Author Topic: [Committee Member] - johnr's proposal to join the BitShares Committee  (Read 19031 times)

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Offline JohnR

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No, we haven't saw that the premium stimulate people to do more shorting, as high premium is always with BTS price down trend and high risk that play a much important role for a shorter to make decision.

Jerry,

Thank you for your thoughtful comments above.  You've provided clarity into your rationale for the negative feedback price feed idea.  I support your effort for it and am eager to see what the future brings.

Clearly you are right that the premium remains, so the incentive mechanisms are not functioning as we intend.  I think what pc is missing is the interplay between the cost of capital, short squeeze ratio, and the equivalency between the premium and the risk of stakeholding. 

1) Yes it may be the case that a bitUSD trading for 1.02 should incentivize short sellers.  In reality it takes a large amount of capital in BTS to synthesize enough bitUSD to sell down to par (this is expensive and hard to justify from the traders perspective). 
2) Combine this with the additional risk placed by the short squeeze ratio which in effect creates a 'net-negative' force on the supply of bitUSD.  As margin calls accumulate with a squeeze ratio above 1 what you see is more and more bts collateralizing less bitUSD (same for any asset).  This downward spiral in outstanding bitUSD exacerbates the supply side problem.
3) The biggest problem with assuming the premium will incentivize sellers to help market reach equilibrium is that with the structural issues still in place that risk (premium) simply transfers to the new short.  True arbitrage is hard to find - and it's definitely not likely in the most liquid markets on BitShares.

Offline JohnR

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Does the above analysis make sense to you?  We can concentrate our collective efforts on supply side solutions if so.

I would mostly agree with the analysis. To go further regarding the supply side, IMO people are not motivated enough to create (borrow) MPAs because the risk being margin called is quite high in volatile/bear market as of now.
How about adding one more incentive to those who takes the risk? As mentioned above, MPA is a good service/product, it has big demand. And therefore it can generate revenue stream (e.g. market fees). IMO it would be nice if those who take the risk and support (borrow) MPA shall have a cut from the revenue. To avoid passive yield harvesting, the borrower shall release borrowed MPA to the open market:
1. An MPA owner specifies market fee portion he would like to share with borrowers.
2. A user borrows the MPA providing the collateral (this may be BTS or any other MPA or UIA, as specified in the MPA collateral settings).
3. To receive the cut of the MPA market fees, the user has to place market sell order on MPA:Collateral asset (e.g. bitUSD:BTS) market.
4. As the MPA is being bought and sold by other users, market fee goes to the MPA's owner vesting balance, particular part of it (as specified in 1st step) is proportionally sharedropped to all borrowers who has executed step 3.

Yury thank you for the message and thoughtful comment.  There is a an aspect to this that is very appealing as it more appropriately aligns the risk/reward proposition between stakeholders and fee beneficiaries.  Maybe it would be prudent to explore this option first with private smart coins and see the results.  What do you think? The issue of course would be that in the bitasset/smart coin universe, committee bitassets far and away dominate in overall transaction volume.

Offline bitcrab

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with BTS price going down, bitCNY are squeezed out, risk and capital cost of shorts increase. but demand change slowly than that, all these lead to higher premium and vice versa.

that's one problem of smartcoin, when premium go farer from 0 there's nothing to stimulate the premium to go toward 0, and that's why we now try the negative feed back price feeding, hope that can help.

Keep in mind that margin called short positions create automatic demand, and the amount of poorly collateralized bitCNY short positions is the biggest reason for the premium.

The whole theory of bitassets is based upon the premium. If bitXY trades with a premium there is an incentive for shorters to create (and sell) more bitXY, which brings the premium down. If bitXY trades below par there is an incentive for shorters to buy up cheap bitXY and close their positions. In both cases, the market price is driven towards par. Therefore it doesn't make sense to claim that nothing stimulates the premium - the premium exists to stimulate market participants.

No, we haven't saw that the premium stimulate people to do more shorting, as high premium is always with BTS price down trend and high risk that play a much important role for a shorter to make decision.
Email:bitcrab@qq.com

Offline pc

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with BTS price going down, bitCNY are squeezed out, risk and capital cost of shorts increase. but demand change slowly than that, all these lead to higher premium and vice versa.

that's one problem of smartcoin, when premium go farer from 0 there's nothing to stimulate the premium to go toward 0, and that's why we now try the negative feed back price feeding, hope that can help.

Keep in mind that margin called short positions create automatic demand, and the amount of poorly collateralized bitCNY short positions is the biggest reason for the premium.

The whole theory of bitassets is based upon the premium. If bitXY trades with a premium there is an incentive for shorters to create (and sell) more bitXY, which brings the premium down. If bitXY trades below par there is an incentive for shorters to buy up cheap bitXY and close their positions. In both cases, the market price is driven towards par. Therefore it doesn't make sense to claim that nothing stimulates the premium - the premium exists to stimulate market participants.
Bitcoin - Perspektive oder Risiko? ISBN 978-3-8442-6568-2 http://bitcoin.quisquis.de

Offline bitcrab

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smartcoin premium depend highly on BTS price, we always observe that in bear market, with BTS price going down, bitCNY are squeezed out, risk and capital cost of shorts increase. but demand change slowly than that, all these lead to higher premium and vice versa.

that's one problem of smartcoin, when premium go farer from 0 there's nothing to stimulate the premium to go toward 0, and that's why we now try the negative feed back price feeding, hope that can help.
Email:bitcrab@qq.com

Offline yury

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Does the above analysis make sense to you?  We can concentrate our collective efforts on supply side solutions if so.

I would mostly agree with the analysis. To go further regarding the supply side, IMO people are not motivated enough to create (borrow) MPAs because the risk being margin called is quite high in volatile/bear market as of now.
How about adding one more incentive to those who takes the risk? As mentioned above, MPA is a good service/product, it has big demand. And therefore it can generate revenue stream (e.g. market fees). IMO it would be nice if those who take the risk and support (borrow) MPA shall have a cut from the revenue. To avoid passive yield harvesting, the borrower shall release borrowed MPA to the open market:
1. An MPA owner specifies market fee portion he would like to share with borrowers.
2. A user borrows the MPA providing the collateral (this may be BTS or any other MPA or UIA, as specified in the MPA collateral settings).
3. To receive the cut of the MPA market fees, the user has to place market sell order on MPA:Collateral asset (e.g. bitUSD:BTS) market.
4. As the MPA is being bought and sold by other users, market fee goes to the MPA's owner vesting balance, particular part of it (as specified in 1st step) is proportionally sharedropped to all borrowers who has executed step 3.
Yury Cherniawsky
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Offline gghi

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      又见到降低MCR的理论,降低MCR是愚蠢的。相反,我们应该建立个长效机制,不断地上调MCR,以促进系统的稳定运行。人性是贪婪的,必须强制玩家降低抵押率,最好的办法就是不断的抬升MCR。同时,在bitcny需求不变的时候,MCR的上升和喂价是正反馈的关系,MCR的上升要求喂价上升,从而带动BTS市场价不断上涨。

Seeing the theory of reducing MCR, it is foolish to reduce MCR. On the contrary, we should establish a long-term mechanism to continuously increase MCR so as to promote the stable operation of the system. Human nature is greedy. We must force players to reduce mortgage rates. The best way is to keep lifting MCR. At the same time, when the demand for bitcny remains unchanged, the rise of MCR and feeding is a positive feedback relationship. The rise of MCR requires feeding to rise, thus driving the BTS market price to rise continuously.
   

Offline JohnR

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A Microeconomic Introduction to Market-Pegged Assets on BitShares
Active Committee Member: JohnR

For the economic analysis skip to section 2.

1. My Background with BitShares and the explanation for this post.
When I first discovered BitShares and its decentralized exchange I was only moderately interested.  When I discovered that its core asset: BTS functions as collateral for dynamic stable coins I became addicted to learning how it worked.  I am interested in understanding how the operate and their infinite applications.  As a nice bonus I started to realize the cryptoasset itself (BTS) had a strong price sensitivity to the usage of smartcoins.  In simple terms, every dollar demanded in smartcoins puts a lot of demand pressure on BTS itself (this means price will have a tendency to increase).  Not only is this good for holders looking to see appreciation, but I appreciate the mathematical elegance of such a relationship.  When I was a BitShares novice it seemed simple: clearly the demand for USD is huge.  There are billions of them floating around the world.  Also people in the crypto world seemed to be obsessed with stable coins and the front runner at the time: Tether, was facing a lot of scrutiny for being unbacked.  I felt that it was only a matter of time before the market realized this and BTS went to the moon.  The truth, as I am closer to understanding now, is more mixed and definitely more interesting.

1.0.  A special thanks to bitcrab for showing me the scalability risks associated with a loose peg to the USD (exchanges will think critically of bitUSD if it consistently trades above one USD).  And additional thanks to xeroc and clockwork for refining my understanding of smart-coin technical operations.

1.1 Background: bitUSD
One of the most practical use cases for BitShares are market-pegged assets.  Two of the most practical MPAs are bitCNY (Chinese Yuan) and bitUSD (United States Dollar).  These are cryptoassets which attempt to track the real-world value of their nominal counterparts.  The first challenge is quite obvious: the real-world currencies are backed by nothing but the ‘full faith and credit of each sovereign nation (or at least the respective central banks thereof).  The crypto-corollaries are backed by our native asset: BTS.  Currently one bitUSD mandates 1.75 x (n BTS = 1 USD).

Reference image 1: bitUSD https://i.imgur.com/HcyqBKf.png

BitUSD has value because it is collateralized by BTS.  Users can exchange bitUSD for any cryptoasset on the BitShares exchange.  They can post limit orders for whatever exchange rate they choose.  But where bitUSD technically gets its value, the backstop in an illiquid market, is from the settlement feature which allows a holder to exchange bitUSD for 100% of the feed price (after a 24 hour waiting grace period). 

2: Stimulus: bitUSD market price is “inefficient”.

Reference image 2: https://i.imgur.com/CrXsoTR.png . -  Notice something? 

Why does bitUSD trade at a premium for fiat USD?  Anything above or below that one USD mark is technically ‘inefficient’.

2.1 Explanation 1: Risk Premium
So now we know what the holder of bitUSD gets for holding, but what does the other side of the equation get out of this?  The user who created that bitUSD and puts it into the market (the bitUSD ‘short’) has a future liability.  He sacrifices the free use of some BTS for the present right to exchange the bitUSD.  Now the short would of course prefer that bitUSD never gets settled – an unanticipated forced swap may come at an inconvenient time.  Yet this risk is ever-present.  In financial theory, market participants are compensated for taking on risk.  Investors in highly distressed companies negotiate for higher premiums or returns.  In BitShares this demand for premium may take the form of an unwillingness to sell the bitUSD at par value – a reservation price of 1.02 or 1.03 may satisfy the short’s incurred risk for keeping the position.

2.2 Explanation 2: Cost of Capital
There is only one way for bitUSD shorts to minimize the risk of being called on a settlement: maintaining a high collateral ratio.  As the network currently functions, a call for settlement exchanges with the least collateralized position.  It is entirely possible that the least collateralized position may in fact be 2x collateralized.  This leads to the second potential explanation for a higher bitUSD price.  Notice in the first chart that perfect collateralization of BitUSD with BTS is 1:1.  Anything above this amount is categorized as ‘overcollateralization’.  Many critics of conventional private banking focus on the fractional reserve lending system: wherein a single bank will take in one dollar of deposits then proceed to issue ten dollars worth of loans on the same dollar.  BitUSD is the opposite of this: for one dollar worth of ‘deposits’ with the network, the network will issue ~ .5 USD worth of bitUSD (the true number depends on the average collateral ratio for all bitUSD but this simplification is sufficient to prove the point).  While the conventional monetary system is awash with digital dollars, the BitShares network suffers a lack of supply. 

Similar to the risk premium mentioned above, bitUSD shorts may seek to be compensated for the excess capital sitting idly in the position.  That individual could deploy his capital in various activities more productive than earning zero percent return.  If he has to put up so much capital it is rational to expect him to be reluctant to sell for close to par value (1 usd).  Here the motivation is slightly different than the risk premium, but the result is the same: a reluctance to sell one bitUSD for one usd. 


3 Supply/Demand/Equilibrium Models

A note.  Typically the models below are used to analyze discrete shifts in demand or supply.  I will bend the rules here.  I am not examining the impact of a shift in demand/supply for BitShares.  Rather I am seeking to prove that the reason bitUSD has shifted from its equilibrium price of 1 USD is driven by supply side forces rather than demand side forces.

Perfect Harmony a.k.a. Equilibrium.  When the quantity demanded equals the quantity supplied the price and quantity are considered “efficient”.

Reference image 3: https://i.imgur.com/jhKnkoE.png

This is a theoretical situation that serves as a starting point for modeling the outcome we seek to achieve. 

When a good or service is undersupplied on the market, prices will increase and quantities exchanged at the market price will decrease.  The distinctive characteristic of an under-supply is that quantity exchanged is depressed from equilibrium.

When a good or service is overdemanded on the market, prices will increase and quantities exchanged at the market price will increase.  The distinctive characteristic of an over-demand is that a higher quantity are exchanged at the market price than would be exchanged at equilibrium.

Reference image 4: https://i.imgur.com/1kXua58.png

Reference image 5: https://i.imgur.com/GqdrU9l.png

4 Model Conclusion. 

Without perfect information we cannot know precisely what is causing the inefficiency (increase in demand or decrease in optimal supply).  But the key is to notice the difference in quantity; this supports a supply side problem rather than a demand side problem.  If bitUSD were facing a lack of demand we would expect to see a lower price and not a higher price.  More often than not, bitUSD trades above it’s par value.  Further I believe there is a sub-optimal amount of circulating bitUSD (compare Tether to bitUSD/CNY) and the inference is that the network faces a supply-side problem rather than a demand side.

The value in this exercise is to identify the most appropriate method for addressing a problem.  Supply side problems should be solved with supply side solutions.  Demand side problems should be addressed with demand side solutions.  Observing the charts above should give some intuition why mismatching problem and solution type will further exacerbate price/quantity dislocations.

5. Exploring solutions with members

Does the above analysis make sense to you?  We can concentrate our collective efforts on supply side solutions if so.

Offline JohnR

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Thank you for the comment.  I had some recent conversations that enlightened me about the community demand for bitCNY and bitUSD to track their fiat counterparts more closely.  The committee is hard at work considering how to make this a reality.

     


              I hope you can work hard for 1BITCNY=1cny.    and   work hard for  1bitusd=1usd

Offline gghi

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              I hope you can work hard for 1BITCNY=1cny.    and   work hard for  1bitusd=1usd

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Offline Digital Lucifer

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Thank you all for the amazing support.  At the moment I am out of the USA and will be more available after the upcoming week.  I look forward to solidifying relationships with the global BTS community and constantly learning in order to serve all stakeholders effectively.

Kind regards,
JohnR

Welcome and thank you in advance for all future (fresh for now) blood donations you will do for the blockchain.

Good luck! :)
Milos (DL) Preocanin
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RN: 2098555000
Murska Sobota, Slovenia.

Offline JohnR

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Thank you all for the amazing support.  At the moment I am out of the USA and will be more available after the upcoming week.  I look forward to solidifying relationships with the global BTS community and constantly learning in order to serve all stakeholders effectively.

Kind regards,
JohnR

Offline binggo

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Charge the security deposit from the asset.   the security deposit should be 888bts at least, to curb the fraudulent and phishing asset.

when someone create a asset,the man need to pay the security deposit to active the asset every year, the security deposit is circular, when paid the new security deposit, then return the old security deposit.

when the asset didn't renew the security deposit timely,then forbid the trading of this asset;

if the asset didn't renew the security deposit  two years,then the DEX can confiscate the security deposit.

hmmm..you might have something there

just for BITCNY and B1TCNY or BITUSD and B1TUSD,so amazing asset!!!

Offline clockwork

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Charge the security deposit from the asset.   the security deposit should be 888bts at least, to curb the fraudulent and phishing asset.

when someone create a asset,the man need to pay the security deposit to active the asset every year, the security deposit is circular, when paid the new security deposit, then return the old security deposit.

when the asset didn't renew the security deposit timely,then forbid the trading of this asset;

if the asset didn't renew the security deposit  two years,then the DEX can confiscate the security deposit.

hmmm..you might have something there