Discussing the problems with bitUSD (smart coins)

[Helikopterben]

Options buyers is traditional markets pay for premium only.  That is why we need some form of leveraged trading, if possible.

[tonyk]

An option with a 10 year expiration is close enough to infinite. The further in the future you go the smaller the difference in price.

So do your estimation based upon the curve generated by 3 month, 6 month, and 12 month expirations.

Do you have any idea how much an option with 3 y expiration and the volatility of BTS will cost?

I bet it will be hitting 1usd per 1usd if not more.

I actually think that the option is not infinite in term because the option doesn't have a fixed price.  So I think that is the wrong algorithm to use.

When I go short, I am pricing the cost of finding someone else to take over my short position in the future relative to the BitUSD holder wishing to exercise.

With liquidity and no fixed price, the premium can be much lower.

1 bitCNY - is 1) 'smart instrument' and 2)the right to sell this instrument for a price of 1 CNY at any point in the future.

So this is definitely some instrument[we are not concerned with exactly here]  plus  a put option with strike of 1 CNY [ aka giving you the right to sell said instrument for 1 CNY = straight definition of an option]...except it has no expiration date.

When you are buying the bitCNY you are paying one CNY for the underlying contract (or smart instrument) and anything above 1 CNY is the premium for the put option.



And yes any option definitely has a price (theoretical value) at any point in time.

I think the place you went wrong is saying you have the right to sell said instrument for 1 CNY... which is no true,  you have the right to sell it for 1 CNY worth of BTS. 

So the person selling the BitCNY into circulation simply has a callable (on-demand) loan.  You borrow money that is callable on demand (24 hour notice)... considering the loan is interest-free itself we can consider the premium on BitCNY to be  PRICE_OF_OPTION - PREPAID_INTEREST where PREPAID_INTEREST is a variable that represents the value gained by the short and is proportional to the expected change in price of the collateral.   

There are a lot of variables in play, but I do not think it is fair to say the premium is just the cost of the option.  It factors in the cost of capital for collateral required to stay in the top 98% where you do not have to provide the option.

In other words the bottom 2% of least-collateralized shorts must assume the cost of the option.  The other 98% don't have to provide the option.  So the premium is pro-rated between these two costs.

I do not know if from this statement of yours is possible to directly reach the same conclusions [at least I did not] but it lead me to realize I am indeed wrong.

The reason is the contract [bitAsset short sell and premium] let's you actively adjust the  max loss [ which is a clear benefit and possible with each price movement in favour of the shorter] . Benefit which the option seller do not have* and which leads to different risk and consecutively price profiles (calculation).

*To simulate the behavior - At that very point it becomes the difference between the prices of 2 options with 2 strike prices - the original BTS price at the short sell and the current BTS price. [ if someone cares to know]

[bytemaster]

An option with a 10 year expiration is close enough to infinite. The further in the future you go the smaller the difference in price.

So do your estimation based upon the curve generated by 3 month, 6 month, and 12 month expirations.

Do you have any idea how much an option with 3 y expiration and the volatility of BTS will cost?

I bet it will be hitting 1usd per 1usd if not more.

I actually think that the option is not infinite in term because the option doesn't have a fixed price.  So I think that is the wrong algorithm to use.

When I go short, I am pricing the cost of finding someone else to take over my short position in the future relative to the BitUSD holder wishing to exercise.

With liquidity and no fixed price, the premium can be much lower.

1 bitCNY - is 1) 'smart instrument' and 2)the right to sell this instrument for a price of 1 CNY at any point in the future.

So this is definitely some instrument[we are not concerned with exactly here]  plus  a put option with strike of 1 CNY [ aka giving you the right to sell said instrument for 1 CNY = straight definition of an option]...except it has no expiration date.

When you are buying the bitCNY you are paying one CNY for the underlying contract (or smart instrument) and anything above 1 CNY is the premium for the put option.



And yes any option definitely has a price (theoretical value) at any point in time.

I think the place you went wrong is saying you have the right to sell said instrument for 1 CNY... which is no true,  you have the right to sell it for 1 CNY worth of BTS. 

So the person selling the BitCNY into circulation simply has a callable (on-demand) loan.  You borrow money that is callable on demand (24 hour notice)... considering the loan is interest-free itself we can consider the premium on BitCNY to be  PRICE_OF_OPTION - PREPAID_INTEREST where PREPAID_INTEREST is a variable that represents the value gained by the short and is proportional to the expected change in price of the collateral.   

There are a lot of variables in play, but I do not think it is fair to say the premium is just the cost of the option.  It factors in the cost of capital for collateral required to stay in the top 98% where you do not have to provide the option.

In other words the bottom 2% of least-collateralized shorts must assume the cost of the option.  The other 98% don't have to provide the option.  So the premium is pro-rated between these two costs.

[tonyk]

An option with a 10 year expiration is close enough to infinite. The further in the future you go the smaller the difference in price.

So do your estimation based upon the curve generated by 3 month, 6 month, and 12 month expirations.

Do you have any idea how much an option with 3 y expiration and the volatility of BTS will cost?

I bet it will be hitting 1usd per 1usd if not more.

I actually think that the option is not infinite in term because the option doesn't have a fixed price.  So I think that is the wrong algorithm to use.

When I go short, I am pricing the cost of finding someone else to take over my short position in the future relative to the BitUSD holder wishing to exercise.

With liquidity and no fixed price, the premium can be much lower.

1 bitCNY - is 1) 'smart instrument' and 2)the right to sell this instrument for a price of 1 CNY at any point in the future.

So this is definitely some instrument[we are not concerned with exactly here]  plus  a put option with strike of 1 CNY [ aka giving you the right to sell said instrument for 1 CNY = straight definition of an option]...except it has no expiration date.

When you are buying the bitCNY you are paying one CNY for the underlying contract (or smart instrument) and anything above 1 CNY is the premium for the put option.



And yes any option definitely has a price (theoretical value) at any point in time.

[bytemaster]

An option with a 10 year expiration is close enough to infinite. The further in the future you go the smaller the difference in price.

So do your estimation based upon the curve generated by 3 month, 6 month, and 12 month expirations.

Do you have any idea how much an option with 3 y expiration and the volatility of BTS will cost?

I bet it will be hitting 1usd per 1usd if not more.

I actually think that the option is not infinite in term because the option doesn't have a fixed price.  So I think that is the wrong algorithm to use.

When I go short, I am pricing the cost of finding someone else to take over my short position in the future relative to the BitUSD holder wishing to exercise.

With liquidity and no fixed price, the premium can be much lower.

[tonyk]

An option with a 10 year expiration is close enough to infinite. The further in the future you go the smaller the difference in price.

So do your estimation based upon the curve generated by 3 month, 6 month, and 12 month expirations.

Do you have any idea how much an option with 3 y expiration and the volatility of BTS will cost?

I bet it will be hitting 1usd per 1usd if not more.

[bytemaster]

An option with a 10 year expiration is close enough to infinite. The further in the future you go the smaller the difference in price.

So do your estimation based upon the curve generated by 3 month, 6 month, and 12 month expirations.

[tonyk]

Problem:
Mathematically, the value of the premium shorts sell to longs is a function of expected future variance in the value of that same premium - which makes it very difficult to calculate. However, markets do this all the time - it's basically pricing the derivative of a derivative. It's like trading options of VIX.
http://sixfigureinvesting.com/2010/01/trading-vix-options/

actually it is trading options with no expiration date on VIX...which makes the task...close to impossible.

otherwise great post + 1

No expiration?

7. Expiring In-the-Money VIX options give a cash payout.  The payout is determined by the difference between the strike price and the VRO quotation on the expiration day.  For example the payout would be $1.42 if the strike price of your call option was $15 and the VRO was $16.42.
8. The expiration or “print” amount when VIX options expire is given under the ^VRO symbol (Yahoo) or $VRO (Schwab).   This is the expiration value, not the opening cash VIX on the Wednesday morning of expiration.  VIX options expire at market open on expiration day, so they are not tradeable on that day.
9. VIX options do not expire on the same days as equity options. It is almost always on a Wednesday  See this post for upcoming expirations.  This odd timing is driven by the needs of a straightforward settlement process.  On the expiration Wednesday the only SPX options used in the VIX calculation are the ones that expire in exactly 30 days.  For more on this process see Calculating the VIX—the easy part.

no expiration in the BTS case. so the sentence should read:

However, markets do this all the time - it's basically pricing the derivative of a derivative. It's like trading options of VIX.  However in the BTS case those are options with no expiration date....which makes the task...close to impossible.

[abit]

Problem:
Mathematically, the value of the premium shorts sell to longs is a function of expected future variance in the value of that same premium - which makes it very difficult to calculate. However, markets do this all the time - it's basically pricing the derivative of a derivative. It's like trading options of VIX.
http://sixfigureinvesting.com/2010/01/trading-vix-options/

actually it is trading options with no expiration date on VIX...which makes the task...close to impossible.

otherwise great post + 1

No expiration?

7. Expiring In-the-Money VIX options give a cash payout.  The payout is determined by the difference between the strike price and the VRO quotation on the expiration day.  For example the payout would be $1.42 if the strike price of your call option was $15 and the VRO was $16.42.
8. The expiration or “print” amount when VIX options expire is given under the ^VRO symbol (Yahoo) or $VRO (Schwab).   This is the expiration value, not the opening cash VIX on the Wednesday morning of expiration.  VIX options expire at market open on expiration day, so they are not tradeable on that day.
9. VIX options do not expire on the same days as equity options. It is almost always on a Wednesday  See this post for upcoming expirations.  This odd timing is driven by the needs of a straightforward settlement process.  On the expiration Wednesday the only SPX options used in the VIX calculation are the ones that expire in exactly 30 days.  For more on this process see Calculating the VIX—the easy part.

[abit]

I agree with your definition of the requirements, but the conclusion is just the current description of how bitshares works...and I'm not sure this is the only possible way it *could* work.

We only need to know this way *could* or *could not* work. If we already knew it could not work, of course we'll try other ways. We've already run on this way so far, it costs a lot to turn to another way.

[tonyk]

Problem:
Mathematically, the value of the premium shorts sell to longs is a function of expected future variance in the value of that same premium - which makes it very difficult to calculate. However, markets do this all the time - it's basically pricing the derivative of a derivative. It's like trading options of VIX.
http://sixfigureinvesting.com/2010/01/trading-vix-options/

actually it is trading options with no expiration date on VIX...which makes the task...close to impossible.

otherwise great post + 1

[monsterer]

General rules:
1) When in oversupply, destruction (settling) should be incentivized
2) When in undersupply, creation (shorting) should be incentivized

I agree with your definition of the requirements, but the conclusion is just the current description of how bitshares works...and I'm not sure this is the only possible way it *could* work.

For example, starspirit demonstrated another model whereby supply and demand is controlled based on yield, where yield can be negative, such that holding bitUSD under a negative yield would naturally cause rational participants to reduce the overall supply of bitUSD, and likewise with an undersupply of bitUSD, a positive yield would have the opposite effect.

[maqifrnswa]

Q) Is there another design which doesn't have the same biased risk profile, or is this just a natural consequence of not having redeemability?

Mathematically, I believe it is a natural consequence. Here's the argument:

From game theory, there are two possible moves:
1) Create smartcoin (short)
2) Destroy smartcoin (settle)

We need to make a game such that the rules of the game encourage creation and destruction such that value is maintained.

Now, like all currencies, you can choose how you want to maintain value. You can have a centralized bank/group of people controlling supply (Federal Reserve), or you can have a fix value as currencies that are on the "Gold Standard." For the sake of merchants and liquidity, BitShares has made the decision that 1 smartcoin should always be redeemable for 1 underlying asset of BTS. That is, BitShares is on the "Gold Standard." (well, technically, bitGOLD is on the "gold standard," but you get what I mean  ) This also means that a centralized group of people are NOT needed, and thus you can rely on decentralized data (feed) to maintain your gold standard (versus the federal reserve)

So now that BitShares is on the Gold Standard, what should the rules be such that creation and destruction incentivize the gold standard?

General rules:
1) When in oversupply, destruction (settling) should be incentivized
2) When in undersupply, creation (shorting) should be incentivized


We need to come up with a system, on a blockchain, that does that. There are really one two rules that can possible be implemented. However, the optimum implementation parameters are unknown and are thus parametrized in BitShares. However, these specific rules MUST be followed, as there really is no other way to achieve our goal given the boundary conditions.

Destruction rule:
1) At any time you are allowed to destroy a smartcoin by exchanging 1 smartcoin for its value in underlying asset

BitShares Implementation: Since underlying value asset is not determined within our system, we need to pull it from external sources that actually trade real versions of the underlying asset. Thus, settlement price should be a function of external price feed.
Arbitrage Profit for enforcing the rule: Finite and the difference between what you can buy the asset for now and what you can settle it for.
Long term profit: None if performed via arbitrage.
Risk to settler: None, besides change in feed between settlement request and execution (see below)

To reduce risk of manipulation via a "sneak attack" on the market: time delay between declaring a settle and settle
To reduce the risk of manipulation by "buying out" the entire market: settlement limits volume to a % of the total volume


Creation rule:
1) You can create (short) at any time to yourself

Implementation: Shorting to yourself at any time is allowed as long as you maintain collateral so that the smartcoin you create is "backed" by something of value
Arbitrage Profit: None
Long term Profit: Infinite and based on the difference in growth rate between smartcoin and BTS.
Risk: uncertainty in the future value of smartcoin relative BTS.

Outcome of rules:
Settlers (longs) have zero risk; shorts have non-zero risk. Therefore, shorts should sell to longs at a premium. The price of this premium is a function of variance in the expected BTS growth rate relative to the underlying asset as well as the variance in the premium itself.

There is one issue I've been struggling with for months:
Problem:
Mathematically, the value of the premium shorts sell to longs is a function of expected future variance in the value of that same premium - which makes it very difficult to calculate. However, markets do this all the time - it's basically pricing the derivative of a derivative. It's like trading options of VIX.
http://sixfigureinvesting.com/2010/01/trading-vix-options/

Conclusion:
Given the boundary condition of "BitShares wants to be on the Gold Standard," it directly follows that 1 smartcoin > underlying asset and forced settlement must exist.

[Samupaha]

The problems as I see them:

• BTS price continues to fall. The declining value of BTS cannot support the creation and maintenance of bitassets
• The market mechanics are not well documented and over complicated for even the most advanced traders
• The market mechanics are skewed towards bitasset holders instead of shorts. This innevitably leads to less liquidity and inefficient markets
• As a result of number 3, it is far less risky and more profitable to margin trade on centralized exchanges than on Bitshares. Why would you short BTC releative to BTS on Bitshares when you can do so on Poloniex while incurring less of a cost
• Market making for bitasset markets is not profitable and far too risky

I'm sure there are more problems that I have not enumerated. I have some idea of how to solve them, but I don't see the BM/community taking the necessary actions to fix these problems. We are wasting time adding features like stealth transfers to the GUI instead of making our core product actually work. I'm at my wits end and I've been here since the beginning.

Good list, I agree with all points.

It seems that MPA is really difficult subject and nobody knows how we can tweak the parameters to work so that they will provide good incentives in all situations. Maybe it would be best if we just set them aside for a while? Maybe it would be best to focus on products that are easily made useful for users, like stealth transfers, and try to get more users with them?

Its important to remember that much progress has been made and the building blocks are in place:  DPOS, basic market infrastructure, a (mostly polished) user-friendly web interface, ect.  We have to remember that this is programmable finance.  What does not work now can always be changed.  Eventually we will find the right formula.  I think there is a good chance we will see some solid adoption with the implementation of a bond/swap market.  Also, I have stated before that Smartcoins for physical commodities may be the ticket to real user adoption.  No other project can compete with that at this point in time. 

Yeah, most important thing here is the DAC platform. If one thing doesn't work we can either tweak it better or try something else. This is trial and error. If we do it enough times, eventually we'll come up with products that work.

[Helikopterben]

The biggest difference will most likely come with the bond/swap market, essentially transferring risk from the lender to the borrower.  With a bond/swap market, the bts holders should be able to create smartcoins and lend them out to earn a nearly risk-free return instead of selling the smartcoin and taking on the added exchange rate risk.  The smartcoin creator's debt/collateral ratio would not change during the course of the loan.  When the loan is paid back, the smartcoin creator could simply adjust the debt and collateral back to 0 and collect the interest owed.  All the smartcoin creator would have to do is maintain sufficient collateral over the course of the loan and he would be in no danger of losing bts, essentially giving him a nearly risk-free return on his bts.  This makes sense as bts is the reserve currency of the system.  This could also potentially put upward pressure on prices as users realize they can get a nearly risk-free, market-driven return on their bts. 

Forced settlement is necessary as there are no time constraints to force settlement like there are in futures and options markets, although the parameters of forced settlement could be tweaked.  Maybe require a 7-day waiting period before the transaction executes and maybe execute at 98% or 95% of feed.  I never really thought guaranteeing settlement on a 1:1 basis was a great idea.  Merchant adoption won't happen unless we have fairly liquid markets and if we have sufficiently liquid markets, then redeeming value near the feed shouldn't be a problem.  Markets need to be liquid first.  They will become liquid if incentives are aligned.  SQP could possibly be adjusted to within 10% of the price feed, but this parameter is only relevant in illiquid markets. 

Its important to remember that much progress has been made and the building blocks are in place:  DPOS, basic market infrastructure, a (mostly polished) user-friendly web interface, ect.  We have to remember that this is programmable finance.  What does not work now can always be changed.  Eventually we will find the right formula.  I think there is a good chance we will see some solid adoption with the implementation of a bond/swap market.  Also, I have stated before that Smartcoins for physical commodities may be the ticket to real user adoption.  No other project can compete with that at this point in time. 

[tonyk]

I'm sure there are more problems that I have not enumerated. I have some idea of how to solve them, but I don't see the BM/community taking the necessary actions to fix these problems. We are wasting time adding features like stealth transfers to the GUI instead of making our core product actually work. I'm at my wits end and I've been here since the beginning.

Absolutely agree! Actually I almost gave up on BTS completely today, after seeing yet another (bug/feature???) in BTS screwing even more the shorts...fortunately it was wrong reporting on cryptofresh's part [*scpes no blame goes to you, actually I am truly amazed what you have done with the explorer, especially given what you have to work with]

[clout]

Even if you don't agree with my analysis for the cause of the premium, you must acknowledge that it was designed to trade at a premium. I think this is suboptimal.

I agree completely.  Bitassets are uttterly useless at the moment. I am beginning to realize this more and more as I try and pitch them to exchanges that are interested in integrating them. I am not sure if the system worked better before the 2.0 launch, but I do know that BitCNY was well pegged and Transwiser did not have the issues that it is running into now.

The problems as I see them:

• BTS price continues to fall. The declining value of BTS cannot support the creation and maintenance of bitassets
• The market mechanics are not well documented and over complicated for even the most advanced traders
• The market mechanics are skewed towards bitasset holders instead of shorts. This innevitably leads to less liquidity and inefficient markets
• As a result of number 3, it is far less risky and more profitable to margin trade on centralized exchanges than on Bitshares. Why would you short BTC releative to BTS on Bitshares when you can do so on Poloniex while incurring less of a cost
• Market making for bitasset markets is not profitable and far too risky

I'm sure there are more problems that I have not enumerated. I have some idea of how to solve them, but I don't see the BM/community taking the necessary actions to fix these problems. We are wasting time adding features like stealth transfers to the GUI instead of making our core product actually work. I'm at my wits end and I've been here since the beginning.

[merivercap]

Even if you don't agree with my analysis for the cause of the premium, you must acknowledge that it was designed to trade at a premium. I think this is suboptimal.

The only feature in the design that intentionally creates a premium is the forced settlement feature because that directly effects the price.  When you create any price floor or guarantee for one side of traders, you will create a premium.   Aside from that, premiums are relative to something.   In our case it's a premium compared to a weighted average of centralized exchanges that have a variety of differences compared to the internal exchange.   Trader preferences between a centralized exchange and the internal exchange may cause a premium, but the internal exchange is currently  too illiquid to make any determination. 

Overall the design may be suboptimal based on liquidity so there may be less participants than we could have, but nothing really is optimal.   Any amount of fees are suboptimal.. lack of leverage is suboptimal (but you have to balance with systemic risk).. confusing GUI's are suboptimal... lack of awareness is suboptimal.. centralized exchanges are suboptimal...  imbalances between long & short are suboptimal...we should improve all these areas as much as we can so if there is a better design I'm all for it.  Maybe somehow allowing someone to short BTS will create a balance you're looking for, but I haven't thought about if that would be easy to do or not.   

Anyways I see areas to improve the design, liquidity, and potentially even premiums, but I don't see any deal-breakers.

[monsterer]

Even if you don't agree with my analysis for the cause of the premium, you must acknowledge that it was designed to trade at a premium. I think this is suboptimal.

[merivercap]

You believe because one side gets margin-called and has to actively maintain collateral that that creates a premium.  I don't believe that. 

With respect, you're wrong. I can prove it:

Lets call the risk of getting margin called Rm and the risk of a black swan Rb. Now, each of these risks has a probability associated with it (call them Pm and Pb)... Even if they are very difficult to quantify, we can say with certainty that Pm > Pb at all times.

Equilibrium price in the bitUSD market is the feed price. When I borrow bitUSD from the market I take on Rm. When I buy bitUSD from the market I take on Rb. If I borrow bitUSD and then sell it at the feed price, I'm saying Rm == Rb, which is obviously a false assumption. If we know that Pm>Pb at all times, then as a rational trader I must sell by borrowed bitUSD greater than the feed price, to make sure I satisfy Pm>Pb.

That's not really a proof, but it's just your hypothesis about what creates the premium.   I don't agree that that causes the premium and if anything it would have a negligible effect.   The risk of margin-calls should not be a significant risk to a trader, especially those with sufficient collateral.  Price risk is the main concern for both long and short.  When each side enters a trade they will be mainly concerned if the market is up or down when they want to exit.   They should already take into consideration any other risk before entering a trade.

What premium are we talking about anyways?   Just want to make sure we are taking the same perspective.   I haven't been trading and have been speaking from a theoretical standpoint..  but currently I see ask for BTS below the settlement price/price feed on openledger.   I see an ask of 387,587 BTS at .0030 USD/BTS and the settlement price  at .0032 USD/BTS.  This  makes sense to me because the Margin Call price is .00291 USD/BTS when I want to open a short....so the SQP should be set to the price feed because buyers know there will be actual margin call settlement at .00291 USD/BTS instead of .0032 USD/BTS so there is no reason to bid anywhere near the higher 'Settlement Price' ...  That's the biggest issue right now.   

Note:  Furthermore, we are trying to analyze all this in an illiquid internal market of maybe 20-30 traders?  The price feed is just an estimate of prices on various exchanges.  The  pricing differences between exchanges can fluctuate 10+% so even trying to make a judgement about if there is a premium/discount between any two exchanges is questionable purely on volatility uncertainty.  You also have different levels of fees (transaction/gateway), liquidity, custodial risk, ease-of-use etc., centralized vs decentralized, leverage/no leverage...  so there should be a lot of factors in play.   Beyond that we have bear market and bull market pressure that will effect premiums/discounts esp in leveraged markets...as well as the potential of forced settlement hovering over shorts in the internal exchange.... those are all factors.

I do agree very lowly-collateralized traders may have more margin-call/volatility/optionality risk and hence would not enter a trade if their own risk preference is not met.  As collateral increases, the volatility risk should become negligible.  Those that argue for random walk theory would argue volatility risk would not matter anyways because the probability that an asset goes up should be equal to the probability it goes down, but that's for another discussion.  Either way these issues may effect liquidity and the price someone is willing to enter.  As stated above premiums/discounts are based on comparing trading on one exchange to another and there are a variety of other factors at play there....   

Bottomline:  I say fix the SQP to equal the price fee in this illiquid market and you'll see trading happen around the price feed....

[clout]

The point was to create a currency, not a trading instrument.  The currency use case requires fungible long positions.

But is it impossible to create a pegged currency that trades at parity which is also fungible?

No just look at BitCNY

[monsterer]

The point was to create a currency, not a trading instrument.  The currency use case requires fungible long positions.

But is it impossible to create a pegged currency that trades at parity which is also fungible?

[sittingduck]

The point was to create a currency, not a trading instrument.  The currency use case requires fungible long positions.   

[clout]

You believe because one side gets margin-called and has to actively maintain collateral that that creates a premium.  I don't believe that. 

With respect, you're wrong. I can prove it:

Lets call the risk of getting margin called Rm and the risk of a black swan Rb. Now, each of these risks has a probability associated with it (call them Pm and Pb)... Even if they are very difficult to quantify, we can say with certainty that Pm > Pb at all times.

Equilibrium price in the bitUSD market is the feed price. When I borrow bitUSD from the market I take on Rm. When I buy bitUSD from the market I take on Rb. If I borrow bitUSD and then sell it at the feed price, I'm saying Rm == Rb, which is obviously a false assumption. If we know that Pm>Pb at all times, then as a rational trader I must sell by borrowed bitUSD greater than the feed price, to make sure I satisfy Pm>Pb.

Your understanding of the market dynamics is limited two types of participants: shorts and longs. These are not the only participants in Bitshares markets. Realistically there are 4 types of market participants within a bitasset market that we should be concerned about, each with their own risk profile:

• Exclusively long a given bitasset
• Exclusively short a given bitasset
• Short and long a given bitasset
• Short a given bitasset and long another asset with comparable price volatility

The problem with the market, aside from the SQP of 110%, is that the majority of market participants are in categories 1 and 2, which makes them sensitive to changes in the market price of the given bitasset vs BTS. When the price of BTS relative to the underlying goes down, fewer shorts enter the market and longs don't want to sell, hence the premium. Although we have not seen the opposite scenario, when the price of BTS relative to the underlying goes up there will be over selling.

Those in category 3 and 4 are essentially just long BTS. Assuming an SQP of 100% they do not incur a great risk even when margin called. The risk to those in category 4 is that they must wait to sell the asset they are long for bitasset they are short. This however would not be a problem in a liquid market which we can easily generate if the deposits and withdrwals are handled by bitasset bridges that must purchase or sell bitassets for their corresponding gateway asset.

We need to get more people into categories 3 and 4 in order to ultimately make bitassets useful.

[clout]

Thanks for bringing up this discussion. Was wondering similar questions. Bitshares advertises bitAssets as a cool way to store value. You like gold, here we have bitGold for you, its value is pegged to gold. But, in order for bitGold to be a cool store of value, somebody have to issue enough and make the market. How do you issue a bitAsset risk free way? If you borrow bitAsset and BTS falls, you are screwed.

If I borrow BitUSD and sell for USD then I maintain a neutral position (long BTS, no leverage).

Only selling BitUSD in the BTS market is creating leverage risk.

This is not true if you are subject to an SQP above 100%

agree with you, we need to set all SQP to 1000,
then ask people who borrowed bitCNY to sell bitCNY for CNY
for other assets which don't have a gateway, you can sell it for stable asset, for example: sell bitUSD for bitCNY/bitGOLD ....
if all people who borrowed bitUSD/bitCNY, only sell for stable asset instead of BTS/BTC, the peg will become more stable.
other people who bought bitUSD can use it to buy BTS/BTC.

all people who borrowed bitCNY can get profit from marketmaker fees.

Yes, we need to make this a community wide initiative.

[monsterer]

Where is the reward in your logic? If I buy bitUSD, I don't get any reward, if I borrow bitUSD, I may get a reward depending on market sentiments ..

If I buy bitUSD I get rewarded if the price of BTS goes down. If the price goes up, I have opportunity cost. If I borrow bitUSD and the price of BTS goes down, I can close at a profit. If the price goes up, I get margin called eventually, which is realised cost.

In the end, you want to answer this question to your self:
Do you want to incentivize customers moving their funds into a stable system?
Do you want to incentivize merchants to use the system?
Or do you want to equally incentivize both parties?

Why would you want to chose a system which benefits any one participant. Such a system is a poorer design than one which is equal to all participants.

[alt]

Thanks for bringing up this discussion. Was wondering similar questions. Bitshares advertises bitAssets as a cool way to store value. You like gold, here we have bitGold for you, its value is pegged to gold. But, in order for bitGold to be a cool store of value, somebody have to issue enough and make the market. How do you issue a bitAsset risk free way? If you borrow bitAsset and BTS falls, you are screwed.

If I borrow BitUSD and sell for USD then I maintain a neutral position (long BTS, no leverage).

Only selling BitUSD in the BTS market is creating leverage risk.

This is not true if you are subject to an SQP above 100%

agree with you, we need to set all SQP to 1000,
then ask people who borrowed bitCNY to sell bitCNY for CNY
for other assets which don't have a gateway, you can sell it for stable asset, for example: sell bitUSD for bitCNY/bitGOLD ....
if all people who borrowed bitUSD/bitCNY, only sell for stable asset instead of BTS/BTC, the peg will become more stable.
other people who bought bitUSD can use it to buy BTS/BTC.

all people who borrowed bitCNY can get profit from marketmaker fees.

[xeroc]

Where is the reward in your logic? If I buy bitUSD, I don't get any reward, if I borrow bitUSD, I may get a reward depending on market sentiments ..
Hence, the premium over the feed can be linked to the reward and if BTS price stays flat, reward goes down, so does the premium.
But I agree that this approach will probably never achieve parity, but that wasn't the idea ..

In the end, you want to answer this question to your self:
Do you want to incentivize customers moving their funds into a stable system?
Do you want to incentivize merchants to use the system?
Or do you want to equally incentivize both parties?

The letter is the nuBits approach .. that's why they are floating AROUND parity.
BitShares approach incentivizes merchants since they can always settle AT parity.
Don't know if there is a system already available that goes for the first options

[monsterer]

You believe because one side gets margin-called and has to actively maintain collateral that that creates a premium.  I don't believe that. 

With respect, you're wrong. I can prove it:

Lets call the risk of getting margin called Rm and the risk of a black swan Rb. Now, each of these risks has a probability associated with it (call them Pm and Pb)... Even if they are very difficult to quantify, we can say with certainty that Pm > Pb at all times.

Equilibrium price in the bitUSD market is the feed price. When I borrow bitUSD from the market I take on Rm. When I buy bitUSD from the market I take on Rb. If I borrow bitUSD and then sell it at the feed price, I'm saying Rm == Rb, which is obviously a false assumption. If we know that Pm>Pb at all times, then as a rational trader I must sell by borrowed bitUSD greater than the feed price, to make sure I satisfy Pm>Pb.

[JA]

Just wonder how to deposit BitUsd to openledger wallet! Sorry for newbie question

send it to your account just like bts

[lihuajkl]

Just wonder how to deposit BitUsd to openledger wallet! Sorry for newbie question

[merivercap]

With a few small changes we could make the following safe:
1. Borrowing BitUSD + Holding BitUSD means no margin call (account holdings and open orders can be used to cover).
2. If you have no access to BitUSD then your collateral will be sold.

I think this offers some convenience and efficiency for shorters and self-shorters, but probably unnecessary at the moment.  Natural margin calls will help generate activity and price discovery anyways.

[merivercap]

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear.

No. I'm going to try and make this as simple as possible to understand. Outside of a systematic failure:

Q) Can you get margin called, when you borrow bitUSD?

Q) Can you get margin called buying bitUSD?

Hey you're the one that brought up black swans and led us on a tangent  .. I was just trying to take a guess about where you were going in the conversation.  Anyways your point just goes back to your original hypothesis and my original response.  You believe because one side gets margin-called and has to actively maintain collateral that that creates a premium.  I don't believe that. 

Anyways, the solution of fixing the SQP I mentioned above will most likely fix most of the premium and it's an easy fix.. no need to redesign the entire blockchain either.   I'll save the battle against forced settlement for another day.  That's the other main reason for a premium , but it's probably not as big a factor right now. 

[monsterer]

With a few small changes we could make the following safe:
1. Borrowing BitUSD + Holding BitUSD means no margin call (account holdings and open orders can be used to cover).
2. If you have no access to BitUSD then your collateral will be sold.

I can't see how this is much different than a margin call? You still have to cover somehow.

The only way to achieve balance is ensure that both longs and shorts have the exact same risk profile. You can do this by turning them both into CFD like bets with long/short BTS against the feed price, but you lose bitUSD as a currency.

[bytemaster]

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear.

No. I'm going to try and make this as simple as possible to understand. Outside of a systematic failure:

Q) Can you get margin called, when you borrow bitUSD?

Q) Can you get margin called buying bitUSD?

If you hold BitUSD you never get called (except for black swan, in which case you are converted to BTS at the swan price)
If you borrow BitUSD you can get called.

With a few small changes we could make the following safe:
1. Borrowing BitUSD + Holding BitUSD means no margin call (account holdings and open orders can be used to cover).
2. If you have no access to BitUSD then your collateral will be sold.

[Helikopterben]

Thanks for bringing up this discussion. Was wondering similar questions. Bitshares advertises bitAssets as a cool way to store value. You like gold, here we have bitGold for you, its value is pegged to gold. But, in order for bitGold to be a cool store of value, somebody have to issue enough and make the market. How do you issue a bitAsset risk free way? If you borrow bitAsset and BTS falls, you are screwed.

If I borrow BitUSD and sell for USD then I maintain a neutral position (long BTS, no leverage).

Then you can loan out your dollars on bitfinex and effectively earn a dividend on bts, albeit a risky dividend.

[monsterer]

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear.

No. I'm going to try and make this as simple as possible to understand. Outside of a systematic failure:

Q) Can you get margin called, when you borrow bitUSD?

Q) Can you get margin called buying bitUSD?

[clout]

now you and the 'get only what you asked for' order matching invention.... this was a great square wheel, imo... I really do not get the grunge you hold against it. 

haha i don't have grudge against it, it just provided a less convenient trading experience than people are accustomed to when trading on traditional exchanges.

[clout]

I just recently push a new upgrade to the price feed script so that witnesses can pick SQP on a per asset basis ..

I don't see what that helps. SQP shouldn't be arbitrarily decided. It should just remain equal to the feed price. In a liquid market it doesn't have much effect. In an illiquid market a high SQP will just discourage further liquidity.

[tonyk]

Hence systemic risk factors should be separated from individual trading risk factors when evaluating the protocol.  Then you'd be closer to identifying why premiums occur.

That's exactly what is already happening and this causes the premium. Traders *know* about the vastly increased risk of getting their position margin called compared to the small systemic risk of black swan, which is why they sell their borrowed bitUSD at a premium.

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear.

this

Since the whole point of SQP is to protect in illiquid markets .. I would think this only works in LIUID markets .. would you agree?

No. SQP doesn't make any sense regardless of the liquidity. Long positions should not arbitrarily be afforded the opportunity to sell Bitassets at a premium. If long positions do not want to sell they shouldn't be induced to sell. The collateral of undercollateralized short positions should sit on the orderbook at the feed price and long positions can redeem their bitassets with the appropriate amount of BTS at anytime.

The SQP is a ill-conceived improvement to the market engine, just like the 'you get what you pay for' rule in Bitshares 1.0. Both attempt to solve  problems that don't exist and in the process diminish the utility of Bitshares as an exchange.

now you and the 'get only what you asked for' order matching invention.... this was a great square wheel, imo... I really do not get the grunge you hold against it. 



After all, it was heavily defended for months ... "The anathema for any front running..."  blog posts were written explaining it!!!!

[xeroc]

He meant to say that we could only apply an SQP of 1000 to liquid markets, because the point of the SQP is to protect against low liquidity.

I agree with you that "it is the greatest stupidity anyone can come up with." Its one of those things that only a really intelligent guy like BM could come up with. Intellectuals tend to over think things. This is one of those instances.

well .. yes ..

I just recently push a new upgrade to the price feed script so that witnesses can pick SQP on a per asset basis ..

[clout]

Hence systemic risk factors should be separated from individual trading risk factors when evaluating the protocol.  Then you'd be closer to identifying why premiums occur.

That's exactly what is already happening and this causes the premium. Traders *know* about the vastly increased risk of getting their position margin called compared to the small systemic risk of black swan, which is why they sell their borrowed bitUSD at a premium.

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear.

this

Since the whole point of SQP is to protect in illiquid markets .. I would think this only works in LIUID markets .. would you agree?

@ xeroc while I am not sure you are not joking...but as it is not usually your style
SQP is supposed to be.... hopefully.... working... in LIQUID markets...
in illiquid ones , and in BTS case more than anywhere else  it is the greatest stupidity anyone can come up with...

(well, that and exchange without API... but I am drifting here)

He meant to say that we could only apply an SQP of 1000 to liquid markets, because the point of the SQP is to protect against low liquidity.

I agree with you that "it is the greatest stupidity anyone can come up with." Its one of those things that only a really intelligent guy like BM could come up with. Intellectuals tend to over think things. This is one of those instances.

[clout]

Hence systemic risk factors should be separated from individual trading risk factors when evaluating the protocol.  Then you'd be closer to identifying why premiums occur.

That's exactly what is already happening and this causes the premium. Traders *know* about the vastly increased risk of getting their position margin called compared to the small systemic risk of black swan, which is why they sell their borrowed bitUSD at a premium.

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear.

this

Since the whole point of SQP is to protect in illiquid markets .. I would think this only works in LIUID markets .. would you agree?

No. SQP doesn't make any sense regardless of the liquidity. Long positions should not arbitrarily be afforded the opportunity to sell Bitassets at a premium. If long positions do not want to sell they shouldn't be induced to sell. The collateral of undercollateralized short positions should sit on the orderbook at the feed price and long positions can redeem their bitassets with the appropriate amount of BTS at anytime.

The SQP is a ill-conceived improvement to the market engine, just like the 'you get what you pay for' rule in Bitshares 1.0. Both attempt to solve  problems that don't exist and in the process diminish the utility of Bitshares as an exchange. 

[tonyk]

Hence systemic risk factors should be separated from individual trading risk factors when evaluating the protocol.  Then you'd be closer to identifying why premiums occur.

That's exactly what is already happening and this causes the premium. Traders *know* about the vastly increased risk of getting their position margin called compared to the small systemic risk of black swan, which is why they sell their borrowed bitUSD at a premium.

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear.

this

Since the whole point of SQP is to protect in illiquid markets .. I would think this only works in LIUID markets .. would you agree?

@ xeroc while I am not sure you are not joking...but as it is not usually your style
SQP is supposed to be.... hopefully.... working... in LIQUID markets...
in illiquid ones , and in BTS case more than anywhere else  it is the greatest stupidity anyone can come up with...

(well, that and exchange without API... but I am drifting here)

[xeroc]

Hence systemic risk factors should be separated from individual trading risk factors when evaluating the protocol.  Then you'd be closer to identifying why premiums occur.

That's exactly what is already happening and this causes the premium. Traders *know* about the vastly increased risk of getting their position margin called compared to the small systemic risk of black swan, which is why they sell their borrowed bitUSD at a premium.

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear.

this

Since the whole point of SQP is to protect in illiquid markets .. I would think this only works in LIUID markets .. would you agree?

[clout]

Hence systemic risk factors should be separated from individual trading risk factors when evaluating the protocol.  Then you'd be closer to identifying why premiums occur.

That's exactly what is already happening and this causes the premium. Traders *know* about the vastly increased risk of getting their position margin called compared to the small systemic risk of black swan, which is why they sell their borrowed bitUSD at a premium.

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear.

this

[BunkerChainLabs-DataSecurityNode]

Lots of discussion and ideas.

Any consensus on a possible Committee or Worker proposal to make changes?

[clout]

If I borrow BitUSD and sell for USD then I maintain a neutral position (long BTS, no leverage).

And what is incentive for doing this?

Market making for a given bitasset and its real world counterpart. You profit from the spread of that market and don't have to worry about the price movement of any assets. At the end of the day you are still just long BTS.

How can you do market making for bitGold:Gold or bitOil:Oil? Something like bitGold -> bitUSD -> USD -> Gold ?

At present the only market you can do this for are BitBTC and BitCNY because there are gateways that can provide direct conversions. Essentially you would borrow BitBTC and trade in a GATEWAY.BTC/BitBTC market.

[merivercap]

Hence systemic risk factors should be separated from individual trading risk factors when evaluating the protocol.  Then you'd be closer to identifying why premiums occur.

That's exactly what is already happening and this causes the premium. Traders *know* about the vastly increased risk of getting their position margin called compared to the small systemic risk of black swan, which is why they sell their borrowed bitUSD at a premium.

I think there's some mixing up of ideas and also mixing up of cause and effect,  but I think what you are trying to get at is that the Feed Price confuses short sellers because they can get called based on the SQP rather than the Feed Price.  Hence rather than using the Feed Price as a reference for trades, they will use the SQP and the SQP becomes the defacto reference price.   We discussed that on another thread a while back and I agree.

Easy fix:  Make SQP equal the Price Feed and the premium will probably mostly disappear. 

[yvv]

If I borrow BitUSD and sell for USD then I maintain a neutral position (long BTS, no leverage).

And what is incentive for doing this?

Market making for a given bitasset and its real world counterpart. You profit from the spread of that market and don't have to worry about the price movement of any assets. At the end of the day you are still just long BTS.

How can you do market making for bitGold:Gold or bitOil:Oil? Something like bitGold -> bitUSD -> USD -> Gold ?

[clout]

If I borrow BitUSD and sell for USD then I maintain a neutral position (long BTS, no leverage).

And what is incentive for doing this?

Market making for a given bitasset and its real world counterpart. You profit from the spread of that market and don't have to worry about the price movement of any assets. At the end of the day you are still just long BTS.

[clout]

Thanks for bringing up this discussion. Was wondering similar questions. Bitshares advertises bitAssets as a cool way to store value. You like gold, here we have bitGold for you, its value is pegged to gold. But, in order for bitGold to be a cool store of value, somebody have to issue enough and make the market. How do you issue a bitAsset risk free way? If you borrow bitAsset and BTS falls, you are screwed.

If I borrow BitUSD and sell for USD then I maintain a neutral position (long BTS, no leverage).

Only selling BitUSD in the BTS market is creating leverage risk.

This is not true if you are subject to an SQP above 100%

[monsterer]

Hence systemic risk factors should be separated from individual trading risk factors when evaluating the protocol.  Then you'd be closer to identifying why premiums occur.

That's exactly what is already happening and this causes the premium. Traders *know* about the vastly increased risk of getting their position margin called compared to the small systemic risk of black swan, which is why they sell their borrowed bitUSD at a premium.

[yvv]

If I borrow BitUSD and sell for USD then I maintain a neutral position (long BTS, no leverage).

And what is incentive for doing this?

[merivercap]

Ok technically you're correct, but pooling shouldn't be significant.   The money you put into the pool is the collateral so having to maintain it  individually or not should not be a major issue.   Maintaining collateral for the shorts is just an expected part of the trade.   I will concede that being long is more hassle-free, but I believe it's a minor difference.

That's like saying the risk of the entire system getting black swanned == the risk of one user getting margin called.

No that's not what I'm saying.  I understand the thinking behind the design to pool collateral and use the least collateralized position as the trigger.  It's an efficient design and the 200% collateral requirement will hold. 

The risk of a short or long are understood before any trade:  A black swan event happens when the least collateralized position loses more than 50% before it's forced out.  Hence everyone should already account for an extremely improbable 50% drawdown event from a single trader in the system.

If traders understand that a 50% drawdown on any trader is systemic and both sides accept systemic risk each will go forward with trades.   Short traders should not be concerned nor do I think they are concerned.  A systemic factor like a black swan event you bring up effects both sides so it  should have very little effect on the premium.  Hence systemic risk factors should be separated from individual trading risk factors when evaluating the protocol.  Then you'd be closer to identifying why premiums occur.

[monsterer]

Ok technically you're correct, but pooling shouldn't be significant.   The money you put into the pool is the collateral so having to maintain it  individually or not should not be a major issue.   Maintaining collateral for the shorts is just an expected part of the trade.   I will concede that being long is more hassle-free, but I believe it's a minor difference.

That's like saying the risk of the entire system getting black swanned == the risk of one user getting margin called.

[bytemaster]

Thanks for bringing up this discussion. Was wondering similar questions. Bitshares advertises bitAssets as a cool way to store value. You like gold, here we have bitGold for you, its value is pegged to gold. But, in order for bitGold to be a cool store of value, somebody have to issue enough and make the market. How do you issue a bitAsset risk free way? If you borrow bitAsset and BTS falls, you are screwed.

If I borrow BitUSD and sell for USD then I maintain a neutral position (long BTS, no leverage).

Only selling BitUSD in the BTS market is creating leverage risk.

[merivercap]

The BTS you use to purchase bitUSD is the collateral.  If you buy bitUSD with dollars, you are essentially buying BTS combined with a CFD.  The idea that you can hold it forever without doing a thing shouldn't be a big deal.

Not individually it isn't. The BTS I use for purchase gets pooled together with all the BTS in the collateral pool, the failure mode here is systemic, it doesn't apply directly to my need to maintain any collateral. That is a big difference.

edit: to put this simply - 1 single user getting margin called != black swan event

Ok technically you're correct, but pooling shouldn't be significant.   The money you put into the pool is the collateral so having to maintain it  individually or not should not be a major issue.   Maintaining collateral for the shorts is just an expected part of the trade.   I will concede that being long is more hassle-free, but I believe it's a minor difference. 

However, when you have a price floor via forced settlement that's like instituting a minimum wage.    You lose liquidity by price fixing just as you would lose jobs with a minimum wage.  Also it would seem the closer you get to a peg, the more the forced settlement becomes relevant and it forces the market away from the peg.   That's more significant than having to spend a few minutes a week making sure your collateral is sufficient.   

[monsterer]

The BTS you use to purchase bitUSD is the collateral.  If you buy bitUSD with dollars, you are essentially buying BTS combined with a CFD.  The idea that you can hold it forever without doing a thing shouldn't be a big deal.

Not individually it isn't. The BTS I use for purchase gets pooled together with all the BTS in the collateral pool, the failure mode here is systemic, it doesn't apply directly to my need to maintain any collateral. That is a big difference.

edit: to put this simply - 1 single user getting margin called != black swan event

[merivercap]

In Bitshares, long and short both put up BTS as collateral and select an asset to settle any differences.  If the asset goes up the short pays the long and if the asset goes down the long pays the short.   Neither have an advantage aside from forced settlement.  Maintaining collateral is just a standard part of trading with leverage.   Most all markets require people to maintain collateral and that's not an additional risk, it's just part of the trade.   Aside from not having a settlement date (which some might say favors shorts),  the only peculiar aspect of the protocol is the forced settlement.

The longs don't put up any collateral. I can go into the spot market and buy a bitUSD and just hold it forever without doing a thing.

The BTS you use to purchase bitUSD is the collateral.  If you buy bitUSD with dollars, you are essentially buying BTS combined with a CFD.  The idea that you can hold it forever without doing a thing shouldn't be a big deal. 

[monsterer]

In Bitshares, long and short both put up BTS as collateral and select an asset to settle any differences.  If the asset goes up the short pays the long and if the asset goes down the long pays the short.   Neither have an advantage aside from forced settlement.  Maintaining collateral is just a standard part of trading with leverage.   Most all markets require people to maintain collateral and that's not an additional risk, it's just part of the trade.   Aside from not having a settlement date (which some might say favors shorts),  the only peculiar aspect of the protocol is the forced settlement.

The longs don't put up any collateral. I can go into the spot market and buy a bitUSD and just hold it forever without doing a thing.

[merivercap]

I think there are a couple very simple tweaks to increase liquidity and remove the premium.   

1) Remove forced settlement. (Even the idea of forced settlement may create a race to be the least collateralized position, reduces liquidity and creates a premium.  It's good to start with the most minimal design.  Any design to help merchants at the expense of others should be placed outside the protocol at the gateways/bridges)

2) Make the short squeeze protection price equal the price feed.

Those two very easy tweaks will get pretty much what most people want and expect.  More liquidity and a closer peg.

I don't think forced settlement creates the premium. IMO what creates the premium is the risk of borrowing from the network compared to the risk of spot buying the asset - look at it like this, if you have to actively maintain your collateral in order to keep your position from getting margin called, your sale price must compensate you for that risk.

If the risk of being long was the same as borrowing, you can achieve parity more easily. This is what we need to strive for, IMO.

I'm not sure I understand what you're saying but CFD's and Total Return Swaps have been around for decades and none of the those markets have permanent premiums.   The Bitshares system is no different from traditional swaps and CFDs.  Many investors use swaps to hedge their position so they have the same outcome of having a stable asset.  Investors who take the other side often just want to trade the ups and downs.   

In Bitshares, long and short both put up BTS as collateral and select an asset to settle any differences.  If the asset goes up the short pays the long and if the asset goes down the long pays the short.   Neither have an advantage aside from forced settlement.  Maintaining collateral is just a standard part of trading with leverage.   Most all markets require people to maintain collateral and that's not an additional risk, it's just part of the trade.   Aside from not having a settlement date (which some might say favors shorts),  the only peculiar aspect of the protocol is the forced settlement.

[monsterer]

I think there are a couple very simple tweaks to increase liquidity and remove the premium.   

1) Remove forced settlement. (Even the idea of forced settlement may create a race to be the least collateralized position, reduces liquidity and creates a premium.  It's good to start with the most minimal design.  Any design to help merchants at the expense of others should be placed outside the protocol at the gateways/bridges)

2) Make the short squeeze protection price equal the price feed.

Those two very easy tweaks will get pretty much what most people want and expect.  More liquidity and a closer peg.

I don't think forced settlement creates the premium. IMO what creates the premium is the risk of borrowing from the network compared to the risk of spot buying the asset - look at it like this, if you have to actively maintain your collateral in order to keep your position from getting margin called, your sale price must compensate you for that risk.

If the risk of being long was the same as borrowing, you can achieve parity more easily. This is what we need to strive for, IMO.

[merivercap]

Q) Why is there a problem implementing pegged assets?

A) The primary answer is that there can be no redeemability to the real asset on chain, for obvious reasons (since fiat/gold/silver/oil are not digital in the first place).

The redemability is not a big issue.  As long as people receive effectively the same value going out of the system it's just as good as having redeemability. 

Q) Why is bitshare's current solution inadequate?

A) Those who borrow bitUSD from the system are at much higher risk than those who buy it from the market because the borrower must actively maintain his collateral and can get margin called by the system if the feed price moves enough

Maintaining sufficient collateral is not the problem, but having to maintain an unpredictable amount of collateral is a problem.  There will probably be ongoing races to not be the least collateralized, hence reducing liquidity.

Q) What effect does this have on the price?

A) The borrower is forced to price his risk into the sale price of the bitUSD he borrows from the system - this leads to a situation where the price of bitUSD will always trade at a premium compared to the feed price, this damages the viability of the product as a whole.

Yes the premium should not be there.  There should be no floor and a tweak in the design should give more parity.

Q) Is there another design which doesn't have the same biased risk profile, or is this just a natural consequence of not having redeemability?

A) Discuss

I think there are a couple very simple tweaks to increase liquidity and remove the premium.   

1) Remove forced settlement. (Even the idea of forced settlement may create a race to be the least collateralized position, reduces liquidity and creates a premium.  It's good to start with the most minimal design.  Any design to help merchants at the expense of others should be placed outside the protocol at the gateways/bridges)

2) Make the short squeeze protection price equal the price feed.

Those two very easy tweaks will get pretty much what most people want and expect.  More liquidity and a closer peg. 

[yvv]

Thanks for bringing up this discussion. Was wondering similar questions. Bitshares advertises bitAssets as a cool way to store value. You like gold, here we have bitGold for you, its value is pegged to gold. But, in order for bitGold to be a cool store of value, somebody have to issue enough and make the market. How do you issue a bitAsset risk free way? If you borrow bitAsset and BTS falls, you are screwed.

[monsterer]

This is fine, it is designed to be at a premium.

I'd like to know your definition of 'fine' here. Mine is quite different it seems.

Bias risk profile is fine to have. The problem is when there is no equilibrium in risk. Since there are no arbitrage opportunities for shorters, equilibrium is difficult to quantify or obtain. If fiat:bitFIAT on/off ramps exist, that would enable arbitrage, or if the blockchain provided a backstop (automatically shorting at settlement +10%), that would help too.

Can you define the difference been a biased risk profile and no equilibrium in risk? To me they sound identical.

How would a fiat on/off ramp to bitUSD would do anything to change the risk profile for borrowing bitUSD by locking up BTS?

[maqifrnswa]

*) A merchant has to price everything in bitUSD *less* than he would have in regular dollars to achieve the same value - this is crazy

I've been ranting about that for months. That causes instability and a possible run-away scenario where competition for "discount using bitusd" drives the bitusd from the peg.
1) starting with a market where 1 usd=0.9 bitusd
2) I'm a merchant that says "10% off if you use bitusd"
3) that puts demand on bitusd
4) bitusd moves to 1 usd = 0.85 bitusd
5) shorts just got burned, even though bts:usd did not move. They don't see a reason for the direction to change, so they sit out and don't generate more bitusd which is needed for the peg.
6) I now say "15% off if you use bitusd"
7) there is no equilibrium

[maqifrnswa]

I disagree with some answers

Q) Why is there a problem implementing pegged assets?

A) The primary answer is that there can be no redeemability to the real asset on chain, for obvious reasons (since fiat/gold/silver/oil are not digital in the first place).

Yes, that is the challenge

Q) Why is bitshare's current solution inadequate?

A) Those who borrow bitUSD from the system are at much higher risk than those who buy it from the market because the borrower must actively maintain his collateral and can get margin called by the system if the feed price moves enough

What you are describing is actually fine and not an inadequacy. The problem, as I see it, is the lack of symmetry in the arbitrage opportunities. The blockchain provides an arbitrage opportunity in the case of an oversupply of bitUSD (forced settlement), and rewards the trader that pushes the market closer to peg while reducing oversupply. There is no opposite action. The equivalent would be the blockchain offering all collected fees for sale at settlement +10% or something like that so more bitUSD are automatically put in to circulation when there is an under-supply. A long knows they can always sell at the feed, but shorts have no such assurance as to at what price they can buy.

Q) What effect does this have on the price?

A) The borrower is forced to price his risk into the sale price of the bitUSD he borrows from the system - this leads to a situation where the price of bitUSD will always trade at a premium compared to the feed price, this damages the viability of the product as a whole.

This is fine, it is designed to be at a premium. The problem is that it is impossible to price this premium since there is no way of predicting what the premium will be in the future since there is no explicit reason (no arbitrage opportunity) for shorting.

It's helpful to think about what the "price" of a smartcoin should be. The price occurs at the balance point where longs are no longer willing to pay for over-valued smartcoins and when shorts are no longer willing to accept more risk. Since the shorter assumes both "normal" risk (variance in BTS:fiat markets) and a new network risk (will the premium for smartcoins improve or worsen in the future?), the short's risk is very difficult to quantify. Having an network backstop will  help shorters to quantify risk, and thus keep the price of a smartcoin closer to peg.

Q) Is there another design which doesn't have the same biased risk profile, or is this just a natural consequence of not having redeemability?

A) Discuss

Bias risk profile is fine to have. The problem is when there is no equilibrium in risk. Since there are no arbitrage opportunities for shorters, equilibrium is difficult to quantify or obtain. If fiat:bitFIAT on/off ramps exist, that would enable arbitrage, or if the blockchain provided a backstop (automatically shorting at settlement +10%), that would help too.

[JonnyB]

I had an idea how to create depth and liquidity for MPAs

There should be an option on the trade page that says buy or sell at live price feed which will place an order on the books at the settlement price but crucially your order will move with the price feed so you don't have to keep updating it.

Yeah, that may help and could make things a lot simpler as well imo.

I might be the only one that thinks like this, but on

https://bitshares.openledger.info/#/market/BTS_USD

On the sell side in brackets I'd like to see the deviation from the peg based on the feed price.

So on the buy side I would see trades starting at for example ($0.98) and on the sell side ($1.02)

The main thing I want to know (Without working it out) is how much a premium over the peg I am paying when buying BitUSD and vice versa.

Then you just place an order at $0.98 and you will be filled when BitUSD is selling 2% below the feed.

Sure that kind of relative tracking is hard to implement though.

yes this is exactly what we need.

[roadscape]

I had an idea how to create depth and liquidity for MPAs

There should be an option on the trade page that says buy or sell at live price feed which will place an order on the books at the settlement price but crucially your order will move with the price feed so you don't have to keep updating it.

Is this what you're thinking? https://github.com/cryptonomex/graphene/issues/450

[well.attenuated]

 

I had an idea how to create depth and liquidity for MPAs

There should be an option on the trade page that says buy or sell at live price feed which will place an order on the books at the settlement price but crucially your order will move with the price feed so you don't have to keep updating it.

[Empirical1.2]

I had an idea how to create depth and liquidity for MPAs

There should be an option on the trade page that says buy or sell at live price feed which will place an order on the books at the settlement price but crucially your order will move with the price feed so you don't have to keep updating it.

Yeah, that may help and could make things a lot simpler as well imo.

I might be the only one that thinks like this, but on

https://bitshares.openledger.info/#/market/BTS_USD

On the sell side in brackets I'd like to see the deviation from the peg based on the feed price.

So on the buy side I would see trades starting at for example ($0.98) and on the sell side ($1.02)

The main thing I want to know (Without working it out) is how much a premium over the peg I am paying when buying BitUSD and vice versa.

Then you just place an order at $0.98 and you will be filled when BitUSD is selling 2% below the feed.

Sure that kind of relative tracking is hard to implement though.

[Samupaha]

Q) Why is there a problem implementing pegged assets?

A) The primary answer is that there can be no redeemability to the real asset on chain, for obvious reasons (since fiat/gold/silver/oil are not digital in the first place).

I have to disagree here a little bit. I'd call BTS a "real" asset because it is the share of Bitshares DAC. As long as Bitshares is up and running, the share has some real value.

Q) Why is bitshare's current solution inadequate?

A) Those who borrow bitUSD from the system are at much higher risk than those who buy it from the market because the borrower must actively maintain his collateral and can get margin called by the system if the feed price moves enough

Correct if I'm wrong: the borrower can get margin called by the system if the feed price moves enough downwards. But if we are in a bull market, this is not a problem and borrowing is profitable? So the real problem is: too much risk / not enough incentives in the bear market.

Q) Is there another design which doesn't have the same biased risk profile, or is this just a natural consequence of not having redeemability?

If I remember right, Bytemaster talked in some hangout about privatized smartcoins. His reasoning was something like that maybe the smartcoins that DAC offers turn out to be inadequate, so it is good to have other choices. With privatized smartcoins anybody can try to beat the default smartcoins and make good profits for himself. So far nobody has tried. Maybe someone should?

[JonnyB]

I had an idea how to create depth and liquidity for MPAs

There should be an option on the trade page that says buy or sell at live price feed which will place an order on the books at the settlement price but crucially your order will move with the price feed so you don't have to keep updating it.

[monsterer]

I am not an economist, but why is this FUNDAMENTALLY worse? Does it not depend
on the perspective? For a merchant it is better since he can be sure that he
will be able to redeem AT LEAST at parity.
For bitUSD long, it is a wash since if they pay with bitUSD.

Only people outside BTS wanting to move into BTS need to pay a premium to enter

It's worse because:

*) Calling a thing a 'dollar' implies its value is designed to be one 'dollar' - this is a marketing nightmare otherwise
*) A merchant has to price everything in bitUSD *less* than he would have in regular dollars to achieve the same value - this is crazy
*) People coming into bitUSD have to pay a premium to own the 'same' product than at nuBits

[xeroc]

I expect there will always be a premium with a volatility proportional to BTS volatility.

That is the idea and expected

This is fundamentally worse than the same volatility centered around parity.

I am not an economist, but why is this FUNDAMENTALLY worse? Does it not depend
on the perspective? For a merchant it is better since he can be sure that he
will be able to redeem AT LEAST at parity.
For bitUSD long, it is a wash since if they pay with bitUSD.

Only people outside BTS wanting to move into BTS need to pay a premium to enter

[giant middle finger]

I expect there will always be a premium with a volatility proportional to BTS volatility. This is fundamentally worse than the same volatility centered around parity.

it absolutely puts us at a huge financial disadvantage when the masses favor stability over security by 2 orders of magnitude (which is the factor i'd wager)

until we approach "stability (liquidity) parity" with Nubits, we are but a novelty for the paranoid (or insecure) (which is obviously the number 1 common thread that our community has)

[monsterer]

How do you expect to sell bitUSD to someone if the average price is $1.25?

Do you think the premium will be as big if we had market makers providing liquidity as in nubits?

I expect there will always be a premium with a volatility proportional to BTS volatility. This is fundamentally worse than the same volatility centered around parity.

[xeroc]

How do you expect to sell bitUSD to someone if the average price is $1.25?

Do you think the premium will be as big if we had market makers providing liquidity as in nubits?

[monsterer]

Please define "stable"!
Please define "peg"!

If the peg means that the price of a token highly correlates with the underlay .. then nubits is as good as bitUSD .. nubits trades AROUND parity and bitusd trades ABOVE parity .. both correlated with USD

How do you expect to sell bitUSD to someone if the average price is $1.25?

[xeroc]

How can a pegged currency be designed to trade above parity? This seems like a logical fallacy.

Please define "stable"!
Please define "peg"!

If the peg means that the price of a token highly correlates with the underlay .. then nubits is as good as bitUSD .. nubits trades AROUND parity and bitusd trades ABOVE parity .. both correlated with USD

[monsterer]

It's not really a "flaw" in the system .. it is how it designed and supposed to be working ..

How can a pegged currency be designed to trade above parity? This seems like a logical fallacy.

[Empirical1.2]

dollar stable product

that's what it is

but does stability = security?

maybe, until MtGox

Yup. But the MtGox moment can take a while...
Also there's no guarantee they won't just move to the next Mt. Gox. Right now the nearly finished DEX is waiting for that kind of catalyst. Cryptsy is clearly having problems atm, it will be interesting to see if that can be leveraged to the benefit of open ledger or if business just moves to another equally risky Centralized exchange but with the good liquidity.

Edit: We could consider adding both types of products, with a warning attached to the much less secure but more liquid one. I believe it was BM who originally suggested that but many including myself were against it at the the time, (because when the risky one invariably fails it will reflect badly on BTS as a whole. But perhaps if there are clear warnings.)

[giant middle finger]

dollar stable product

that's what it is

but is stability more important than security here?

maybe, until MtGox...maybe not, and Nubits is proving this.

Nubits seems to be monetizing stability, while we have mad security

I guess we are truly different, and the only way to be "better" is to provide equal "stability" while advertizing our "unique counterparty-risk free security"

[Empirical1.2]

"BitUSD would have as much liquidity as Nubits if it was as easy to use for the past year."

Wrong. NuBits liquidity has almost nothing to do with its ease of use.

of course, but I did not imply such causation

I'm not saying that Nubits is easy to use, I'm saying that BitShares is not

and of course, something difficult and complex is capable of having much liquidity as well as something easy to use

correlation does not cause hangovers:

Fact is, that if our wallet was easier to use (back up, documented, etc), then I'd be providing $15k liquidity in the bitUSD and CNY markets myself right now.

Fair enough. Without the added explanation that independent market makers would most likely provide comparable liquidity if BTS was easier to use, I thought you were implying ease of use was responsible for NuBits liquidity.

I still disagree though. Most people are looking to hedge into dollar stable product when BTC is clearly declining. I think Monsterer explained it recently, but that makes it very hard to maintain a tight peg in a profitable way, hence why those dollar products that are subsidized to provide that liquidity but as a result aren't fully backed are likely to have more success.

The problem with market making is its only profitable in mean reverting markets (sometimes referred to as ranging), as soon as you get a strong trend the market maker will lose money because it will end up with an unbalanced inventory of assets. That risk makes designing a good one very very complicated.

[cube]

In fact, I don't even know how to create a paper wallet, and until I do, I'm cash (BTS) on the sidelines, waiting for the next wiz kid who is smarter than me delete his cash cache

You can copy out the three private keys ('owner', 'active' and 'memo') and print them on paper.  The private keys are displayed in the 'Account->Permission' page.

[cube]

Q) Why is there a problem implementing pegged assets?

A) The primary answer is that there can be no redeemability to the real asset on chain, for obvious reasons (since fiat/gold/silver/oil are not digital in the first place).

Although the 'redeemability' is not in the form of real physical asset, the peg could work if the underlying backing asset - a digital asset called 'bts', is strong enough.  Unfortuantely bts price has been going down and at times fast decline. This lead to sudden margin calls for the under collaterised.  There is a general lack of confidence in bts.

I think a weak bts is part of the reason for the peg not working.

[Empirical1.2]

"BitUSD would have as much liquidity as Nubits if it was as easy to use for the past year."

Wrong. NuBits liquidity has almost nothing to do with its ease of use.

It is artificially provided by liquidity pools set up for that purpose which I believe were/are subsidized/receive additional compensation from NuShares holders to provide that service.

http://nulagoon.com

[JonnyB]

Q) Why is there a problem implementing pegged assets?

A) The primary answer is that there can be no redeemability to the real asset on chain, for obvious reasons (since fiat/gold/silver/oil are not digital in the first place).

But bitcoin is on a chain and BItBTC is still illiquid , there is no reason anyone would hold bitbtc as its more expensive, less secure, not widely used, iliquid, subject to margin calls/ forced settlement

Q) Is there another design which doesn't have the same biased risk profile, or is this just a natural consequence of not having redeemability?

A) Discuss

Yes as someone else in this thread has already said other assets should be able to be held as collateral.
The Ultimate design in my opinion would be real bitcoin being locked into the bitshares blockchain as a sidechain and then this could be used for collateral instead of BTS.

[abit]

Your statements are absolutely correct and have been communicated that way for quite some time .. it's called 'floor or parity' ...
It's not really a "flaw" in the system .. it is how it designed and supposed to be working ..

In order to be safe against falling prices you will always need to have more then 1x collateral ..
The only thing that you can do differently is .. also allow other kinds of assets to be used as collateral ... much like what MAKER is doing with the DAI on ethereum ..

In regards to "other kinds of assets", if you mean UIA/IOU, it's difficult to determine the value of collateral as well as to lock/force-sell the collateral, if you mean MPA, it will need even more liquidity -- a chicken-and-egg issue.

[Empirical1.2]

NuBits have been relatively successful even though there is no redeemability onchain.

The fact that their market makers have provided liquidity for over a year through all of BTC's fluctuations give the market confidence that they are worth the short term risk especially during BTC downturns/high volatility.

Uphold (formerly BitReserve) has it's assets in a traditional bank but it too has been successful and is supposedly the fastest growing money platform in the world.

They've demonstrated that providing BitAsset backing is secondary to providing liquidity.

Ergo BitAssets have failed primarily due to not having a mechanism for providing reasonable liquidity around the peg.

[bitcrab]

Your statements are absolutely correct and have been communicated that way for quite some time .. it's called 'floor or parity' ...
It's not really a "flaw" in the system .. it is how it designed and supposed to be working ..

In order to be safe against falling prices you will always need to have more then 1x collateral ..
The only thing that you can do differently is .. also allow other kinds of assets to be used as collateral ... much like what MAKER is doing with the DAI on ethereum ..

I always considered whether Bitshares can introduce BTC as mgwBTC in NXT and use it as collateral to generate other bitassets such as BitUSD, BitCNY.

[bitcrab]

as there is no  redeemability, users regard bitUSD as an anti-vulnerability asset, not an currency that has equal value as USD, this lead to all the results.

 

[xeroc]

Your statements are absolutely correct and have been communicated that way for quite some time .. it's called 'floor or parity' ...
It's not really a "flaw" in the system .. it is how it designed and supposed to be working ..

In order to be safe against falling prices you will always need to have more then 1x collateral ..
The only thing that you can do differently is .. also allow other kinds of assets to be used as collateral ... much like what MAKER is doing with the DAI on ethereum ..

[monsterer]

Q) Why is there a problem implementing pegged assets?

A) The primary answer is that there can be no redeemability to the real asset on chain, for obvious reasons (since fiat/gold/silver/oil are not digital in the first place).

Q) Why is bitshare's current solution inadequate?

A) Those who borrow bitUSD from the system are at much higher risk than those who buy it from the market because the borrower must actively maintain his collateral and can get margin called by the system if the feed price moves enough

Q) What effect does this have on the price?

A) The borrower is forced to price his risk into the sale price of the bitUSD he borrows from the system - this leads to a situation where the price of bitUSD will always trade at a premium compared to the feed price, this damages the viability of the product as a whole.

Q) Is there another design which doesn't have the same biased risk profile, or is this just a natural consequence of not having redeemability?

A) Discuss