market conditions to always be reconcilable at the peg price. As you are aware, I've already presented methods that may enable this, such as https://bitsharestalk.org/index.php/topic,15880.0.html and  https://bitsharestalk.org/index.php/topic,16029.msg205338.html#msg205338. These have not been widely reviewed at this stage.

In theory, if the external interest rate available on a currency is higher than the internal rate, the arbitrager (with existing BTS inventory) can earn profit by shorting bit-Currency, selling BTS outside and investing the real currency proceeds into an interest-bearing deposit. In a mature market, this should ensure that interest rates, within the constraint of arbitrage costs, are aligned with external rates, whether positive or negative. In that way, the potential for negative rates on the bit-Currency should not make the bit-Currency relatively unattractive to the real currency. Arbitrage would need to be encouraged in a more immature market though to not hinder its growth.

The biggest problem that certain members such as yourself have had with my yield-based system is the settlement at the price feed, which has been considered unnecessary by many in the longer term, and prone to price feed distortions. I maintain that a price feed is essential, but I do acknowledge the practical issues in managing it. Its worth noting though that this latest bitAsset 2.0 iteration also now features instantaneous forced settlement at the price feed, which is much closer to my own suggestions. The main difference is that, if price feed manipulation does occur, in this system it is always longs benefiting from shorts, whereas in my whitepaper, that distortion could run either way.

In thinking about the manipulation and other price feed issues, I've come up with some further suggestions that I will need to make in another post.

[bytemaster]

Is it possible (in principle) to include something similar to Factom (http://factom.org) in Bitshares?

Yes

[brainbug]

Is it possible (in principle) to include something similar to Factom (http://factom.org) in Bitshares?

[maqifrnswa]

Yes there will be BTS bulls who want to leverage themselves and hence create bitUSD.  However in a stock market, assuming information symmetry, the current price is supposed to reflect all future considerations.  Hence in general the chances that any stock or BTS will go up or down is considered to be 50/50 when considering volatility risk.  (Random walk & efficient market theory..Note: I'm not a big fan of efficient market theory, but it provides some guidance)  The desire to create bitUSD may not be that strong in a neutral market and most may opt to just buy more BTS instead.

In bull markets, I can see demand to create bitUSD increase significantly due to market psychology.  In bear markets, the available bitUSD will shrink significantly for the same reason.  You can see what happened with the current system: http://coinmarketcap.com/assets/bitusd/

In Nov '14 the bitUSD float started at $1 million...went down below $500k in Feb '15, and in April '15 it went below $200k, and now it's around $150k with bitUSD selling at a premium.   A bear market exacerbates bitUSD creation.  Also increased consumer/merchant adoption of bitUSD will generally compound the downward pressure.  Sure in the long run, BTS should go up with more transaction fees and adoption, but in the short run the added pressure to buy bitUSD may keep downward pressure on BTS prices. Just a theory.  I think that may be what was happening with bitCNY.  There was good adoption and a premium for bitCNY, but less & less availability especially with fewer incentives to create bitCNY. 

In a neutral market with expectations of volatility, I think the forced settlement feature makes it disadvantageous to create bitUSD.  It creates an imbalance in the CFD contract.  The owners of bitUSD can call for an unlimited amount of BTS at the price feed without affecting the market pricing.  I even think there could be manipulation as I mentioned earlier.  It seems bitUSD shorts are at the beckon call of the longs and can be squeezed out at any time.  Over time I think the bitUSD shorts will learn the advantages bitUSD longs have (just like the current design) and be reluctant to short.  While the system may seem to work well in bull markets, in neutral or bear markets the flaws may show up. 

My preference would be to just settle all short bitUSD positions at the bid that fall below 100% collateral.  Hence there would be a natural flow of settlement rather than calculated, abrupt, potentially massive forced settlement maneuvers from bitUSD longs. 

(Note: I may even prefer a daily settle of the entire bitUSD float at the price feed rather than an option of unlimited forced settlement at the price feed at anytime, but I would have to think about it more and it would probably be too much of a burden on the market engine anyways.)

BTW for those BTS bulls this past year, what has been your experience with creating bitUSD?   Do you care about forced settlement?

Thoughts in general?

I agree with a lot of what your saying:

My concern ... [is] that the system breaks down if everyone expects trends to continue. With no pressure to restore the price back to the feed, it is just as likely to drift from the feed as it is towards - so you can make as much money speculating on drifting away from the median. When does that drifting stop? Since there is no arbitrage, there is no reason for it to stop and there is no reason for it to continue. Once it drifts away you know have your new value with equal chance going towards the median or away. It's the "random walk" of wall street, just with no reason for it to go one way or the other.

Using programming terminology, undersupply of bitUSD is "undefined behavior" while oversupply is handled gracefully with forced calls at 99%.

Futures markets use daily clearing of accounts, like you suggest. That is something that would force creation/destruction of bitUSD so supply=demand. I'll need to think about it some more, I'm sure BM and the devs are thinking too - it's an interesting problem. I do like thinking of it as a supply control problem.

[sittingduck]

The risk of manipulation will be priced into premium charged by shorts.    Price feeds can be averaged to prevent rapid changes. 


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[lastagile]

I don't think this will work. It will be a game totally controled by whales. They will manipulate the market with no risk. Any one with enough fiat money can attack the system. I do not know why u go through such a proposal


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[merivercap]

You can short to yourself and buy BTS on an exchange, but all that does is place a bet that you think the BTA:BTS price will return to the feed. There is no arbitrage and thus you are not helping the market become efficient. One can just as easily bet that it will move away from the feed. Why would one strategy be preferred over the other?

Answering my own question, if BTS are expected to be more valuable tomorrow than they are today (measured in real USD), I will want to leverage as much bitUSD as possible to get them. That force continues until I hit the feed and people can start calling me. That is the restoring force that was missing, and will fix this model. bitUSD:realUSD spread is now defined and is a function of the rate of growth of BTS, volatility, and exchange risk.

It's a catch-22: BTS needs the feed to be enforced to be profitable, but in order for the feed to be enforced BTS must be profitable. I think that's fine, if more BTS are destroyed in fees than are given to block producers/developers, then it is "profitable"

Yes there will be BTS bulls who want to leverage themselves and hence create bitUSD.  However in a stock market, assuming information symmetry, the current price is supposed to reflect all future considerations.  Hence in general the chances that any stock or BTS will go up or down is considered to be 50/50 when considering volatility risk.  (Random walk & efficient market theory..Note: I'm not a big fan of efficient market theory, but it provides some guidance)  The desire to create bitUSD may not be that strong in a neutral market and most may opt to just buy more BTS instead.

In bull markets, I can see demand to create bitUSD increase significantly due to market psychology.  In bear markets, the available bitUSD will shrink significantly for the same reason.  You can see what happened with the current system: http://coinmarketcap.com/assets/bitusd/

In Nov '14 the bitUSD float started at $1 million...went down below $500k in Feb '15, and in April '15 it went below $200k, and now it's around $150k with bitUSD selling at a premium.   A bear market exacerbates bitUSD creation.  Also increased consumer/merchant adoption of bitUSD will generally compound the downward pressure.  Sure in the long run, BTS should go up with more transaction fees and adoption, but in the short run the added pressure to buy bitUSD may keep downward pressure on BTS prices. Just a theory.  I think that may be what was happening with bitCNY.  There was good adoption and a premium for bitCNY, but less & less availability especially with fewer incentives to create bitCNY. 

In a neutral market with expectations of volatility, I think the forced settlement feature makes it disadvantageous to create bitUSD.  It creates an imbalance in the CFD contract.  The owners of bitUSD can call for an unlimited amount of BTS at the price feed without affecting the market pricing.  I even think there could be manipulation as I mentioned earlier.  It seems bitUSD shorts are at the beckon call of the longs and can be squeezed out at any time.  Over time I think the bitUSD shorts will learn the advantages bitUSD longs have (just like the current design) and be reluctant to short.  While the system may seem to work well in bull markets, in neutral or bear markets the flaws may show up. 

My preference would be to just settle all short bitUSD positions at the bid that fall below 100% collateral.  Hence there would be a natural flow of settlement rather than calculated, abrupt, potentially massive forced settlement maneuvers from bitUSD longs. 

(Note: I may even prefer a daily settle of the entire bitUSD float at the price feed rather than an option of unlimited forced settlement at the price feed at anytime, but I would have to think about it more and it would probably be too much of a burden on the market engine anyways.)

BTW for those BTS bulls this past year, what has been your experience with creating bitUSD?   Do you care about forced settlement?

Thoughts in general?

[jsidhu]

Agreed fully. From brokers ive used to trade forex and cfds there is no initial margin when you place a trade the maintenance margin moniters margin levels and forces a market order at a level in your contract.. configurable on serverside mt4 software but each broker has its own and depends on leverage used. It worked as intended. The time eurchf flew down and below many accounts margin levels it didnt work.. brokers went out of business because they coulsnt cover customwr losses. How would we deal with the blck swan? 100% margin to be safe.

Wow.  Nice insight!    BTW what was the leverage & maintenance margin in the forex?  Isn't forex leverage like 100:1 or 200:1 sometimes?  Forex is not a volatile market so a 1% move is huge and can see why some brokers went down. 

Hmmm.. I think I actually meant 100% like you did ... a regular maintenance margin of 50% means you have 2:1.  In that case you can have half as much collateral as your exposure. I was actually looking at having the value of your position = your collateral so I guess that is 100% and no leverage. (I think when I said 50% threshold I meant having your collateral be 50% of your total .. ie. collateral + position which was a confused way of looking at it.)... anyways that would look good.  100% collateral.

Banks use 10:1 max retailers use 100:1 or more but are usually losing their accounts. Margin requirement is usually recipricol of leverage ie 50:1 is 2% margin requirement. Typically margin call happens when equity falls below 50% of the balance. We can offer leverage but if the move is fast enough it can wipe more than 100% in that case maybe we can cap the max winning for the person who took the other side of that trade.

Thanks for the info.

Yes as much as I like the idea of leverage to get liquidity, I think it's better to have the main blockchain unlevered because longs & shorts are guaranteed to be covered no matter what happens to prices.  New BTS exchange companies can build on top of the Bitshares blockchain with a lot more leverage, use caps as you mentioned and have settlement over shorter time periods (hrs/minutes) and add a lot more features if they wanted.

[maqifrnswa]

You can short to yourself and buy BTS on an exchange, but all that does is place a bet that you think the BTA:BTS price will return to the feed. There is no arbitrage and thus you are not helping the market become efficient. One can just as easily bet that it will move away from the feed. Why would one strategy be preferred over the other?

Answering my own question, if BTS are expected to be more valuable tomorrow than they are today (measured in real USD), I will want to leverage as much bitUSD as possible to get them. That force continues until I hit the feed and people can start calling me. That is the restoring force that was missing, and will fix this model. bitUSD:realUSD spread is now defined and is a function of the rate of growth of BTS, volatility, and exchange risk.

It's a catch-22: BTS needs the feed to be enforced to be profitable, but in order for the feed to be enforced BTS must be profitable. I think that's fine, if more BTS are destroyed in fees than are given to block producers/developers, then it is "profitable"

[merivercap]

Agreed fully. From brokers ive used to trade forex and cfds there is no initial margin when you place a trade the maintenance margin moniters margin levels and forces a market order at a level in your contract.. configurable on serverside mt4 software but each broker has its own and depends on leverage used. It worked as intended. The time eurchf flew down and below many accounts margin levels it didnt work.. brokers went out of business because they coulsnt cover customwr losses. How would we deal with the blck swan? 100% margin to be safe.

Wow.  Nice insight!    BTW what was the leverage & maintenance margin in the forex?  Isn't forex leverage like 100:1 or 200:1 sometimes?  Forex is not a volatile market so a 1% move is huge and can see why some brokers went down. 

Hmmm.. I think I actually meant 100% like you did ... a regular maintenance margin of 50% means you have 2:1.  In that case you can have half as much collateral as your exposure. I was actually looking at having the value of your position = your collateral so I guess that is 100% and no leverage. (I think when I said 50% threshold I meant having your collateral be 50% of your total .. ie. collateral + position which was a confused way of looking at it.)... anyways that would look good.  100% collateral.

Banks use 10:1 max retailers use 100:1 or more but are usually losing their accounts. Margin requirement is usually recipricol of leverage ie 50:1 is 2% margin requirement. Typically margin call happens when equity falls below 50% of the balance. We can offer leverage but if the move is fast enough it can wipe more than 100% in that case maybe we can cap the max winning for the person who took the other side of that trade.

Thanks for the info.

Yes as much as I like the idea of leverage to get liquidity, I think it's better to have the main blockchain unlevered because longs & shorts are guaranteed to be covered no matter what happens to prices.  New BTS exchange companies can build on top of the Bitshares blockchain with a lot more leverage, use caps as you mentioned and have settlement over shorter time periods (hrs/minutes) and add a lot more features if they wanted. 

[jsidhu]

Agreed fully. From brokers ive used to trade forex and cfds there is no initial margin when you place a trade the maintenance margin moniters margin levels and forces a market order at a level in your contract.. configurable on serverside mt4 software but each broker has its own and depends on leverage used. It worked as intended. The time eurchf flew down and below many accounts margin levels it didnt work.. brokers went out of business because they coulsnt cover customwr losses. How would we deal with the blck swan? 100% margin to be safe.

Wow.  Nice insight!    BTW what was the leverage & maintenance margin in the forex?  Isn't forex leverage like 100:1 or 200:1 sometimes?  Forex is not a volatile market so a 1% move is huge and can see why some brokers went down. 

Hmmm.. I think I actually meant 100% like you did ... a regular maintenance margin of 50% means you have 2:1.  In that case you can have half as much collateral as your exposure. I was actually looking at having the value of your position = your collateral so I guess that is 100% and no leverage. (I think when I said 50% threshold I meant having your collateral be 50% of your total .. ie. collateral + position which was a confused way of looking at it.)... anyways that would look good.  100% collateral.

Banks use 10:1 max retailers use 100:1 or more but are usually losing their accounts. Margin requirement is usually recipricol of leverage ie 50:1 is 2% margin requirement. Typically margin call happens when equity falls below 50% of the balance. We can offer leverage but if the move is fast enough it can wipe more than 100% in that case maybe we can cap the max winning for the person who took the other side of that trade.

[luckybit]

Another point for Merchants:

1) Offer to accept BitUSD at face value and you get to keep the premium (a couple of percent).   Hence, rather than Credit Cards which the merchant pays 3% with BitUSD they can earn up to 3%.   
2) Offer a 3% discount for paying in BitUSD and thus generate more business. 

Either way, merchants now have incentive to accept BitUSD at face value *AND* to promote it as the preferred means of payment.

Is there a way to get merchants to actually sell BitUSD? Shop at Overstock and get cash back in BitUSD?