Author Topic: Critical Review of bitUSD by an academic at LSE  (Read 399 times)

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Offline JohnR

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Critical Review of bitUSD by an academic at LSE
« on: October 13, 2018, 02:27:29 am »
This was written by an academic economist after reviewing bitUSD as a stable coin.  Please join in as I consider how to eviscerate this criticism.  The Dismal Science be damned!

--Begin--

"Not a fan.

> Anyone with BitUSD can settle their position within an hour at the feed price.

I was assuming seconds at most. Is an hour at all competitive with other currencies?  I know that at most times there will be market-makers buying and selling much faster, but in volatile markets the prospect of being locked up for an hour should really scare traders, particularly shorts.

> In practice, the only way new BitUSD enters circulation is if there is someone willing to pay enough of a premium to convince a short to provide guaranteed liquidity at the price feed on demand, while also covering the cost of exchange rate risk.
...

> the only people to whom the premium matters are those who are looking to enter or exit the ecosystem.

This is correct, but the premium does provide a disincentive to adopt.  Historically premium seems to have typically been -2% to +10%, but as the economy grows I think it has to grow to compensate shorts for tieing up their collateral.  At first sight it is quite clever to have this margin set by a competitive market but it also means margin will be set too high for rapid growth, I think. Part of the Saga and Basis stories is raising pump-priming capital to get a nice, stable, solid-looking economy off the ground so trust can start to develop and we need to do the same.

The central problems though are that you can only get 1 BitUSD by paying $1 + margin for it and you are not even guaranteed to get $1 back because the collateral is not held in $.


The way this will all collapse is though a fall in crypto collateral values.  As this starts to happen some shorts will want to cover their BitUSD positions so they can sell the collateral and cut their losses, so BitUSD may even spike up, but the collateral sales will further depress prices.  Soon some short position will fall below $1 collateral triggering forced settlement on all contracts within an hour.  I assume collateral would fall further during that hour because this is how crises always work, so the end settlement price may be quite a lot lower than $1.  In theory this should be good for shorts but in practice they have lost too much on their collateral that they won't really notice, so nobody winds up happy."

Offline pc

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Re: Critical Review of bitUSD by an academic at LSE
« Reply #1 on: October 13, 2018, 08:26:35 am »
> Anyone with BitUSD can settle their position within an hour at the feed price.

I was assuming seconds at most. Is an hour at all competitive with other currencies?  I know that at most times there will be market-makers buying and selling much faster, but in volatile markets the prospect of being locked up for an hour should really scare traders, particularly shorts.

Forced settlement is meant to be the last means to get something out of your long position. Trading should normally happen on the market, not via forced settlement. The delay exists to prevent abuse.

The way this will all collapse is though a fall in crypto collateral values.  As this starts to happen some shorts will want to cover their BitUSD positions so they can sell the collateral and cut their losses, so BitUSD may even spike up, but the collateral sales will further depress prices.  Soon some short position will fall below $1 collateral triggering forced settlement on all contracts within an hour.  I assume collateral would fall further during that hour because this is how crises always work, so the end settlement price may be quite a lot lower than $1.  In theory this should be good for shorts but in practice they have lost too much on their collateral that they won't really notice, so nobody winds up happy."

True, has already happened for some bitassets. Like all other financial systems, our has its limits too.

If this economist has time I'd like to hear his opinion on the discussion in the BSIP-42 thread. :-)
Bitcoin - Perspektive oder Risiko? ISBN 978-3-8442-6568-2 http://bitcoin.quisquis.de

Offline ripplexiaoshan

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Re: Critical Review of bitUSD by an academic at LSE
« Reply #2 on: October 15, 2018, 04:02:11 am »
Very interesting and professional comments. Actually we have already realized the issue of smartcoin, that's why we would like to compensate it by running OMO fund and SRPING FUND, that is to act as some kind of central bank. An absolute free running financial market does not exist.
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Offline sschiessl

Re: Critical Review of bitUSD by an academic at LSE
« Reply #3 on: October 15, 2018, 06:19:36 am »
Is that a public discussion somewhere?

Online Chris4210

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Re: Critical Review of bitUSD by an academic at LSE
« Reply #4 on: October 18, 2018, 09:36:33 pm »
Is that a public discussion somewhere?

There has been an academic paper by blockchain.com . You can find it here https://blog.blockchain.com/2018/09/26/the-state-of-stablecoins/ .
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