Author Topic: Pegged Cryptocurrencies for Remittances  (Read 3776 times)

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Offline George_Bitspark

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Pegged Cryptocurrencies for Remittances
« on: January 29, 2017, 07:45:46 am »
Hi Bitshares,

I am George, the founder and CEO of Bitspark (www.bitspark.io) we have been a pioneer in Bitcoin remittances conducting the first cash in cash out remits back in 2014 and I am interested to understand more about the state of Smartcoins in Bitshares. You may have seen my recent article on Coindesk where I discuss a little bit about pegged crypto's (http://www.coindesk.com/why-theres-still-hope-for-bitcoin-remittance-companies/) at the end I mention Nubits but I am open to whatever solution works. Since then, I have been investigating the potential options out there for a cryptocurrency with a pegged fiat value and thought it would be time to reach out to the Bitshares community to get your thoughts on what works and what doesn't. 

Essentially a cryptocurrency with a pegged value has business use cases in the remittance world, no so much in the consumer space transacting between one another (although obviously that works it just requires alot of pre-requisites) but more in the area of remittance companies managing their balances and FX exposure. I might also add that the opportunity is not in the 8 commonly FX'd currencies but of emerging markets currencies which are difficult to trade into and out of, it's easy to trade into and out of USD/EUR/CNY already. I have a few ideas but I'd like to understand from the community what the drawbacks have been (if any) in adoption of the Smartcoin pegged fiat assets? Is it finding adequate liquidity on exchanges? Lack of shorters to take the other side of the trade? Lack of buying pressure for the smartcoin? Look forward to hearing your thoughts.

Regards

George Harrap
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« Last Edit: January 29, 2017, 08:03:12 am by George_Bitspark »
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Offline ebit

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Re: Pegged Cryptocurrencies for Remittances
« Reply #1 on: January 29, 2017, 09:50:50 am »
I  used bitcny to buy bts ,I don't like settlement,but settlement is the important pegging rule .
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Offline svk

Re: Pegged Cryptocurrencies for Remittances
« Reply #2 on: January 29, 2017, 06:40:26 pm »
Welcome!

I'm surprised you mention Nubits since I thought it died when the peg failed,  is it still operational?

The main problem we've had with smart coins is as you mention liquidity.  It's a chicken and egg problem where we need liquidity to attract traders,  and traders to create liquidity. Last I checked the supply of BitUSD  was only around 100k, and with BTS in a long downtrend it's a hard sell for shorters to take the risk of creating more,  and without liquidity its even riskier since you may not be able to close your positions.

There's some initiatives at the moment to incentivize smart coin creation so maybe that will help,  but it's hard to say for sure.
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Offline Chris4210

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Re: Pegged Cryptocurrencies for Remittances
« Reply #3 on: January 29, 2017, 08:43:53 pm »
Hi George,

interesting article about Bitspark. I added you on Linkedin, lets have a chat to talk about some details regarding Smartcoins. We probably can help you there.

Best regards,

Christoph
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Offline JianJolly

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Re: Pegged Cryptocurrencies for Remittances
« Reply #4 on: January 29, 2017, 08:59:41 pm »
Hi George,

First of all, welcome! I hope you will get some clues from this community for the benefit of your venture. I read your CoinDesk article, and will try to continue your line of thought. To restate it, the issue is enabling cross-border micropayments. In that regard, cryptocurrencies have proven to bring forth one big advantage and an equally important drawback. The advantage is obviously that the transfer of value-bearing assets is made easy. The drawback is that one is limited to a specific asset group in such operations (i.e., cryptocurrencies), which obligates the existence of local cashflow nodes (i.e., fiat-to-crypto exchanges).

Let us restrict ourselves with US dollar remittances, since even that remains unsolved. If Alice, who is in the US, wants to send $200 to Bob, who is in EU, she would exchange her dollars for, say, bitcoins, and send the bitcoins to Bob, who will then exchange the bitcoins for dollars. In this case, the imbalance between US-to-EU transfers and EU-to-US transfers (cf. "P2P netting of payments" in your CoinDesk article) is resolved by way of arbitragers.

As for fiat-pegged crypto-assets, they seem to be an abstraction layer on top of the abovementioned dollar->bitcoin->dollar method. As such, they bring a new set of solutions and problems. The solution is, again, obvious; easy transfer of dollars. However, if Alice is to send a fiat-pegged crypto-asset to Bob, she will still need to convert her dollars to crypto-dollars to begin with. In this case, again, centralized local institutions may help. But this time those institutions need to agree on an interoperability framework which must provide not only the reliable transfer capabilities but also a crypto-dollar the validity of whose pegging is beyond local circumstances. This requirement holds regardless of how the pegging is undertaken.

Now, fundamentals: There is no taking without giving. In order to get a fiat-pegged asset, one needs to put some value somewhere. Let's say Alice buys 200 crypto-USD from the local vendor by depositing $200. As Bob gets the pegged assets, he will need to cash them out for dollars. But the $200 is still in Alice's jurisdiction. Thus, there needs to be a backend where the local vendor converts Alice's deposited money into the underlying cryptocurrency and sends it to Bob's jurisdiction at the same moment when Alice transfers the $200-worth crypto-assets. Not only this, but also the local vendor in Bob's jurisdiction should convert the underlying cryptocurrency into dollars in order to transfer them to Bob's bank account.

This model calls for the entire set of problems associated with liquidity and credit risk management. One might ask at this point why Alice buys the crypto-dollars by depositing dollars. She may as well use a cryptocurrency such as bitcoin to acquire the said asset. However, as has been said, the fiat-pegged cypto-asset already serves as an abstraction layer to this process. So it would be in this case meaningless to send the fiat-pegged crypto-assets instead of the underlying cryptocurrency. To approach the problem from another perspective, Alice needs to deposit dollars at some point in order to get the cryptocurrency in anyways. Hence, if Alice directly uses dollars to buy crypto-dollars, it means this: Alice asks her local vendor to make the conversion on behalf of herself. Well, it sounds like this is a service. As a service, it should cost something. So the question is whether or not it would cost more than SWIFT.

To restate a cardinal point, those considerations do not depend on how the pegging is undertaken. The vendor may faciliate Nubits or Bitshares, and bitcoins or other cryptocurrencies may be utilized as collateral. It does not matter. In the end, Alice will need to get that pegged asset. As far as my research goes, there is no fulfilling solution to this problem which is publicly discussed. Notwithstanding, I believe I have found a solution which does not at all depend on the idea of pegging, but rather on playing with the fundamental logic of "no taking without giving." If somehow Alice could deposit dollars without actually depositing cash, and if this process would yield a kind of blockchain entity, then there might be a novel path upon us. But I will not go into the details of that.

Returning to an earlier issue, if there are local exchanges enabling dollar-to-cryptodollar conversion back and forth, then different exchanges located in different parts of the world should work with one and the same crypto-dollar asset whose value they all agree is pegged to dollar. Begging help from central banks won't work, since using blockchain cannot magically help them solve the issues which prevent them to facilitate real-time cross-border settlements. Utilizing a centrally issued crypto-asset (such as TetherUSD) won't work either, since it involves a considerable default risk. One may think that a licensed multinational money transfer agent (such as PayPal) could issue the needed crypto-asset. However, again, utilizing blockchain could hardly solve the problems that prevent PayPal to allow seamless and cost-efficient cross-border operations.

As for bitUSD or Nubits, as far as the issue of cross-border settlement is considered, they serve as nothing but an abstraction layer on top of sending the underlying cryptocurrency, leaving all the liquidity management problems unsolved. Therefore, a shift of focus is needed. We need to understand that the problem is not in designing a fiat-pegged crypto-asset, but in managing liquidity and other risks. Take BitPay as an example. They do not have a fiat-pegged crypto-asset. They take 1% fee, and they make it possible to pay in fiat with bitcoins. We thus need a similar complementary structure with which one may pay in fiat with fiat - but with the intermediation of a reserve cryptocurrency.

That is all I have to say for now. There are much to discuss about how to structure a solution for the last point I made, but I feel that I have already written too much.

Best,

Jian
« Last Edit: January 29, 2017, 09:04:58 pm by JianJolly »

Offline GChicken

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Re: Pegged Cryptocurrencies for Remittances
« Reply #5 on: January 30, 2017, 12:00:47 am »
and without liquidity its even riskier since you may not be able to close your positions.

i would like to clarify this by saying that position can always be settled 1:1 for the underlying collateral; this is not a market sell operation but a smart contract that will destroy the smartcoin being settled and release the collateral to the settler at the price feed.

Offline George_Bitspark

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Re: Pegged Cryptocurrencies for Remittances
« Reply #6 on: January 30, 2017, 03:09:08 am »
Thanks for the feedback everyone, very interesting. Indeed so it looks like a chicken and egg situation regarding liquidity as it normally is. I have a few more questions:

[member=11456]svk[/member] mentioned around 100k btUSD in total supply, I assume that as bitUSD is bought on exchanges, and liquidity is removed from the orderbook that the price of a bitUSD may rise above 1:1 and therefore provide an incentive for traders to add more liquidity to bitUSD, essentially as it approaches 100k, the supply will increase is the idea? But for bitUSD supply to increase, it also means increased adoption of BTS as collateral so actually it is BTS liquidity and price that is impacted the most in that situation?

[member=43221]JianJolly[/member] indeed the gateways into and out of the crypto world are essential, for remittance companies this is what they do, so the question is more about how those remittance companies manage these cryptotokens and who they offload the token to at the end of the day to settle their balance.



 
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Offline GChicken

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Re: Pegged Cryptocurrencies for Remittances
« Reply #7 on: January 30, 2017, 04:57:30 am »
This is for your initial question:
Lack of sophisticated investors meaning a lack of investors willing to short the assets into existence (partly due to a long term down trend in BTS price).
The reasons above lead to less liquidity on the internal market to support the peg; this is also not helped by lack of understanding regarding the settlement feature  (essentially releasing collateral  and destroying the smartcoin) this feature allows the person settling the asset to take the BTS collateral at 1:1 with the face value of the smartcoin. Given this low liquidity and fundamental misunderstanding of the exit options for a holder of smartcoins the markets have not flourished to their full potential.

 I think there is a business opportunity for a large player to step in and jump start the market. Essentially plan would be as so:
1. accumulating as much BTS as she can at this lower price point
2. funneling the BTS into smartcoin collateral.
3. Market making the DEX Selling the smartcoins on the dex for a 1-2% profit (providing buyers liquidity) and using BTS to support the sell side (providing sellers liquidity).
4. Using smartcoins to support the business case (fx liquidity)
5. Funnel profits to buying more BTS to issue more smartcoins with demand.


Maybe the plan is missing something but the main point is this:
Once a tipping point is reached where the sellers of BTS are out weighed by the buyers and MM the price of BTS will rise. With a rising price of BTS the collateral ratio on the smartcoins the MM holds will increase providing higher level of collateral decreasing the risk of margin call or allowing the MM to issue more smartcoins. 1-2% spread on the Bitshares market will increase confidence in other users which will increase market activity and generate extra profit from people going in and out of smartcoins



[member=11456]svk[/member] mentioned around 100k btUSD in total supply, I assume that as bitUSD is bought on exchanges, and liquidity is removed from the orderbook that the price of a bitUSD may rise above 1:1 and therefore provide an incentive for traders to add more liquidity to bitUSD, essentially as it approaches 100k, the supply will increase is the idea? But for bitUSD supply to increase, it also means increased adoption of BTS as collateral so actually it is BTS liquidity and price that is impacted the most in that situation?


100k is the current supply, supply only increase as investors short the asset into existence; which if their was a % premium over the face value may incentive's them to do so. 

BitUSD and other smartcoins are a completely free market so supply and demand will dictate the price on the open market, although there are some arbitrage opportunities for traders that should keep the price close the price feed:
If the price of BitUSD is below the peg traders have a profit opportunity to buy the cheap smartcoin and 'settle' it via the network for 1:1 with the face value; conversely if it is higher than the price feed traders could short a smartcoin into existence and sell it into the market.
Every smart coin is backed by BTS as collateral so the increased usage/market cap of smartcoins would mean that more BTS is locked on the network backing the smartcoins

Offline George_Bitspark

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Re: Pegged Cryptocurrencies for Remittances
« Reply #8 on: January 30, 2017, 06:14:11 am »
Thanks for the great explainer [member=38721]GChicken[/member], I now have a much better understanding of the process! On another note about smartcoins and user issued assets, it seems that some Smartcoins (bitUSD, bitCNY) have no counterparty risk as the collateral is held as BTS in a smart contract, whereas others like OPEN.BTC do- I need to trust and send Bitcoin to Openledger who I hope will then grant me one OPEN.BTC. Is there BTS collateral held for these assets aswell, pegged to the price feed of BTC or it solely based on the fact that I need to trust the issuer? E.g. if Openledger disappeared oneday could I still liquidate my OPEN.BTC for 100% of its face value in BTS.

On another note, how does the Bitshares client determine what pairs should be displayed, I see I can trade directly some Smartcoin pairs e.g. bitUSD:bitCNY however others not, assume this is based on volume? Thanks!
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Offline yvv

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Re: Pegged Cryptocurrencies for Remittances
« Reply #9 on: January 30, 2017, 06:16:22 am »
Quote
Only a tiny minority of currencies are freely floated and exchangeable outside their country of origin (generally, it's the top eight currency pairs: USD, EUR, AUD, GBP, CAD, JPY, SGD, HKD).

Prices are as good as they get here and spreads are tiny, but these are the currencies of rich countries, not of the recipient nations of remittances globally.

There are of course other currencies that are freely traded. But, if we are to solve the issue of remittances globally, we would need close to 180 currencies to be able to be transacted easily and cost effectively, and this is not currently possible.

Here is misunderstanding of remittance problem. People in "poor" countries happily accept USD or EUR, because there is no problem to exchange them for local currencies on internal market. The problem of remittance is to deliver USD or EUR to recipient's hands.

Offline yvv

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Re: Pegged Cryptocurrencies for Remittances
« Reply #10 on: January 30, 2017, 06:36:57 am »

On another note, how does the Bitshares client determine what pairs should be displayed, I see I can trade directly some Smartcoin pairs e.g. bitUSD:bitCNY however others not, assume this is based on volume? Thanks!

You can choose whatever pair you want in trade tab. The client bookmarked some actively traded pairs for you.

Offline GChicken

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Re: Pegged Cryptocurrencies for Remittances
« Reply #11 on: January 30, 2017, 06:55:43 am »
Thanks for the great explainer [member=38721]GChicken[/member], I now have a much better understanding of the process! On another note about smartcoins and user issued assets, it seems that some Smartcoins (bitUSD, bitCNY) have no counterparty risk as the collateral is held as BTS in a smart contract, whereas others like OPEN.BTC do- I need to trust and send Bitcoin to Openledger who I hope will then grant me one OPEN.BTC. Is there BTS collateral held for these assets aswell, pegged to the price feed of BTC or it solely based on the fact that I need to trust the issuer? E.g. if Openledger disappeared oneday could I still liquidate my OPEN.BTC for 100% of its face value in BTS.

On another note, how does the Bitshares client determine what pairs should be displayed, I see I can trade directly some Smartcoin pairs e.g. bitUSD:bitCNY however others not, assume this is based on volume? Thanks!

Correct; Smartcoins have no counterpart risk as they are backed by BTS held by a smart contract which is ran by the network.

Open.BTC is a UIA (User Issued Asset) and you need to trust the issuer (OpenLedger in this case) to honor that for you to retrieve your BTC back when you go to withdraw; very similar to BitFinex.BTC or PoloniEX.BTC, the BTC you trade on these platform is just known of BTC as they are the sole issuer of the 'token/coupon' that represents BTC on their platform; but again there is the same level of trust.

As for smartcoins we have many (bitBTC, BitEUR, bitCNY , bitSILVER, bitGOLD, BTWTY(top 20 alt coin index)) and could create many more (bitXDR, bitOIL, bitAPPL, bitGOOGLE, bitUSDEUR, bitSPX). Given that smartcoins are issued by people willing to short the asset into existence and then sell them on the market to a counterpart who is willing to take the other side of this trade. All that is required is the asset is launched and a sum of witnesses broadcast regular price feeds to the network that the smart contract will utilized for settlement, issuance/collateral requirements and margin call operations ect. The market starts empty with 0 coins issued until someone puts up collateral and shorts them into existence.

I personally use the light wallet and my experience is that there is a "MY Markets" tab which displays the markets that you have marked as your favorites, based on volume/activity and there is also another tab "Find Markets" which will allow a market for any asset to any other asset; most assets have highest liquidity against BTS or Open.BTC but markets also utilize bitBTC, bitCNY and bitUSD as the trading bots will track 3 way arbitrage opportunities through all these markets.

Offline Brekyrself

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Re: Pegged Cryptocurrencies for Remittances
« Reply #12 on: January 30, 2017, 07:55:55 am »
Thanks for the great explainer [member=38721]GChicken[/member], I now have a much better understanding of the process! On another note about smartcoins and user issued assets, it seems that some Smartcoins (bitUSD, bitCNY) have no counterparty risk as the collateral is held as BTS in a smart contract, whereas others like OPEN.BTC do- I need to trust and send Bitcoin to Openledger who I hope will then grant me one OPEN.BTC. Is there BTS collateral held for these assets aswell, pegged to the price feed of BTC or it solely based on the fact that I need to trust the issuer? E.g. if Openledger disappeared oneday could I still liquidate my OPEN.BTC for 100% of its face value in BTS.

On another note, how does the Bitshares client determine what pairs should be displayed, I see I can trade directly some Smartcoin pairs e.g. bitUSD:bitCNY however others not, assume this is based on volume? Thanks!

Correct; Smartcoins have no counterpart risk as they are backed by BTS held by a smart contract which is ran by the network.

Open.BTC is a UIA (User Issued Asset) and you need to trust the issuer (OpenLedger in this case) to honor that for you to retrieve your BTC back when you go to withdraw; very similar to BitFinex.BTC or PoloniEX.BTC, the BTC you trade on these platform is just known of BTC as they are the sole issuer of the 'token/coupon' that represents BTC on their platform; but again there is the same level of trust.


Even if OpenLedger were to disappear, what stops another gateway from stepping up and accepting Open assets in exchange for their asset?   Trades on Open assets generate a fee given to the issuer, another gateway could simply swap these out.  open.steem vs BitUSD would become blocktrades.steem vs BitUSD for example.

Offline JianJolly

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Re: Pegged Cryptocurrencies for Remittances
« Reply #13 on: January 30, 2017, 08:34:42 am »
Even if OpenLedger were to disappear, what stops another gateway from stepping up and accepting Open assets in exchange for their asset?   Trades on Open assets generate a fee given to the issuer, another gateway could simply swap these out.  open.steem vs BitUSD would become blocktrades.steem vs BitUSD for example.

The issuer holds the reserve backing the asset. If the issuer disappears, it also means that the reserve disappears. Without the reserve, another exchange cannot offer the service you mention.


and without liquidity its even riskier since you may not be able to close your positions.
i would like to clarify this by saying that position can always be settled 1:1 for the underlying collateral; this is not a market sell operation but a smart contract that will destroy the smartcoin being settled and release the collateral to the settler at the price feed.

I think the hypothetical situation he refers involves the inability to get back the bitassets after creating and spending them. So, the question is: What if I buy all those $100k-worth bitUSD, and refuse to give them back? Creators of the bitassets would be willing to give more than 1 USD per 1 bitUSD, because according to their contract, they may get $2-worth of BTS per bitUSD. So this is a lose-lose situtation.
« Last Edit: January 30, 2017, 08:37:36 am by JianJolly »

Offline Brekyrself

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Re: Pegged Cryptocurrencies for Remittances
« Reply #14 on: January 30, 2017, 08:29:53 pm »
Even if OpenLedger were to disappear, what stops another gateway from stepping up and accepting Open assets in exchange for their asset?   Trades on Open assets generate a fee given to the issuer, another gateway could simply swap these out.  open.steem vs BitUSD would become blocktrades.steem vs BitUSD for example.

The issuer holds the reserve backing the asset. If the issuer disappears, it also means that the reserve disappears. Without the reserve, another exchange cannot offer the service you mention.


and without liquidity its even riskier since you may not be able to close your positions.
i would like to clarify this by saying that position can always be settled 1:1 for the underlying collateral; this is not a market sell operation but a smart contract that will destroy the smartcoin being settled and release the collateral to the settler at the price feed.

I think the hypothetical situation he refers involves the inability to get back the bitassets after creating and spending them. So, the question is: What if I buy all those $100k-worth bitUSD, and refuse to give them back? Creators of the bitassets would be willing to give more than 1 USD per 1 bitUSD, because according to their contract, they may get $2-worth of BTS per bitUSD. So this is a lose-lose situtation.

Can the fee pools be publicly funded as a way to jump start dead assets?  This would be a fail safe if the initial issuer disappeared?