Author Topic: Theory and Late Night Musings on Smartcoins  (Read 3118 times)

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Offline Empirical1.2

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1) The USD smartcoin is defined to have an equivalent value to the dollar.  2) The price-feed determines the value of the USD smartcoin relative to BTS.  Then we can conclude USD smartcoins can be created and extinguished with either other USD smartcoins or BTS using the price-feed.

The way I understand it at the moment is that the reason for the current method is so that Smartcoins remain over-collateralized in most market conditions and thus 1 BitUSD should almost always be redeemable for $1 worth of BTS even during significant BTS price declines.

By allowing people to extinguish their debt with BTS you would be reducing the collateral backing Smartcoins unless the BTS they used went into a Smartcoin collateral pool/BTS took over the position?

Perhaps that's part of the reason to keep it at least $1, but I think it's more important to declare equivalence.  Like I mentioned earlier it's trying to value a moving target with another moving target.  It makes more sense to me to just declare a USD Smartcoin $1 and use the price-feed as the authority. That's ok.  We can test out the latter option with a Privatized Smartcoin so we can experiment. 

Yeah the second part I just posted about and you can indirectly use BTS to extinguish the debt or reset it at a lower exchange rate so I think things should be fine with that.


Quote
It makes more sense to me to just declare a USD Smartcoin $1 and use the price-feed as the authority.

I don't understand everything you wrote but I think few will value it at a dollar unless it has some collateral system/other(liquidity providers) to keep it pegged at the dollar.

Your thinking seems to be similar to BM originally thinking a BitUSD would be peg to $1 just because that's what the declared consensus was, even with a price feed I don't think that will be the case...


BitUSD has been seeded with the consensus that the value of one BitUSD should be equal to the value of one US dollar.  Therefore, unless something happens to change this consensus the most profitable trade to make is to buy BitUSD when it is under 1 USD and sell BitUSD when it is over 1 USD.  If you trade against this then you are predicting others will do the same and as far as I know there is no rationale for any other price.


I'm not hot with this stuff, but from my perspective a BitUSD may be worth less than a USD in the beginning to me, because of system risk, lack of utility and the cost+effort of converting via a centralised exchange to say real USD for example.


I do think you could make fractional reserve Smartcoins work by creating them whenever there is demand and using trading fees to incentivize some holders to lock them up so that the Smartcoins currently in circulation are fully collateralized https://bitsharestalk.org/index.php/topic,21078.msg273103.html#msg273103

This would be great in terms of enabling the seamless conversion of  LTC to BitLTC, USD to BitUSD etc. via a bridge  and make it a DEX that could compete with centralized crypto exchanges.
« Last Edit: February 04, 2016, 02:51:51 am by Empirical1.2 »
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Offline merivercap

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1) The USD smartcoin is defined to have an equivalent value to the dollar.  2) The price-feed determines the value of the USD smartcoin relative to BTS.  Then we can conclude USD smartcoins can be created and extinguished with either other USD smartcoins or BTS using the price-feed.

The way I understand it at the moment is that the reason for the current method is so that Smartcoins remain over-collateralized in most market conditions and thus 1 BitUSD should almost always be redeemable for $1 worth of BTS even during significant BTS price declines.

By allowing people to extinguish their debt with BTS you would be reducing the collateral backing Smartcoins unless the BTS they used went into a Smartcoin collateral pool/BTS took over the position?

Perhaps that's part of the reason to keep it at least $1, but I think it's more important to declare equivalence.  Like I mentioned earlier it's trying to value a moving target with another moving target.  It makes more sense to me to just declare a USD Smartcoin $1 and use the price-feed as the authority.  That's ok.  We can test out the latter option with a Privatized Smartcoin so we can experiment. 

Yeah the second part I just posted about and you can indirectly use BTS to extinguish the debt or reset it at a lower exchange rate so I think things should be fine with that. 
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Offline merivercap

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Ok I think I got it.  Borrowers can use external assets to purchase BTS and then create new Smartcoins to replace the debt at a lower exchange rate and that should take care of the issue.    Hence Bob in the lost key example can purchase $4 million in BTS, create new Smartcoin USD to replace the old debt at the lower exchange rate.  It's the same effect as updating the collateral position. 

So I think that solves the issue that was puzzling me there last night...
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Offline Empirical1.2

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1) The USD smartcoin is defined to have an equivalent value to the dollar.  2) The price-feed determines the value of the USD smartcoin relative to BTS.  Then we can conclude USD smartcoins can be created and extinguished with either other USD smartcoins or BTS using the price-feed.

The way I understand it at the moment is that the reason for the current method is so that Smartcoins remain over-collateralized in most market conditions and thus 1 BitUSD should almost always be redeemable for $1 worth of BTS even during significant BTS price declines.

By allowing people to extinguish their debt with BTS you would be reducing the collateral backing Smartcoins unless the BTS they used went into a Smartcoin collateral pool/BTS took over the position?
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Offline merivercap

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I just looked at it briefly, perhaps the network can offer to take over your short position for a hefty premium.

In other words for 'Feed + 10%' in BTS, the network will assume your short position and then it can keep the short position in a separate account/space so that BitAsset is just as collateralized as it was before? (There would have to be a daily 2% limit/other that can be transferred to the network a day so it can't be exploited by a whack feed/other)

As Johnny Bitcoin says he is reluctant to create BitAssets not knowing if he will be able to buy the BitAsset back in future.

He has also bought BitBTC at up to a 30% premium hoping to exploit/expose this very flaw in the future...

The dex is struggling to get going and I think we need to create maybe $50,000 BITUSD and 100 BITBTC using reserve funds as collateral and sell it in to the market at feed price +5% with the proceeds of the sale going back into the reserve funds.

Although I would like to create bitBTC into existence myself I'm not currently confident I'll be able to buy back the bitBTC at a reasonable price in the future to close my collateral position. I've bought 5 BITBTC at a huge premium (+30%) and I'm unlikely to sell anytime soon. Meaning those who wish to exit their collateral positions will be unable to as I'm not selling and I hold 10% of total supply. 
Smartcoin creators need to be bolstered by a supply of smartcoin liquidity and this should come from the reserve pool.

does anyone know if the reserve pool has an actual account?

What is your reasoning for buying bitBTC with 30% premium?

If I buy up all the bitbtc I can and refuse to sell it back for any less than +50% premium then there's profit for me.
And some people may really want to close their collateral positions so they can sell their BTS they have tied up in collateral.
If this strategy is sucessful and their are many desperate people unable to close their collateral positions I will have proved their is a need to create some base money using the reserve pool funds.
I maybe wrong however if people are will to keep borrowing bitbtc in to existence and sell it to me.

Interesting thread post and Johnnybitcoin's trading strategy does highlight the theoretical issues that I was musing about.  In this case a trader can hold smartcoin assets and limit the trading supply.  It's the same effect as if a large amount of smartcoins were circulating or if someone just loses keys to a large amount.   It's hard if not impossible to buy it back to extinguish the debt.   The system will margin call any undercollateralized positions at the market if people can't buy back enough and I believe that currently they are somewhat protected since the  price feed has to be below the margin call price for the actual forced settlement to occur.   I believe then the MSSR kicks in to protect the actual settlement to not be too much below the price feed, otherwise there would be massive losses with illiquidity.    Overall the mechanism  seems kludgy.   I don't believe a reserve fund would solve the problem and it may just magnify them.  Larger traders can accumulate positions against the reserve fund just the same way they could do to an individual trader.   I think finding the release valve requires going one step back to the original premise that we are creating monetary assets from the debt.    If we start from there we just need to make two rules.  1) The USD smartcoin is defined to have an equivalent value to the dollar.  2) The price-feed determines the value of the USD smartcoin relative to BTS.  Then we can conclude USD smartcoins can be created and extinguished with either other USD smartcoins or BTS using the price-feed.
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Offline merivercap

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what if Bob is a big bank? Does the big bank(s) have any incentive to buy up at least half of the bts, own the system and use the dex for trading smartcoins?
I see in the news that banks invest something like $50-$60 mil to build their own blockchain solutions. Is the assumption that someone with $20 mil buying bts slowly could easily acquire at least half of bts now and own the system correct?
Why they don't just do that instead of reinventing the wheel? They can obtain the control of an amazing system at very low price currently, most of the work has been already done, they can issue their smartcoins on bitshares blockchain, provide liquidity and increase the confidence of their clients that they actually have their customers funds verifiable on the blockchain. What am I missing ?

Not really much incentive.  The ecosystem is too anti-establishment for banks.  I think it's a good thing that we have an alternative ecosystem.  Maybe Identabit or some other system can be used with traditional banks. 
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Offline merivercap

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Nice musings.

What you are basically saying is allow forced settlements of debts. Right now we only have forced setllement of bitassets.

I think this is because those who want to hold bitusd need to be pretty certain their bitusd won't be turned into bts if the orignal creator wants to settle up.

Theoretically you can design it so that you can force settle the outstanding Smartcoins as you suggest, but that's not a good design.  Force settlement should only happen when collateral is insufficient.  I don't think user-generated forced settlement works or is necessary.  My main point is that a Smartcoin debt should be able to be extinguished with BTS. 

You can have much of the USD Smartcoin float circulating in the economy just like fiat.  Let's say $4,000,000 USD Smartcoin  is circulating in the economy from Bob's debt in the example above instead of being sent to a wallet and lost.   The same scenario exists.  Some are being saved on phones and computers just as people would stash cash under a pillow.  Others would have USD Smartcoin ready to be spent etc.  If Bob force-settled all that $4 million to pay off the debt first off the pricing changes would be drastic.  Secondly all the masses of people showing up to pay in USD Smartcoin for groceries will see some funny looking BTS on their phones.  The trading supply shouldn't be dictated by the monetary use of Smartcoins nor should Smartcoin availability be dictated by trading.   I believe we can do this by just relying on the price feed and allowing Smartcoin debt to be paid in BTS, but would like second and third opinions to see if that makes sense.
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Offline merivercap

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In the end, we don't need smart coins, we don't need BitShares platform, right? If fiat is good enough..

External money means nothing if no one wants to sell her stake to external. 4M $ won't be able to buy 1 billion BTS @0.004$ per BTS. No enough market depth on the selling side.

On the other hand, if you have enough money to maintain BTS price at a certain level, your position will never get margin called. Say, if you own half of all the tokens when market cap is 10M$, and you have another 5M$ fiat, you can maintain a buy wall at current price, so value of the half won't go lower. It's even easier to maintain a buy wall at a lower price for example at price when market cap is 7M$, in this case you just need 3.5M$ fiat.

If Bob own the whole system, how much is his tokens? No trade, no price.

Well I'm not saying fiat is good enough and that's a loaded question because I can go rambling on about banking cartels and printing presses, but that's for another time.  With Smartcoins you can send it anywhere around the world instantly with negligible fees.  You also own the money so there are no limits, freezes, restrictions.  You can also easily trade Smartcoins for any other Smartcoin/Bitcoin asset in the system.  Smartcoins are definitely not the same as traditional fiat.

In any case on to your other point yes if you have enough external money you can support the price so it never gets margin called.  (In the scenario with Bob BTS prices probably would have moved up significantly if he tried to purchase $4 million.  Worst case he could have used all the money to support it. 

Yes if Bob owns the entire system and he does not trade, the price feed would be N/A.  Once he does start trading it will have a price.  People will still value BTS because they use the network and the network generates transaction revenue from all the assets in the system. 

Also prices are not a definitive measure of value.  If only 0.1% of shares of a company's shares trades on any given day, all it indicates is that 0.1% of traders felt it was worth the prices they exchanged for.  Those prices in the price feed determine the 'market value' of a company.  It's the same with the DAC.  99.9% of the people could be HODLing, be on vacation or have lost their keys.   Tis the nature of markets.
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Offline Empirical1.2

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I just looked at it briefly, perhaps the network can offer to take over your short position for a hefty premium.

In other words for 'Feed + 10%' in BTS, the network will assume your short position and then it can keep the short position in a separate account/space so that BitAsset is just as collateralized as it was before? (There would have to be a daily 2% limit/other that can be transferred to the network a day so it can't be exploited by a whack feed/other)

As Johnny Bitcoin says he is reluctant to create BitAssets not knowing if he will be able to buy the BitAsset back in future.

He has also bought BitBTC at up to a 30% premium hoping to exploit/expose this very flaw in the future...

The dex is struggling to get going and I think we need to create maybe $50,000 BITUSD and 100 BITBTC using reserve funds as collateral and sell it in to the market at feed price +5% with the proceeds of the sale going back into the reserve funds.

Although I would like to create bitBTC into existence myself I'm not currently confident I'll be able to buy back the bitBTC at a reasonable price in the future to close my collateral position. I've bought 5 BITBTC at a huge premium (+30%) and I'm unlikely to sell anytime soon. Meaning those who wish to exit their collateral positions will be unable to as I'm not selling and I hold 10% of total supply. 
Smartcoin creators need to be bolstered by a supply of smartcoin liquidity and this should come from the reserve pool.

does anyone know if the reserve pool has an actual account?

What is your reasoning for buying bitBTC with 30% premium?

If I buy up all the bitbtc I can and refuse to sell it back for any less than +50% premium then there's profit for me.
And some people may really want to close their collateral positions so they can sell their BTS they have tied up in collateral.
If this strategy is sucessful and their are many desperate people unable to close their collateral positions I will have proved their is a need to create some base money using the reserve pool funds.
I maybe wrong however if people are will to keep borrowing bitbtc in to existence and sell it to me.
« Last Edit: February 03, 2016, 01:05:45 pm by Empirical1.2 »
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Offline mf-tzo

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what if Bob is a big bank? Does the big bank(s) have any incentive to buy up at least half of the bts, own the system and use the dex for trading smartcoins?
I see in the news that banks invest something like $50-$60 mil to build their own blockchain solutions. Is the assumption that someone with $20 mil buying bts slowly could easily acquire at least half of bts now and own the system correct?
Why they don't just do that instead of reinventing the wheel? They can obtain the control of an amazing system at very low price currently, most of the work has been already done, they can issue their smartcoins on bitshares blockchain, provide liquidity and increase the confidence of their clients that they actually have their customers funds verifiable on the blockchain. What am I missing ?

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In the end, we don't need smart coins, we don't need BitShares platform, right? If fiat is good enough..

External money means nothing if no one wants to sell her stake to external. 4M $ won't be able to buy 1 billion BTS @0.004$ per BTS. No enough market depth on the selling side.

On the other hand, if you have enough money to maintain BTS price at a certain level, your position will never get margin called. Say, if you own half of all the tokens when market cap is 10M$, and you have another 5M$ fiat, you can maintain a buy wall at current price, so value of the half won't go lower. It's even easier to maintain a buy wall at a lower price for example at price when market cap is 7M$, in this case you just need 3.5M$ fiat.

If Bob own the whole system, how much is his tokens? No trade, no price.
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Offline merivercap

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If the above is true, what about allowing people to extinguish the USD Smartcoin debt by paying in BTS.  The price feed always determines the USD Smartcoin/BTS price every hour.  In this scenario Bob can take $4,000,000 he has in his bank, purchase BTS and extinguish the debt and prevent any global settlement from occurring.

Doesn't this mess with the fungibility of long USD? I had thought the reason you had to settle in USD is because USD needs to be purchased from the spot market to get out of the contract, otherwise if the system borrowed it from BTS, you'd be back to square one?

I don't believe it will effect fungibility even if it seems puzzling at first. 

Describing the mechanism in terms of CFDs is more about describing one implementation of the broader concept of creating monetary assets.  It's easier to describe it without using CFDs, but here goes:

If a long USD wanted to be paid back and a short USD was in danger of being called on his collateral the shorter may have BTS outside this contract he can access to pay the long.  He can pay in his outside stash of BTS or convert the BTS to an equivalent amount of USD by borrowing from the system.  Furthermore, the short should be able to take external USD from his bank to pay the long USD and satisfy the contract.  The latter scenario creates the more unusual consequence that we described with Bob using $4 million from his bank.

One key is that we can really simplify what a USD Smartcoin is when thinking of it this way.  A USD Smartcoin can be defined to be exactly one dollar in value.   This value is based on the price feed that determines how many external dollars each BTS demands.   All that is required is that any monetary debt  created is paid back either with real external dollars or USD Smartcoins in the system. 

Currently I think we were trying to value a moving target with another moving target.  Instead, we can define equivalence of a USD Smartcoin with a dollar and just understand BTS still fluctuates and that as long as any debt is paid back based on the price feed all is good in the world.

Anyways I gotta sleep on this...thx. 
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Offline JonnyB

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Nice musings.

What you are basically saying is allow forced settlements of debts. Right now we only have forced setllement of bitassets.

I think this is because those who want to hold bitusd need to be pretty certain their bitusd won't be turned into bts if the orignal creator wants to settle up.
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Offline monsterer

If the above is true, what about allowing people to extinguish the USD Smartcoin debt by paying in BTS.  The price feed always determines the USD Smartcoin/BTS price every hour.  In this scenario Bob can take $4,000,000 he has in his bank, purchase BTS and extinguish the debt and prevent any global settlement from occurring.

Doesn't this mess with the fungibility of long USD? I had thought the reason you had to settle in USD is because USD needs to be purchased from the spot market to get out of the contract, otherwise if the system borrowed it from BTS, you'd be back to square one?
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Offline merivercap

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Part 1
So every once in a while I revisit the theory of Smartcoins.  At this point the best way for me to describe how Smartcoins are created is explaining the idea of creating monetary assets using debt.  It's actually much like how traditional banks create money, but we can discuss that some other time.

The basic idea is that you can take any asset: home, car, TV and create monetary assets from it.  If a home costs $500,000 you can create a $200,000 loan from it and use it as money.  You can take your car that's worth $5,000 and create a loan on it for $2,000 and use it as money.  You can do the same with a $1,000 TV.  You can create  a $200 loan and use it as money.   Hence you can really monetize any asset that exists in the world if you wanted to.

In the case of Bitshares, the DAC is the asset that you can create monetary assets from.  Feel free to read a white paper we've been working on here: http://bit.ly/1KpkGfe

Part 2
Ok so let's talk about the Bitshares platform right now.  We can click a button and create USD Smartcoins using BTS as collateral.  If we borrow $10,000 that is our debt to the network and we eventually have to pay that back.  The price feed determines about how many BTS that $10,000 is worth every hour or so.  Currently we would have to purchase $10,000 in USD Smartcoins from  the network to extinguish our debt. 

Let's think about this scenario.  Let's say the Bitshares DAC is worth $10,000,000.  Let's say hypothetically one person Bob owned most of the network and wanted to create $4,000,000 in USD Smartcoins and clicks a button to do.   Let's further assume Bob sends  these $4,000,000 USD Smartcoins to wallet B from his wallet A and loses his key to wallet B.  In this scenario Bob can never purchase the USD Smartcoins back to extinguish the debt because there is none available, and if the Bitshares DAC falls to $7 million in value (1.75x USD Smartcoin total debt) it would seem that there would be a black swan/global settlement. 

Part 3
If the above is true, what about allowing people to extinguish the USD Smartcoin debt by paying in BTS.  The price feed always determines the USD Smartcoin/BTS price every hour.  In this scenario Bob can take $4,000,000 he has in his bank, purchase BTS and extinguish the debt and prevent any global settlement from occurring.

This also leads to having USD Smartcoin assets in the ecosystem that are not tied to any debt.  The reason this can occur is because outside capital was put into the ecosystem.  Bob now may have a debt outside the ecosystem of $4,000,000 or he could just be really wealthy.   In any case let's say out of good fortune Bob finds his lost key for wallet B.  He can now pay his outside debt with the USD Smartcoins he recovered.

Part 4
The mechanism above allows us to create monetary assets independent of the supply of USD Smartcoins in the ecosystem.  It may minimize the potential for global black swan settlements.   All that is required is that if someone creates a debt, they pay back the network with the equivalent value based on the price feed.  It can be with internal assets or external assets via BTS.  Thinking about this further, theoretically we don't even need an internal trading market or liquidity.  We can use external pricing as the measure of value.  Of course having good internal markets and using price feeds based on internal markets may prove more reliable in estimating value in the long run.

Anyways.. just some quick late night musings and wanted some feedback to see if this made sense, and if I'm missing something etc... thx. 
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