Proposal for Having Alternate Smartcoin Designs

[yvv]

Banks do charge premium from the people who lend them money very often. You lend your money to a bank when you open a debit account. Some banks don't charge you for this, but many do charge various fees.

[Helikopterben]

the system never owns bitUSD because the very moment it creates them, it lends them to you so at no point in time it has the opportunity to own them)

This is why I think "borrow" is the wrong way to look at it and will only confuse new users, but there will probably be a steep learning curve for new users who decide to create smartcoins anyway.  That and the fact that borrowers don't charge premium.

[yvv]

You are not borrowing bts from the system.  You are borrowing bts from yourself because you are the owner of that bts being used as collateral.  The system itself does not own any bts.

It's bitUSD (not BTS) that's being borrowed.

The system does not own bitUSD.  I cannot borrow an asset that no one or no thing owns.

Yes, you can. System creates bitUSD for you from the air on your demand and it becomes your liability, aka debt. All banks do this.

[jakub]

You are not borrowing bts from the system.  You are borrowing bts from yourself because you are the owner of that bts being used as collateral.  The system itself does not own any bts.

It's bitUSD (not BTS) that's being borrowed.

The system does not own bitUSD.  I cannot borrow an asset that no one or no thing owns.

When you click the "Borrow USD" button you ask the system to create some new bitUSD and lend them to you.
So you borrow these bitUSD from the system and you'll have to return them to the system in the future.

(Technically you are right - the system never owns bitUSD because the very moment it creates them, it lends them to you so at no point in time it has the opportunity to own them)

[Helikopterben]

You are not borrowing bts from the system.  You are borrowing bts from yourself because you are the owner of that bts being used as collateral.  The system itself does not own any bts.

It's bitUSD (not BTS) that's being borrowed.

The system does not own bitUSD.  I cannot borrow an asset that no one or no thing owns. 

[Helikopterben]

I lent it on the network and charged a premium for that service.

What?? What premium are you talking about? You paid a fee. You will pay the fee one more time when you terminate your debt.

I was joking a bit man.  I have done this many times over since 2.0 launch.

[jakub]

You are not borrowing bts from the system.  You are borrowing bts from yourself because you are the owner of that bts being used as collateral.  The system itself does not own any bts.

It's bitUSD (not BTS) that's being borrowed.

[yvv]

Did you try to do exercise which I suggested? Just go and press the damn button, then check your account overview.

I have created usd, cny, gold, silver, and bitcoin, but I did not borrow it. 

Perfect! Now go to account overview page and check the "Collateral Positions" section. The leftmost column is your debt. You will be forced to pay it off when your collateral goes below the threshold.

I lent it on the network and charged a premium for that service.

What?? What premium are you talking about? You paid a fee. You will pay the fee one more time when you terminate your debt.

[Helikopterben]

In this case you borrow one type of money (i.e. bitUSD) against a collateral in the form of another type of money (i.e. BTS).
So one might say there is no premium or interest rate involved because the size of the collateral itself is enough to compensate the lender (i.e. the system) for their risk.

Perhaps you could say that the short seller is borrowing security from the system... but in that case I would say it is the bitusd buyer who is actually paying the premium to borrow security from the system... but this still doen't make sense because the system charges tx fees for this security.

Lending to yourself and borrowing from yourself - this concept does not make sense.

It makes about as much sense as this:

It's similar to borrowing money from a bank at zero interest and keeping this borrowed money safely in a bank account of the same bank.

You are not borrowing bts from the system.  You are borrowing bts from yourself because you are the owner of that bts being used as collateral.  The system itself does not own any bts.  I get what you guys are saying but I am still unconvinced that the smartcoin creator is a borrower.  They may not be a lender in the traditional sense but they are not a borrower either.

[GaltReport]

So what premium or interest rate does the system charge for this loan?  Borrowers usually pay a premium or interest rate for borrowing money.  Its more like lending to yourself and borrowing from yourself at the same time, instead of the system.  As I said before, maybe lender is not the correct term to use.  The smartcoin creator is more like an options seller.

In this case you borrow one type of money (i.e. bitUSD) against a collateral in the form of another type of money (i.e. BTS).
So one might say there is no premium or interest rate involved because the size of the collateral itself is enough to compensate the lender (i.e. the system) for their risk.

Lending to yourself and borrowing from yourself - this concept does not make sense. Similarly you cannot sell something to yourself or buy something from yourself.
In our case you borrow something (i.e. bitUSD) from the system and as long as you remain in control of this borrowed thing, you are not exposed to any risk (and any profit).

It's similar to borrowing money from a bank at zero interest and keeping this borrowed money safely in a bank account of the same bank.
Theoretically you have a debt but still your financial situation is not affected in any way as long as you do nothing with this borrowed money.

Yes, bold part is how  I understand it.  Short is putting up their BTS collateral to Borrow BitUSD from the system and sell it (when someone buys it).

[jakub]

So what premium or interest rate does the system charge for this loan?  Borrowers usually pay a premium or interest rate for borrowing money.  Its more like lending to yourself and borrowing from yourself at the same time, instead of the system.  As I said before, maybe lender is not the correct term to use.  The smartcoin creator is more like an options seller.

In this case you borrow one type of money (i.e. bitUSD) against a collateral in the form of another type of money (i.e. BTS).
So one might say there is no premium or interest rate involved because the size of the collateral itself is enough to compensate the lender (i.e. the system) for their risk.

Lending to yourself and borrowing from yourself - this concept does not make sense. Similarly you cannot sell something to yourself or buy something from yourself.
In our case you borrow something (i.e. bitUSD) from the system and as long as you remain in control of this borrowed thing, you are not exposed to any risk (and any profit).

It's similar to borrowing money from a bank at zero interest and keeping this borrowed money safely in a bank account of the same bank.
Theoretically you have a debt but still your financial situation is not affected in any way as long as you do nothing with this borrowed money.

[merivercap]

The short actually borrows BTS from the long bitUSD buyer.   I think the confusion is the 200% collateral, because it seems like the short is providing both sides.  What's not explicitly seen is the BTS collateral that the long bitUSD buyer brings to the table on trade execution and that's what is used by the short to get leverage.  The short borrows BTS to get more exposure to ups/downs. 

The extra collateral for the short is unnecessary even though the intent might have been to be more conservative with the protocol.   

[Helikopterben]

yvv is right. Short position holder borrows bitUSD from the system and one day s/he will have to return these bitUSD.
S/he can do it voluntarily (by buying back bitUSD from the market) or involuntarily (by being margin called or forced settled).

So what premium or interest rate does the system charge for this loan?  Borrowers usually pay a premium or interest rate for borrowing money.  Its more like lending to yourself and borrowing from yourself at the same time, instead of the system.  As I said before, maybe lender is not the correct term to use.  The smartcoin creator is more like an options seller.

Empirical1.2 makes sense:

I don't think the short seller is a lender/borrower.

The current BitAssets are bit like a contract for difference so it's just a market that matches buyers and sellers.

If the shorts were extremely bullish they'd be wiling to pay a premium to longs to take the other side of the contract and vice versa.

I don't know though.

[Helikopterben]

Did you try to do exercise which I suggested? Just go and press the damn button, then check your account overview.

I have created usd, cny, gold, silver, and bitcoin, but I did not borrow it.  I lent it on the network and charged a premium for that service. 

[jakub]

Wrong answer.  I will give you the correct answer.  The short seller is a lender, not a borrower.

You get it 180 degree wrong. Go to bitshares.openledger.info then "Trade" tab and press "Borrow USD" button. See what happens.

yvv is right. Short position holder borrows bitUSD from the system and one day s/he will have to return these bitUSD.
S/he can do it voluntarily (by buying back bitUSD from the market) or involuntarily (by being margin called or forced settled).

[yvv]

I don't think the short seller is a lender/borrower.

The current BitAssets are bit like a contract for difference so it's just a market that matches buyers and sellers.

It is a contract for difference, but you still need to borrow bitAsset to create it into existence. It becomes your liability, aka debt.

If the shorts were extremely bullish they'd be wiling to pay a premium to longs to take the other side of the contract and vice versa.

I don't know though.

This is true. Saying that shorts should not pay premium, I was not correct. They may agree to pay under certain conditions.

[abit]

Opinions and facts must be tested.  How are the alternatives being tested?

I tend to agree with proposal to test bitAssets which pay premium or interest to holders. Setting positive interest would motivate holders and demotivate borrowers, increasing demand and reducing supply which would push the price up. Setting negative interest would reduce  demand and increase supply which would push the price down.  This could give an efficient way to keep the asset close to peg.

Why not fork a chain and test if impossible to test by a private MPA?

[yvv]

Wrong answer.  I will give you the correct answer.  The short seller is a lender, not a borrower.

You get it 180 degree wrong. Go to bitshares.openledger.info then "Trade" tab and press "Borrow USD" button. See what happens.

That "borrow USD" button should say "loan USD".  Actually it should say "create USD."  That would be more correct terminology.

Did you try to do exercise which I suggested? Just go and press the damn button, then check your account overview.

[yvv]

Edit:  If I buy a house and go to the bank for a loan, I am not required to put a 200% down payment toward the loan as the borrower.  Same logic applies.

You continue messing things up. Banks either charge interest for loans or require collateral or do both. Usually, higher collateral you deposit, less interest they charge you. You don't have to pay interest for borrowing bitAssets, because you need to deposit very high collateral.

[Empirical1.2]

Wrong answer.  I will give you the correct answer.  The short seller is a lender, not a borrower.

You get it 180 degree wrong. Go to bitshares.openledger.info then "Trade" tab and press "Borrow USD" button. See what happens.

That "borrow USD" button should say "loan USD".  Actually it should say "create USD."  That would be more correct terminology.

I don't think the short seller is a lender/borrower.

The current BitAssets are bit like a contract for difference so it's just a market that matches buyers and sellers.

If the shorts were extremely bullish they'd be wiling to pay a premium to longs to take the other side of the contract and vice versa.

I don't know though.

[Helikopterben]

Wrong answer.  I will give you the correct answer.  The short seller is a lender, not a borrower.

You get it 180 degree wrong. Go to bitshares.openledger.info then "Trade" tab and press "Borrow USD" button. See what happens.

That "borrow USD" button should say "loan USD".  Actually it should say "create USD."  That would be more correct terminology.

[yvv]

Wrong answer.  I will give you the correct answer.  The short seller is a lender, not a borrower.

You get it 180 degree wrong. Go to bitshares.openledger.info then "Trade" tab and press "Borrow USD" button. See what happens.

[Helikopterben]

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

The short seller is a borrower, not a lender. You borrow bitUSD to provide them to the market. Those who buy these bitUSD are the lenders.

If that is correct, then why do short sellers not PAY premium to smartcoin buyers?  Borrowers almost always pay either premium or interest to lenders.  By your logic, the short seller should pay premium to the buyer.

Short sellers should not pay any premiums, they are already fucked up enough for borrowing bitAssets. Why do you want them to be fucked up even more?

I asked you a question that you failed to answer.  I will ask the question again.  Why do short sellers not pay a premium if they are borrowers?

Because this is how the devs made the bitshares. You don't have to pay a premium for a loan, but you have to keep 200% collateral instead. You are asking trivial questions.

Wrong answer.  I will give you the correct answer.  The short seller is a lender, not a borrower.

Edit:  If I buy a house and go to the bank for a loan, I am not required to put a 200% down payment toward the loan as the borrower.  Same logic applies.

[yvv]

Opinions and facts must be tested.  How are the alternatives being tested?

I tend to agree with proposal to test bitAssets which pay premium or interest to holders. Setting positive interest would motivate holders and demotivate borrowers, increasing demand and reducing supply which would push the price up. Setting negative interest would reduce  demand and increase supply which would push the price down.  This could give an efficient way to keep the asset close to peg.

[fuzzy]

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

The short seller is a borrower, not a lender. You borrow bitUSD to provide them to the market. Those who buy these bitUSD are the lenders.

If that is correct, then why do short sellers not PAY premium to smartcoin buyers?  Borrowers almost always pay either premium or interest to lenders.  By your logic, the short seller should pay premium to the buyer.

Short sellers should not pay any premiums, they are already fucked up enough for borrowing bitAssets. Why do you want them to be fucked up even more?

I asked you a question that you failed to answer.  I will ask the question again.  Why do short sellers not pay a premium if they are borrowers?

Because this is how the devs made the bitshares. You don't have to pay the premium for the loan, but you have to keep 200% collateral instead. You are asking trivial questions.

Opinions and facts must be tested.  How are the alternatives being tested?

[yvv]

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

The short seller is a borrower, not a lender. You borrow bitUSD to provide them to the market. Those who buy these bitUSD are the lenders.

If that is correct, then why do short sellers not PAY premium to smartcoin buyers?  Borrowers almost always pay either premium or interest to lenders.  By your logic, the short seller should pay premium to the buyer.

Short sellers should not pay any premiums, they are already fucked up enough for borrowing bitAssets. Why do you want them to be fucked up even more?

I asked you a question that you failed to answer.  I will ask the question again.  Why do short sellers not pay a premium if they are borrowers?

Because this is how the devs made the bitshares. You don't have to pay a premium for a loan, but you have to keep 200% collateral instead. You are asking trivial questions.

[yvv]

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

The short seller is a borrower, not a lender. You borrow bitUSD to provide them to the market. Those who buy these bitUSD are the lenders.

If that is correct, then why do short sellers not PAY premium to smartcoin buyers?  Borrowers almost always pay either premium or interest to lenders.  By your logic, the short seller should pay premium to the buyer.

Short sellers should not pay any premiums, they are already fucked up enough for borrowing bitAssets. Why do you want them to be fucked up even more?

I see alot of disagreements here.  Why not test your opinions in the market by having a smartcoin competition that awards something like a month's worth of worker proposal wages after x months to the smartcoin that best maintains the peg?

Seems to me the best way to go about this while being productive...

These are not opinions. This is how shorting currently works. Short seller is a borrower, not a lender. He borrows money to have a leverage. He pays for loan by exposing himself to a risk. Paying interest or premium would demotivate from borrowing bitAsset and reduce the supply. I agree, however, that this would be an interesting experiment.

[xeroc]

Risk of being margin called ..

[Helikopterben]

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

The short seller is a borrower, not a lender. You borrow bitUSD to provide them to the market. Those who buy these bitUSD are the lenders.

If that is correct, then why do short sellers not PAY premium to smartcoin buyers?  Borrowers almost always pay either premium or interest to lenders.  By your logic, the short seller should pay premium to the buyer.

Short sellers should not pay any premiums, they are already fucked up enough for borrowing bitAssets. Why do you want them to be fucked up even more?

I asked you a question that you failed to answer.  I will ask the question again.  Why do short sellers not pay a premium if they are borrowers?

[fuzzy]

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

The short seller is a borrower, not a lender. You borrow bitUSD to provide them to the market. Those who buy these bitUSD are the lenders.

If that is correct, then why do short sellers not PAY premium to smartcoin buyers?  Borrowers almost always pay either premium or interest to lenders.  By your logic, the short seller should pay premium to the buyer.

Short sellers should not pay any premiums, they are already fucked up enough for borrowing bitAssets. Why do you want them to be fucked up even more?

I see alot of disagreements here.  Why not test your opinions in the market by having a smartcoin competition that awards something like a month's worth of worker proposal wages after x months to the smartcoin that best maintains the peg?

Seems to me the best way to go about this while being productive...

[yvv]

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

The short seller is a borrower, not a lender. You borrow bitUSD to provide them to the market. Those who buy these bitUSD are the lenders.

If that is correct, then why do short sellers not PAY premium to smartcoin buyers?  Borrowers almost always pay either premium or interest to lenders.  By your logic, the short seller should pay premium to the buyer.

Short sellers should not pay any premiums, they are already fucked up enough for borrowing bitAssets. Why do you want them to be fucked up even more?

[Helikopterben]

I don't think we will be able to get smartcoins to trade at parity with the current design, which is perfectly fine because I think the current design is the best design, possibly with a few tweaks and feature adds. 

  I think removing forced settlement should enable prices to range around parity, just like Nubits. (Not making any comments on the rest of Nubits design, only that at least they are trying for 1:1)

Nubits trades 1:1 because market makers maintain a peg around parity with buy and sell walls.  Their sells have the same risk/reward profile as their buys.  This is possible when your assets aren't securely collateralized. 

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

Not sure I follow you here.   The short gets leverage by shorting bitUSD.  I'm not sure why you are explaining it in terms of the short as lender.  The short actually creates a debt into the system so the short should be a borrower of 1 bitUSD in your example.  The short's BTS collateral is necessary to make sure the 1 bitUSD debt is paid back in full.  I assume the system adds the bitUSD buyer's BTS into the collateral pool such that both long and short have collateral for each bitUSD.

As I asked above, If the short seller is the borrower, then why is the short seller not paying the premium?  If I decide to buy a house with a loan, I go to the bank and ask them to tie up some of their money so I can buy the house.  I will then pay interest over time for this service.  Smartcoin buyers are asking short sellers to tie up their money to create the smartcoins.  The short seller will charge a premium for this service, hence the short seller is a lender.  Maybe lender doesn't describe the concept very well.  Its more like an options seller.  Its kind of difficult to find a traditional example that would describe the concept because smartcoins are designed differently because of the desire to preserve the currency function.  This is why I think lending smartcoins vs selling smartcoins will have much lower premiums.  Perhaps we should create a parallel lending market if possible and see if that helps bootstrap liquidity.  Im sure that would be costly though.

In the current design shorts put twice the collateral, but I don't think that's necessary and I assume can easily be changed.  If the short only had to put 300bts in the scenario and the long had to put 300bts you would have 600bts collateral when a trade is executed (200% collateral overall).  A loss of 50% of BTS against USD would trigger a black swan so to be safe the system can just trigger margin-calls at 75% of initial collateral.  That's very safe esp since price feeds update every hour.

That was part of the original design, but it is more efficient IMO for the short seller to create usd with his own collateral and then sell it, which is how it is done now.  The short seller can then take the proceeds from the sale and adjust collateral if he wants.  Perhaps an order type could be created where the creation of usd is contingent on the sale and the proceeds are automatically added to collateral.  I'm not sure this would make much of a difference though.

I just want to run one hypothetical example of the current system if a bitUSD trade is executed at the price feed:   
Feed price is: .00345606 USD/BTS  (289.3468 BTS/USD)
Collateral is 675 BTS (at 2.33x collateral against price feed) or $2.33.  A bitUSD buyer would add 289.34 more BTS of collateral to purchase the bitUSD.  Hence the total collateral in the system is 3.33x)
Call price is: .00259249 USD/BTS (385.7295 BTS/USD)

The shorter will be called at a 25% loss of BTS vs USD.  The shorter's loss in BTS will be 96.4 BTS (385.7 BTS - 289.3 BTS) or about 14.3% of the initial collateral.  The shorter will end up with 578.6 BTS (675BTS - 96.4BTS) worth $1.50. 

The shorter's total loss is $0.83 (or 36%) because of the leverage instead of $0.58 (or 25%) without leverage.

If we only required the shorter to hold 1x collateral of 289.3468 BTS (or $1.00), then in the same scenario the shorter would end up with 192.9 BTS (289.3BTS - 96.4BTS) or $0.50 cents. 

The total loss in that scenario is $0.50 (or 50%) because of the leverage instead of $0.25 (or 25%) without leverage.

Anyways I'm doing this late so hopefully my numbers are ok.  I assume the design & collateral system works as described above.  If so we should be able to reduce collateral for the shorts.

Looks good to me.

[Helikopterben]

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

The short seller is a borrower, not a lender. You borrow bitUSD to provide them to the market. Those who buy these bitUSD are the lenders.

If that is correct, then why do short sellers not PAY premium to smartcoin buyers?  Borrowers almost always pay either premium or interest to lenders.  By your logic, the short seller should pay premium to the buyer.

[yvv]

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

The short seller is a borrower, not a lender. You borrow bitUSD to provide them to the market. Those who buy these bitUSD are the lenders.

[merivercap]

I don't think we will be able to get smartcoins to trade at parity with the current design, which is perfectly fine because I think the current design is the best design, possibly with a few tweaks and feature adds. 

  I think removing forced settlement should enable prices to range around parity, just like Nubits. (Not making any comments on the rest of Nubits design, only that at least they are trying for 1:1)

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

Not sure I follow you here.   The short gets leverage by shorting bitUSD.  I'm not sure why you are explaining it in terms of the short as lender.  The short actually creates a debt into the system so the short should be a borrower of 1 bitUSD in your example.  The short's BTS collateral is necessary to make sure the 1 bitUSD debt is paid back in full.  I assume the system adds the bitUSD buyer's BTS into the collateral pool such that both long and short have collateral for each bitUSD.

In the current design shorts put twice the collateral, but I don't think that's necessary and I assume can easily be changed.  If the short only had to put 300bts in the scenario and the long had to put 300bts you would have 600bts collateral when a trade is executed (200% collateral overall).  A loss of 50% of BTS against USD would trigger a black swan so to be safe the system can just trigger margin-calls at 75% of initial collateral.  That's very safe esp since price feeds update every hour.

I just want to run one hypothetical example of the current system if a bitUSD trade is executed at the price feed:   
Feed price is: .00345606 USD/BTS  (289.3468 BTS/USD)
Collateral is 675 BTS (at 2.33x collateral against price feed) or $2.33.  A bitUSD buyer would add 289.34 more BTS of collateral to purchase the bitUSD.  Hence the total collateral in the system is 3.33x)
Call price is: .00259249 USD/BTS (385.7295 BTS/USD)

The shorter will be called at a 25% loss of BTS vs USD.  The shorter's loss in BTS will be 96.4 BTS (385.7 BTS - 289.3 BTS) or about 14.3% of the initial collateral.  The shorter will end up with 578.6 BTS (675BTS - 96.4BTS) worth $1.50. 

The shorter's total loss is $0.83 (or 36%) because of the leverage instead of $0.58 (or 25%) without leverage.

If we only required the shorter to hold 1x collateral of 289.3468 BTS (or $1.00), then in the same scenario the shorter would end up with 192.9 BTS (289.3BTS - 96.4BTS) or $0.50 cents. 

The total loss in that scenario is $0.50 (or 50%) because of the leverage instead of $0.25 (or 25%) without leverage.

Anyways I'm doing this late so hopefully my numbers are ok.  I assume the design & collateral system works as described above.  If so we should be able to reduce collateral for the shorts. 

[tbone]

I think the real reason why I prefer to create another smart coin instead of CNY is not because of some unreasonable parameter
the importan reason is committee will never  response as fast as the market's change, they can't and shouldn't take care of all business
an alternate smartcoin can  have a committee which can focus on it's business,  and can get more resouses to suport it's business

Am I the only one who thinks this is an INCREDIBLY bad idea?

[Helikopterben]

I don't think we will be able to get smartcoins to trade at parity with the current design, which is perfectly fine because I think the current design is the best design, possibly with a few tweaks and feature adds.   

You are bullish on parity if the right tweaks are made or it's okay to not be at parity?

It's ok to not be at parity with the current design of premium being paid up front.  The only way to trade at parity is for the smartcoin buyer to pay interest payments to the smartcoin creator instead of paying a premium.  So you can either have premium or interest payments.  From what I understand, interest payments would be more difficult with a blockchain.

[Helikopterben]

I don't think we will be able to get smartcoins to trade at parity with the current design, which is perfectly fine because I think the current design is the best design, possibly with a few tweaks and feature adds. 

First, we need to understand the roll of the short seller.  The short seller is a lender that provides a service to the network by lending bts to borrowers in the form of smartcoins.  Lenders do not lend money for free so they will either charge interest or charge a premium.  Otherwise, the risk/reward doesn't work.  For example, if I lend 1 usd into existence at a rate of 300 bts/usd with 2x collateral of 600bts, then my risk of loss is 100% of outlay (with a 50% drop in price) while my potential gains are only 50% of outlay.  It just does not make sense to enter this agreement unless I charge a fee to compensate for the added risk.

So the question becomes:  Why would anyone pay $1.10 for $1.00?  First of all, I outline why this may be the case when trading physical commodities vs digital assets such as bitcoin, usd, ect.  Second of all, this is why I think we need some sort of leveraged trading, if possible.  Traditional options and futures markets are highly leveraged.  If I ask someone to deposit $1,100 and he gets credited in the system for $1,000, then he will be reluctant to do it and say that he would rather use a centralized exchange where he can deposit $1,000 and get credited for $1,000.  However, if I tell someone they can deposit $1,100 and get credited in the system for $2000, then he may be more willing to do it because leveraged traders are comfortable with paying a premium to borrow money.  In this situation, the trader would pay $100 to the lender to borrow $1,000 and put in $1,000 of his own money at 2x leverage.  Obviously he will have to be aware of margin call requirements and the loan may have to have a contract end date.  This would also work out well for the lender as he could earn a return on his bts and not be exposed to exchange rate risk as long as he maintains proper collateral.  For instance, if the smartcoin creator creates 1,000 usd and lends it out vs selling it, then all that is required is for the borrower to repay the loan in full, at which point the lender can adjust collateral back to 0 without having to buy any usd on the open market.  Because of this, I imagine premiums would be much lower to borrow smartcoins than to buy smartcoins. 

I agree that forced settlement is questionable as to whether it is needed or not, but I don't think removing it will affect premium that much.  As someone else suggested, maybe parameters can be changed for cny vs usd vs euro to determine which design works best.  I think it would get confusing to have multiple designs of usd and I'm not sure how beneficial it would be, but it is definitely worth a shot at this stage. 

[merivercap]

What I hope to see is more detailed explanation how and why your system would work. Saying just "should be enough" is not very convincing for people like me who haven't fully grasped these things.

But I somewhat like the idea of MPA that floats around the peg and not over. Could we test it first on a different asset than fiat-MPA? Maybe gold or oil? For now I support fiat-MPAs that are pegged at least for the face value (although I might change my mind later if I see that's not working) because it guarantees the value for users. This is propably a good thing for commerce. But maybe assets like gold do not need such guarantees and we could let them to float around face value?

Ok.  Yeah I might find time to write something up and model it like a white paper.  Most of the current design seems to be fine so I can explain the current system as well.   I'll leave out the forced-settlement/guarantees/'at-least' face-value part.  I'll just explain how and why the system without forced settlement should work.

[merivercap]

I agree. I'd like to see a design for parity where risk is equal on each side of the trade. This is made difficult because of the need for fungible longs.

To keep this simple, let's start with a design without fungable longs and go from there.

BTS/USD market:

* Longs and shorts trade on margin in a CFD style market
* The only currency in use is BTS (different to the current design where bitUSD is also used)
* Long BTS orders post BTS collateral
* Short BTS orders also post BTS collateral
* A matching long BTS order with a short BTS order begins the contract
* Both sides need to maintain their positions in order to avoid getting margin called
* Both sides start in BTS and end up in BTS
* Either side can close their position at any time, or get margin called in which case that contract is closed
* The other party which didn't initiate the close (directly or indirectly) gets rematched with next eligible order on the market

Thoughts?

Your design seems fine in general and will be good to try out if the current design doesn't work, but I'm actually optimistic about 95% of the current design.   One huge benefit to the current design is that you don't need to have people close positions as often or ever if you're long the bitAsset and this is especially important if you want to maintain consistent circulation of bitAssets to be used as money.   I think having a stable balance of long term bitAsset holders and long-term bitAsset shorts is incredibly important. 

I am proposing adjusting parameters first before doing a more extensive re-design.  Really with the recent fork update, the only remaining major issue I have is with forced settlement.  It forced settlement was set at 90 cents and used as a emergency safety valve instead of the way it is currently I wouldn't be as concerned. 

BTW I remember you brought up something about the difference between the long's and short's collateral and I agree.  I think the short is currently putting 200% collateral and when the bitAsset long purchases the bitAsset together there is 300% collateral at the outset.  Hence I don't think you need to have the short put up 200% collateral, only 100%.  Hence the long and short would put up 200% BTS collateral when the trade happens.  Liquidity is directly proportional to leverage and we should loosen up the requirements of the short.  Furthermore the price feed updates hourly so we should be safe because a 50% draw down is unlikely to happen within one hour to cause a black swan.  Let me know if you're seeing the same thing.   That may be the other adjustment I would propose. 

[fuzzy]

I think the real reason why I prefer to create another smart coin instead of CNY is not because of some unreasonable parameter
the importan reason is committee will never  response as fast as the market's change, they can't and shouldn't take care of all business
an alternate smartcoin can  have a committee which can focus on it's business,  and can get more resouses to suport it's business

Multiple committees for various business functions makes sense.  It is actually kind of what it sounds like identabit is doing.

[monsterer]

I would have a set daily allowance where BTS provides liquidity by selling at 1.01 and buy back at 0.99. (Then once that's breached a further daily allowance at 0.98, 0.97) Ideally the blockchain would be break-even to profitable long term providing this service. These limits and ranges can be tweaked by the committee based on results.

Fairly sure this cannot work, because you cannot enforce the peg inside the dex.

edit: excepting through IOU markets - BTS / IOU USD on the DEX would enforce the peg

[xeroc]

What customers want is liquidity within a tight range around the peg.

Nubits is able to offer this because they are operating on fractional reserve & subsidizing liquidity providers.

Uphold (formerly BitReserve) is able to offer this and do it for free because they are investing the reserve in yield-bearing instruments.
https://support.uphold.com/hc/en-us/articles/205290895-How-does-Uphold-make-money-

The name of the game is providing liquidity in a tight range around the peg. 

Personally, considering BTS already has dilution, I would use the blockchain as a market maker for three key market CNY, USD and GOLD.
I would have a set daily allowance where BTS provides liquidity by selling at 1.01 and buy back at 0.99. (Then once that's breached a further daily allowance at 0.98, 0.97) Ideally the blockchain would be break-even to profitable long term providing this service. These limits and ranges can be tweaked by the committee based on results.

Committee could use accumulated fees for market making as well. Atm therd are $6900 worth in USD alone.

I'll try to talk to the committe members and see if we can figure something out

[Empirical1.2]

What customers want is liquidity within a tight range around the peg.

Nubits is able to offer this because they are operating on fractional reserve & subsidizing liquidity providers.

Uphold (formerly BitReserve) is able to offer this and do it for free because they are investing the reserve in yield-bearing instruments.
https://support.uphold.com/hc/en-us/articles/205290895-How-does-Uphold-make-money-

The name of the game is providing liquidity in a tight range around the peg. 

Personally, considering BTS already has dilution, I would use the blockchain as a market maker for three key market CNY, USD and GOLD.
I would have a set daily allowance where BTS provides liquidity by selling at 1.01 and buy back at 0.99. (Then once that's breached a further daily allowance at 0.98, 0.97) Ideally the blockchain would be break-even to profitable long term providing this service. These limits and ranges can be tweaked by the committee based on results.

[yvv]

The idea to play with different designs of smart assets is absolutely reasonable. You never know which concept is the best unless you test all of them. Just don't screw up current bitAssets, because they sort of work. Introduce new types of assets, and let's see how they perform.

[monsterer]

I agree. I'd like to see a design for parity where risk is equal on each side of the trade. This is made difficult because of the need for fungible longs.

To keep this simple, let's start with a design without fungable longs and go from there.

BTS/USD market:

* Longs and shorts trade on margin in a CFD style market
* The only currency in use is BTS (different to the current design where bitUSD is also used)
* Long BTS orders post BTS collateral
* Short BTS orders also post BTS collateral
* A matching long BTS order with a short BTS order begins the contract
* Both sides need to maintain their positions in order to avoid getting margin called
* Both sides start in BTS and end up in BTS
* Either side can close their position at any time, or get margin called in which case that contract is closed
* The other party which didn't initiate the close (directly or indirectly) gets rematched with next eligible order on the market

Thoughts?

[Samupaha]

What I hope to see is more detailed explanation how and why your system would work. Saying just "should be enough" is not very convincing for people like me who haven't fully grasped these things.

But I somewhat like the idea of MPA that floats around the peg and not over. Could we test it first on a different asset than fiat-MPA? Maybe gold or oil? For now I support fiat-MPAs that are pegged at least for the face value (although I might change my mind later if I see that's not working) because it guarantees the value for users. This is propably a good thing for commerce. But maybe assets like gold do not need such guarantees and we could let them to float around face value?

[merivercap]

I would like to hear more about how to peg something without having a forced settlement. For me it seems to be a really important feature that makes sure that the peg holds. How you are going to replace that?

If you have natural margin-call settlement happen around the price feed that should be enough.   I believe the next fork will update settlement such that margin-calls will only happen if the price-feed is below the call price so that should have the same effect. 

Otherwise illiquid markets should have a range... sometimes it may go to 80 cents... sometimes 1.20... the only way you get tighter spreads is with more active traders and market makers.  I wouldn't make a judgement about a design if a bitUSD trades at 80 cents in an illiquid bull market nor would I be that suprised that a bitUSD trades at 1.20 in an illiquid bear market.   In a liquid market it shouldn't matter if it's a bull or bear market you'll have enough traders on both sides such that it will have a small spread around 1 dollar. 

If the idea of 80 cent bitUSD is that terrible, just set the lower limit to 90 cents and allow a worst-case forced settlement there.  I just don't care to make any judgement about if a design is good or not when the sample size is so small and you have such illiquidity. 

[Samupaha]

I would like to hear more about how to peg something without having a forced settlement. For me it seems to be a really important feature that makes sure that the peg holds. How you are going to replace that?

[alt]

I think the real reason why I prefer to create another smart coin instead of CNY is not because of some unreasonable parameter
the importan reason is committee will never  response as fast as the market's change, they can't and shouldn't take care of all business
an alternate smartcoin can  have a committee which can focus on it's business,  and can get more resouses to suport it's business

[bitcrab]

it's easy to solve this by below setting:

Code: [Select]

  "force_settlement_offset_percent": 200,
it is set that the force settlement requester need to pay 2%(or other reasonable percent) above the feed price to the shorter.

then the premium can be removed and the shorter will be safe enough and the merchant/consumer can enjoy the 1:1 pegging.

[alt]

yes,  we have decided to create another private smart CNY
https://bitsharestalk.org/index.php/topic,20406.0/topicseen.html

[merivercap]

Hey community,
The more I think about the current design of Smartcoins, the more I believe they will not work.  Force settlements, guarantees, and premiums all have negative consequences that will make Smartcoins unattractive to most people. 

For consumers:
Smartcoins with a permanent premium will be both confusing and inconvenient for daily use for consumers.  The further the price of bitUSD goes away from one dollar the more unlikely it will be adopted.  With fees, a permanent premium, and illiquidity I see bitUSD selling at times for 1.25 to 1.35. 

For traders:
The forced settlement feature creates a disadvantage for shorts so there will be far less desire for shorts to create Smartcoins and hence less liquidity overall.   

I think evaluating the traction of any design can take some time so for those that want to experiment, promote and build off the current design I think that's fine.   However,  I strongly believe in a design without forced settlements or permanent premiums and believe we do not have as much time to keep testing one design at a time and risk having to start over again.  If we can create one alternate design or two we can be far more efficient in discovering what design will allow us to gain the most traction and allow businesses more options to help Bitshares grow rapidly.   Hence I propose we have one more design for bitUSD and possibly bitCNY.

I do understand we will be splitting up the liquidity of the market and may cause some slight confusion for traders, but traders will have more options and I think we will have distinct groups of traders and users who would prefer one design over the other so the downside will not be that great.

Let me know your thoughts.  Thanks.