SmartCoin use cases

[Helikopterben]

I have seen much confusion and many concerns questioning the use cases of SmartCoins, almost to the point of questioning whether SmartCoins are really necessary.

Just to set the record straight - I think no-one here questions SmartCoins as a financial product.

Yes most people here get it but I have seen people in other places question their use.  For instance, the other day someone on polo said, "why would I want to buy a bit-this or bit-that."

[maqifrnswa]

Incentives for the SmartCoin Seller

The next question becomes:  what are the incentives for the SmartCoin seller (liquidity provider).  As I look at the SILVER:BTS market right now I see a settlement price of 4289.5 and a latest price of 4619.  Assuming settlement price hasn’t changed since the latest price, the SmartCoin seller asked for a 7.69% premium to collateralize bts in the form of silver and sell it.  For simplicity, suppose this was for 1 ounce of silver.  That means the SmartCoin seller received 329.5 bts as compensation for providing liquidity in the silver market.  The buyer was willing to pay 329.5 bts to obtain 1 ounce of silver and the trade took place.  This premium is a function of market dynamics and fluctuates over time as buyers and sellers agree on prices and premium.  Premium is often charged for buyers of physical commodities and derivatives of physical commodities as outlined in the oil example above.  Rarely do buyers get a discount in these transactions except for some cases in futures contract backwardation.

Nice write up. Your description of shorting is great (assuming a liquid market). We don't have a liquid market yet, which is why the premium is so high.

I agree with jakub -- smartcoin technology/idea isn't the issue, it's system trust combined with low liquidity. Shorters are taking on huge risks (in a thin & low market cap platform), and longs don't seem too keen on paying the premium demanded. UIAs fix that by eliminating the need for shorters until market cap increases.

[Empirical1.2]

This is more or less the conversation I am having with business people:

Q: OK, so who backs SmartCoins?
A: That's the point. Nobody does. It's a kind of futures contract guaranteed by the whole BitShares system.
Q: So if this system crashes for whatever reason I lose my money. And what's the current valuation of this system?
A: About USD 8 million.
Q: That's not enough for me to feel secure.

I know this is not a rational answer as the security of SmartCoins is not related to our valuation.
But that's unfortunately the perception we have to deal with at this moment. UIAs don't have this problem.

One way to answer this is to explain that smartcoins are backed with shares of Bitshares DAC. When new smartcoins are created, BTS is needed. If there are lots of new smartcoins, it means that creators have to buy BTS from the markets and that will raise the price of BTS. That way the valuation of the system automatically goes up when people are making more smartcoins.

BitShares is a Decentralized company that exists on a blockchain like Bitcoin.

It offers currency stable Smartcoins like USD which are backed by a dynamic, over-collateralised pool of BitShares.

The system has proved so robust,  that even after an 80% decline in the value of the underlying BTS shares, all currency products maintained at least a 100% reserve ratio & held their respective curency pegs.

While there is systemic risk, Smartcoins have no counterparty risk. They are also private and cannot be seized or confiscated by any government.

[Samupaha]

This is more or less the conversation I am having with business people:

Q: OK, so who backs SmartCoins?
A: That's the point. Nobody does. It's a kind of futures contract guaranteed by the whole BitShares system.
Q: So if this system crashes for whatever reason I lose my money. And what's the current valuation of this system?
A: About USD 8 million.
Q: That's not enough for me to feel secure.

I know this is not a rational answer as the security of SmartCoins is not related to our valuation.
But that's unfortunately the perception we have to deal with at this moment. UIAs don't have this problem.

One way to answer this is to explain that smartcoins are backed with shares of Bitshares DAC. When new smartcoins are created, BTS is needed. If there are lots of new smartcoins, it means that creators have to buy BTS from the markets and that will raise the price of BTS. That way the valuation of the system automatically goes up when people are making more smartcoins.

[Helikopterben]

UIAs don't have this problem.

With UIAs, one doesn't need to care about how much the price/value of a BTS is.
But the problem is, in this way, why would the price/value of BTS increase? Even if the system is "profiting" by collecting more and more BTS's into reserved fund pool, the asset issuers have incentives to keep the price/value of BTS at a low level so that they can pay less to operate their businesses. The goal of BTS holders and the UIA issuers are not aligned.
It seems this is what Ripple is facing.

Fees will be lowered as prices rise, so asset issuers shouldn't worry about bts price.  Users will want to own bitshares to collect premiums for Smartcoin issuance.  You can't get that right now with any other crypto natively on the blockchain.  This should put upward pressure on price.  Also, when the bond market is implemented, users will be able to earn interest natively on the blockchain, which should put upward pressure on prices.

[Helikopterben]

Very cool summary ..

I am a little confused as to what exactly the "." means in your tables. Is it decimal separator or thousands separator?

From what I understand, Europeans use a "," and americans use a "." as a decimal separator.

[cube]

It's highly likely, the actual Fort Knox is quite empty but the idea/metaphor of BTS being your own personal vault is a strong one imo.

Yes, it was a powerful and yet simple message.  However, this message is somehow in the myriad of constant changes.

[Empirical1.2]

Everyone in this space talks about trustless transacting and permissionless innovation.
How about trustless and permissionless OWNERSHIP?
The end goal of Bitshares is the ability of anyone in the world to store wealth in the cloud, away from prying eyes of his enemies, family, criminals, or governments. The ability to invisibly lock wealth somewhere where it's untouchable and relatively stable, has to be worth so much to so many people, that my head starts to collapse on itself every time I think about it.

While I was reminiscing over Stan's pre-merger hype posts, I came across an old BTSX image he posted in that vein...

It's highly likely, the actual Fort Knox is quite empty but the idea/metaphor of BTS being your own personal vault is a strong one imo.

[triox]

Wholeheartedly agree with OP. I'll add that if smartcoins/bitassets are proven to work long-term, they may be the last and only method of true ownership.

Nobody really owns his bank account, his stock portfolio nor his cash (try traveling with more than a few grand).

Everyone in this space talks about trustless transacting and permissionless innovation.
How about trustless and permissionless OWNERSHIP?
The end goal of Bitshares is the ability of anyone in the world to store wealth in the cloud, away from prying eyes of his enemies, family, criminals, or governments. The ability to invisibly lock wealth somewhere where it's untouchable and relatively stable, has to be worth so much to so many people, that my head starts to collapse on itself every time I think about it.

[jakub]

UIAs don't have this problem.

With UIAs, one doesn't need to care about how much the price/value of a BTS is.
But the problem is, in this way, why would the price/value of BTS increase? Even if the system is "profiting" by collecting more and more BTS's into reserved fund pool, the asset issuers have incentives to keep the price/value of BTS at a low level so that they can pay less to operate their businesses. The goal of BTS holders and the UIA issuers are not aligned.
It seems this is what Ripple is facing.

We can address this issue by strictly adhering to the principle of keeping the fees in sync with BTS market price.
It's doable with the current scheme of committee proposals.

[abit]

UIAs don't have this problem.

With UIAs, one doesn't need to care about how much the price/value of a BTS is.
But the problem is, in this way, why would the price/value of BTS increase? Even if the system is "profiting" by collecting more and more BTS's into reserved fund pool, the asset issuers have incentives to keep the price/value of BTS at a low level so that they can pay less to operate their businesses. The goal of BTS holders and the UIA issuers are not aligned.
It seems this is what Ripple is facing.

[jakub]

  Nice analysis

I have seen much confusion and many concerns questioning the use cases of SmartCoins, almost to the point of questioning whether SmartCoins are really necessary.

Just to set the record straight - I think no-one here questions SmartCoins as a financial product.
What is being questioned is our ability to successfully pitch SmartCoins with the market cap being so low.

This is more or less the conversation I am having with business people:

Q: OK, so who backs SmartCoins?
A: That's the point. Nobody does. It's a kind of futures contract guaranteed by the whole BitShares system.
Q: So if this system crashes for whatever reason I lose my money. And what's the current valuation of this system?
A: About USD 8 million.
Q: That's not enough for me to feel secure.

I know this is not a rational answer as the security of SmartCoins is not related to our valuation.
But that's unfortunately the perception we have to deal with at this moment. UIAs don't have this problem.

[abit]

Very cool summary ..

I am a little confused as to what exactly the "." means in your tables. Is it decimal separator or thousands separator?

I think it's decimal separator

[xeroc]

Very cool summary ..

I am a little confused as to what exactly the "." means in your tables. Is it decimal separator or thousands separator?

[onceuponatime]

Brilliant! Great job!