BitAsset 2.0 Requirements & Implied Design

[jakub]

This is the biggest (imo) possible flow in bitAssets 2.0
Shorts are not getting any real premium if they sell at a premium to open the position but will have to buy at a premium to close the position!

Also, it will be perceived as a premium if they sell at a price which is higher than the price they expect to be when they close the position.
So it boils down to the difference between the current premium and the premium expected in the future.
It's a very subtle distinction but I believe it might all we need to make it work.

[jakub]

This is the biggest (imo) possible flow in bitAssets 2.0
Shorts are not getting any real premium if they sell at a premium to open the position but will have to buy at a premium to close the position!

So it all comes down whether BM's assumptions turn out to be holding:

  1.  The further BitUSD gets from $1 the more incentive there is for for BitUSD holders to take profits and sell. 
  2.  The further BitUSD gets from $1 the less demand there is to buy BitUSD
  3.  The further BitUSD gets from $1 the more demand there is to short BitUSD

It looks like we will never know unless we try it in action.

[zerosum]

- shorts are willing offer liquidity but demand a premium in return

This is the biggest (imo) possible flow in bitAssets 2.0
Shorts are not getting any real premium if they sell at a premium to open the position but will have to buy at a premium to close the position!


The relieve the shorts get is in:
-less collateral (200%->100%)
-no need to cover every 30 days - good but of little to no practical value. In other words I firmly believe that the 30 day cover rule in bitAsset 1.0 is not a big deal if everything else is OK (as opposed to skewed in the longs' favour).

- they can also sell below the peg (as opposed to v1.0 were they cannot do so) but this is pretty useless  99% of the time as longs can request settlement at 100%??? 99%.

The benefit for the longs in v2.0:
-More direct way to get 100% of their 'value' by a setlment request, instead of having to wait up to 30 days [tools to wait these 30 days and get your $1.00 value does not exist as of now, but lets say they do exist in a reasonable time (aka 5-7 years   ).

To sum it up 2.0 is better system but do not expect miracles... also the main benefit of it for the shorts (reduced collateral) is easily achievable in 1.0 but changing a single variable or two in the code....

[jakub]

During a bts bear market, which we are having now, there is more demand to be long USD and less demand to be short USD, and we are seeing this right now.

But this wouldn't be the case if shorts could issue bitUSD well above the market feed, would it?
And this is what BitAssets 2.0 will allow - if I understand it correctly.

Shorts can issue bitUSD above the feed now.  In fact the first short sell order is nearly 20% above the feed, meaning no one is willing to short unless they get a 20% discount.  There are buyers willing to pay a 10% premium right now but no one is willing to sell or short to them.  Most likely this imbalance is caused by the 30 day short covering rule.

But maybe longs would be willing to accept the 20% discount that shorts are now demanding if they were guaranteed liquidity, i.e. if they can be sure they will always be able to sell their bitUSD back to the issuer.
This is my understanding of BitAssets 2.0:
- longs are willing to pay a bit more but demand liquidity in return
- shorts are willing offer liquidity but demand a premium in return

[profitofthegods]

Shorts can issue bitUSD above the feed now.  In fact the first short sell order is nearly 20% above the feed, meaning no one is willing to short unless they get a 20% discount.  There are buyers willing to pay a 10% premium right now but no one is willing to sell or short to them.  Most likely this imbalance is caused by the 30 day short covering rule.

Actually I do agree with this as the 30 day thing makes people buy to cover their shorts when they actually may just want to stay short.So if you are constantly shorting, you have to also be constantly buying, whereas buyers aren't forced to sell or short so they can just keep buying.

[Helikopterben]

During a bts bear market, which we are having now, there is more demand to be long USD and less demand to be short USD, and we are seeing this right now.

But this wouldn't be the case if shorts could issue bitUSD well above the market feed, would it?
And this is what BitAssets 2.0 will allow - if I understand it correctly.

Shorts can issue bitUSD above the feed now.  In fact the first short sell order is nearly 20% above the feed, meaning no one is willing to short unless they get a 20% discount.  There are buyers willing to pay a 10% premium right now but no one is willing to sell or short to them.  Most likely this imbalance is caused by the 30 day short covering rule. 

[lastagile]

[Edit: Shortened]

Thanks BM for providing your views around yield.

Firstly, I’m still struggling to see how we deal with high yielding currencies. If users are forced to lock it away in the bond market for yield, it won’t be used for transactions.
...

I would summarize it like this:  does cash pay interest?   do checking accounts ever pay meaningful interest?    There are many people here claiming that the "longs should pay the shorts" well, that is happening naturally by the longs *not charging interest* to the shorts.    This will increase supply of BitUSD and reduce the premium above the feed.   Any interest payments will only add to the risk profile the shorts face and create larger premiums above the feed.   No one ever pays meaningful interest for "on demand instant liquidity investments". 

To get high interest bonds usually requires locking up your funds for a period of time in some kind of bond.   It normally entails some kind of risk. 

If the blockchain mirrors the real world then BitUSD can ben lent at interest for fixed terms in the bond market to shorts who want the guarantee of not being called or who want extra leverage.   There will be a huge market to borrow BitUSD against other, more-stable, collateral.  IE: Borrow BitUSD using BitGold as collateral.   Here is a market that has minimal BTS exposure and will likely have large demand.   

So those who need liquidity can stay in BitUSD, those who want yield can offer their BitUSD to the bond market.    The existence of the Bond market creates arbitrage opportunities where you can buy BitUSD and then lend it at X% interest.  This is just like banking / cash where you have the option to get yield, but not everyone takes it.   

longs should pay the shorts. If it is not the case, this project will fail. This my opinion, we will see it.
Most important thing for BTS is the peg. Premium means not pegged.
No one want short makes BTS die!

[profitofthegods]

Just to put in my two cents worth - focusing on getting more traders would be as good a solution as making changes to the way the system works.

Current traders, which is a fairly small group I would think, have become risk averse due to getting burned on a falling price and are therefore acting irrationality. Getting more traders and therefore a greater diversity of past history and perspectives may be a better solution than trying to tailor the system to cater for the current type of irrationality, because if there is one thing we can be confident of its that people will find a new way to act irrationally in the future.

[jakub]

During a bts bear market, which we are having now, there is more demand to be long USD and less demand to be short USD, and we are seeing this right now.

But this wouldn't be the case if shorts could issue bitUSD well above the market feed, would it?
And this is what BitAssets 2.0 will allow - if I understand it correctly.

[Helikopterben]

No one wants to short.  Without shorting there is no bitUSD supply.  Unfortunately I think with the new design we will have the same result.

Balance is the key.  Not favoring one side or the other.  Modern CFD contracts are balanced.  Parties agree on settlement days and price feeds.  The current system is unbalanced in favor of bitUSD longs.

This is the problem that needs to be solved one way or the other.  Lots of demand and very little supply:



I believe the problem is a bit more complex than this.  Markets largely move based on human emotion and can trend in one direction or the other for long periods of time.  During a bts bear market, which we are having now, there is more demand to be long USD and less demand to be short USD, and we are seeing this right now.  During a bull market, like what was seen last summer, there is more demand to short USD and less demand to buy USD.  I believe this is where rules favoring longs were erroneously put into place.  Once the market turned from bull to bear, then demand to buy USD increased and demand to short USD decreased.  Consequently, USD buyers could not find sellers.  During the bull market, short sellers could not find USD buyers. 

IMO, too much emphasis is put on a 'stable' cryptocurrency.  All assets, including fiat currencies, are not stable by their very nature.  They fluctuate in value relative to other assets, but some assets such as bitcoin fluctuate much more violently than other assets such as the USD.  However, this can change over time.  In fact, there may become a time where assets such as bts or bitcoin fluctuate less violently than the USD, if faith is lost in the USD. 

Guaranteeing liquidity at the expense of the shorts will not fix the problem.  Shorts simply will not short if they are unfairly disadvantaged and you cannot have a 'stable' cryptocurrency if no one is willing to short it into existence.  Perhaps a floating market order at the price feed could be used for longs who want to redeem USD as close as possible to USD.  In other words, if there are no sellers at the price feed, then the order will track the price feed until someone places a sell order exactly at the price feed, and then the order will be matched.  In a highly liquid market, this should only take seconds, even for a whale, but even in a very illiquid market the order should be filled within a few hours.  The same can be done for shorts.  Liquidity will come from traders and market makers, who will not require instant redemption of USD.

I know many solutions have been proposed including the use of interest rates.  Also, interest rates that float between positive and negative have been proposed and this could potentially be the solution.  However, I am a bit skeptical because many legacy markets, especially futures markets which bitshares seems to be more like, don't use interest rates for most assets.  Also, I don't think time constraints such as forced covering should be used because that would prevent the function of currency for these assets.  The market should be as free as possible with the only requirement being that orders have to be executed within X% of the price feed.  Orders can be placed outside of that X%, but they won't be activated until the price feed comes within that X%.  If buyers want to buy, they buy.  If sellers want to sell, they sell.  If short sellers want to short, they short.  If not, then no trades take place.  To 'nearly' guarantee liquidity for asset holders, a floating market order at the feed price can be used.  In this scenario, I believe the risk of systemic failure would be greater than the risk of no liquidity.  Eventually liquidity will enter the system as users become more comfortable and believe it will work, but this will take time.

[bytemaster]

[Edit: Shortened]

Thanks BM for providing your views around yield.

Firstly, I’m still struggling to see how we deal with high yielding currencies. If users are forced to lock it away in the bond market for yield, it won’t be used for transactions.
...

I would summarize it like this:  does cash pay interest?   do checking accounts ever pay meaningful interest?    There are many people here claiming that the "longs should pay the shorts" well, that is happening naturally by the longs *not charging interest* to the shorts.    This will increase supply of BitUSD and reduce the premium above the feed.   Any interest payments will only add to the risk profile the shorts face and create larger premiums above the feed.   No one ever pays meaningful interest for "on demand instant liquidity investments". 

To get high interest bonds usually requires locking up your funds for a period of time in some kind of bond.   It normally entails some kind of risk. 

If the blockchain mirrors the real world then BitUSD can ben lent at interest for fixed terms in the bond market to shorts who want the guarantee of not being called or who want extra leverage.   There will be a huge market to borrow BitUSD against other, more-stable, collateral.  IE: Borrow BitUSD using BitGold as collateral.   Here is a market that has minimal BTS exposure and will likely have large demand.   

So those who need liquidity can stay in BitUSD, those who want yield can offer their BitUSD to the bond market.    The existence of the Bond market creates arbitrage opportunities where you can buy BitUSD and then lend it at X% interest.  This is just like banking / cash where you have the option to get yield, but not everyone takes it.   

[merivercap]

I think the forced settlement is too much in favor of bitUSD holders.

I support your idea. The two side of market should be equal. (Even a little advantage for shorter. )
We should garantee the shorters' interest

Dude, what are you talking about?! ...
...

I disagree. 

1) There is already and will be tremendous demand for bitUSD from millions of people who don't even know what BTS is.  With bitUSD you can have the benefits of Bitcoin and send money instantly anywhere around the world without using a bank or worrying about volatility.  That's the main reason people will hold bitUSD.  To use it.  It's more useful than BTS for payments.

2) Secondly traders want bitUSD to have a stable asset and park money in so they can trade in and out of crypto

3) The market is not functioning primarily because of the bear market, but probably because of the design of forced 30-day settlement.  We went from about $1 million in bitUSD supply to about $150k currently.  No one wants to short.  Most shorters have probably quit.  Without shorting there is no bitUSD supply, and much less reason for Bitshares to even exist.  Unfortunately I think with the new design we will have the same result.  There may be a boost in bitUSD supply when prices turn around, but eventually with volatility and downturns in pricing the shorts are going to be squeezed out.  We do not have a problem of bitUSD demand.  We have a problem of bitUSD supply.

4) There is risk to investing in securities of any company.  Hence people hold cash or bonds instead of stock to minimize risk especially when they're risk-averse, when they have more immediate cash flow needs or when they're older.  The price of stability and lower risk is forgoing the opportunity for higher gains with more risk.  The current price of any security includes all future potential and considerations.  Otherwise no one should hold any cash or bonds at all and own 100% Apple or Google or BTS or any penny-stock because they have more potential.   

5) Balance is the key.  Not favoring one side or the other.  Modern CFD contracts are balanced.  Parties agree on settlement days and price feeds.  The current system is unbalanced in favor of bitUSD longs.

Cheers.

[toast]

There is a market for liquidity that we have yet to tap into.  Do you want a piece of it or not?  This proposal is all about taping into this LIQUIDITY market.  Because up until now we have decided not to participate.  Your competitors are participating, so I suggest that we do as they are doing.

I actually suspect the currency market might be better without traders, and supported by issuers with an income motive.

Yes.. Good thing nubits didn't get sufficient momentum to steal this before having to deal with economic realities. Someone is going to eat your lunch and have easy instant crypto usd, cny, and gold.

[starspirit]

On other points:

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.     

I didn't get this?

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. 

By construction it is at all times meaningful enough for supply and demand to equilibrate at the feed price.

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

I agree. I actually suspect the currency market might be better without traders, and supported by issuers with an income motive. Traders can operate in bond and other asset markets. But I think you're saying we can just have a bond market for yield, with no at-call interest market. I suspect we still need a deposit market too (or interest-bearing currency), otherwise users will just use real currency in interest bearing deposits rather than bit-cash for transactions.

[starspirit]

[Edit: Shortened]

Thanks BM for providing your views around yield.

Without yield, BTA 2.0 is effectively like non-interest bit-cash. While I do aesthetically like the idea of replicating traditional markets with full cash/deposit/bond options, I wonder about how stable both the peg and the cash supply will be without a mechanism to regulate supply and demand.

Firstly, I’m still struggling to see how we deal with high yielding currencies. If users are forced to lock it away in the bond market for yield, it won’t be used for transactions.

Secondly, although most of the time I think price would range between the 100% settlement price and some level of premium at which consumers stop buying, I can foresee some situations where it may become clear to the consensus that a bitUSD is worth meaningfully more or less than a real USD, as a result of risk or yield factors on either side. This could lead to rapid and severe contractions or expansions of bitUSD demand/supply as everyone either wants in or wants out. 

Examples include:

- if the external yield on the real currency rises considerably
- if coverage in the collateral pool becomes marginal and there is a meaningful risk of insolvency
- a regulatory issue around bitAssets
- counter-party risk in the real USD banking system
- a severe bear market in BTS

With a yield mechanism, supply and demand would still shift but more moderately. Of course, one might not like the swings in yield that such situations might cause anyway, that’s why this is a matter of preference, and open to debate.

The flexibility of yield also allows maximum tightness of the peg, which I think the market would see favourably. By suggesting this, I'm not claiming the price feed is a correct valuation of BTS, so I don't think the fuzziness of that underlying valuation matters. I’m only assuming that it is the best estimate of the instantaneous transaction price available, ignoring spreads. That is, if arbitragers or settlers wish to convert between bitUSD and USD using BTS, this is the price that gives them confidence of getting what they expect.