Author Topic: Discussing the problems with bitUSD (smart coins)  (Read 20780 times)

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Offline 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.
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Offline merivercap

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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.
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Offline 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.
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Offline merivercap

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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. 
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Offline yvv

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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.

Offline 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.

Quote
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?
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Offline maqifrnswa

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*) 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
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Offline maqifrnswa

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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.
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Offline JonnyB

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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.
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Offline 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
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Offline well.attenuated

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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.
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Offline Empirical1.2

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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.

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Offline Samupaha

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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?

Offline JonnyB

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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.
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Offline 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
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