Discussing the problems with bitUSD (smart coins)

[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