Author Topic: On the impossibility of paying all BitAssets debts on the Bitshares blockchain  (Read 2824 times)

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Offline Sapiens

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Let's suppose that:

1 Bts = 1 USD and that Joe has 1000 Bts.

That means Joe has 1000 USD worth of BTS.

Joe uses his 1000 Bts to borrow 500 BitUSD at a CR = 2 from the Blockchain.

Then Joe uses his 500 BitUSD to buy 500 Bts from Ana. Ana who, being risk averse, stores those 500 BitUSD in a cold wallet.

Now Joe has 1000 Bts frozen as collateral on the blockchain and 500 Bts available in his wallet.

Joe uses his 500 Bts to trade and get some profits from Ken, who holds several cryptocurrencies but no BitUSD.

Suppose also that there are no more players in this little world.

As time passes, bts price decreases to 1 Bts = 0.5 USD, and Joe is margin called.

He wants to pay his debt immediately, he looks desperately for anybody who can sell him some BitUSD but there is none. Because all the created BitUSD is in Ana's cold wallet.

Even if Joe has made profits he will be unable to pay no matter what because no BitUSD is available in the market.

Under the current protocol, Joe portraits the situation of many debtors and Ana that of many BitAsset holders. I only see two possible solutions for this problem.
  • Joe voluntarily closes his position. In that case, the collateral in excess of debt is returned back to Joe. Because there are still 500 BitUSD in the hands of Ana and those 500 BitUSD need to be backed by something, the collateral retained from Joe enters a pool of debt management that needs to be replenished by some fees.
  • If Joe doesn't close his position before his CR falls below a certain threshold, his position (both debt and collateral) is taken over by the pool.  Much like in the traditional markets, long and short positions have closing dates and/or prices.

If, as is happening today, Joe increases his voting power by going into debt and uses that inflated voting power to prevent his position to be taken over, then the whole system is unsustainable. This is because Ana will eventually understand that her 500 BitUSD won't be backed justly and, being risk averse by hypothesis, she will leave the system. Ken, on his part, having only Joe to trade on a system which is controlled by Joe, will also leave, leaving Joe alone.
« Last Edit: October 19, 2019, 01:24:19 pm by Sapiens »

Offline pc

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The problem is solved if Joe is allowed to pay his debt in an asset other than BitUSD.

No it isn't. How should it work?

1. Ana still has 500 bitUSD and relies on the settlement guarantee, i. e. she expects to be paid $500 worth of BTS whenever she wants to cash out.
2. The blockchain has created the bitUSD from thin air. It can only destroy them when they are paid back. If Joe pays his debt in BTC, then the blockchain can't burn the BTC, and even if it did the bitUSD would continue to exist.

I agree with your analysis that with many people sticking to their bitAssets instead of trading them the system can't work if the collateral is in a downtrend. However, BitAssets come with the promise of stable value. With that promise, it is only natural (and perfectly acceptable IMO) that people buy and hold BitAssets when BTS is in a downtrend.

What's missing is an appropriate incentive for BitAsset holders to sell their holdings, thus reducing the debt. The original design of BitAssets came with two such incentives, both of which have been effectively scrapped by now:

1. MSSR - a large MSSR rewards holders for selling into margin calls. Because this mechanism leads to a premium on the market price (and because it is expensive for debt holders), MSSR has been reduced further and further, which has improved the peg but also removed the incentive to sell into margin calls.

2. Global settlement aka Black Swan - global settlement is like a Damocles' sword pending above both BitAsset holders and debt holders. It sets a limit to the promise of stable value, and thus provides another incentive for BitAsset holders to sell their holdings, because if they stick to them for too long they will start losing value. Thanks to Global Settlement Protection, this threat has been muddied and partially removed.
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Offline Thul3

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Let's suppose that:

1 Bts = 1 USD and that Joe has 1000 Bts.

That means Joe has 1000 USD worth of BTS.

Joe uses his 1000 Bts to borrow 500 BitUSD at a CR = 2 from the Blockchain.

Then Joe uses his 500 BitUSD to buy 500 Bts from Ana. Ana who, being risk averse, stores those 500 BitUSD in a cold wallet.

Now Joe has 1000 Bts frozen as collateral on the blockchain and 500 Bts available in his wallet.

Joe uses his 500 Bts to trade and get some profits from Ken, who holds several cryptocurrencies but no BitUSD.

Suppose also that there are no more players in this little world.

As time passes, bts price decreases to 1 Bts = 0.5 USD, and Joe is margin called.

He wants to pay his debt immediately, he looks desperately for anybody who can sell him some BitUSD but there is none. Because all the created BitUSD is in Ana's cold wallet.

Even if Joe has made profits he will be unable to pay no matter what because no BitUSD is available in the market.

Under the current protocol, Joe portraits the situation of many debtors and Ana that of many BitAsset holders. The problem is solved if Joe is allowed to pay his debt in an asset other than BitUSD.

This is the systematical error i'm talking about which will always accure at a point no matter what price BTS has.
If the longterm holders of bitassets get a high % number of that existing bitasset it will always lead that people won't get their margin call eaten and that they can't close their debt anymore because there are not enough bitassets on the market.

The only possibility is to add more collateral which is needed twice the amount of bitassets.
However when seeing how price feeds get manipulated into a big down trend just by throughing a few million BTS on CEX than every debter is going to ask himself if it makes sense to put more collateral into the debt (which btw increases the risk instead of decreasing) when the price feed is being so easy manipulated and gamed.

Quote
1. MSSR - a large MSSR rewards holders for selling into margin calls. Because this mechanism leads to a premium on the market price (and because it is expensive for debt holders), MSSR has been reduced further and further, which has improved the peg but also removed the incentive to sell into margin calls.

Which leeds to a even bigger downtrend of BTS price

Quote
2. Global settlement aka Black Swan - global settlement is like a Damocles' sword pending above both BitAsset holders and debt holders. It sets a limit to the promise of stable value, and thus provides another incentive for BitAsset holders to sell their holdings, because if they stick to them for too long they will start losing value. Thanks to Global Settlement Protection, this threat has been muddied and partially removed.

People didn't sold their bitUSD even when GS accured.
« Last Edit: October 19, 2019, 09:44:47 am by Thul3 »

Offline pc

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I didn't say that MSSR = 10% and GS were *sufficient* incentives. But at least there *were* incentives. Now there are none.
Bitcoin - Perspektive oder Risiko? ISBN 978-3-8442-6568-2 http://bitcoin.quisquis.de

Offline sahkan

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How about if we change the rules? And instead of GS where the blockchain takes over the debt, it simply gets settled to Ana. So Ana gets 1000 BTS and all debts are wiped out.

Online R

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How about if we change the rules? And instead of GS where the blockchain takes over the debt, it simply gets settled to Ana. So Ana gets 1000 BTS and all debts are wiped out.
CEX would then have to replace their held bitassets with BTS in user portfolios, no? Doesn't sound right.

Offline Sapiens

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Hey everyone,

I've modified the original post after noticing that the solution I proposed is no solution at all.

Offline sahkan

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How about if we change the rules? And instead of GS where the blockchain takes over the debt, it simply gets settled to Ana. So Ana gets 1000 BTS and all debts are wiped out.
CEX would then have to replace their held bitassets with BTS in user portfolios, no? Doesn't sound right.

The debt would be replaced by Joe's collateral. So Joe's debt gets settled to Ana, his debt is 0, and Ana has 1000BTS instead of BitUSD. Joe gets to keep 500BTS that he was trading with + the profits he made on trading. That's in that scenario, if CEX is holding bitAssets and they get settled then yes they would have to swap funds for users, but that would be their problem to solve; DEX is build for DEX not for CEX.

Offline abit

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... CEX is holding bitAssets and they get settled then yes they would have to swap funds for users, but that would be their problem to solve; ...
The most possible scene I could imagine is that CEXs would delist bitAssets and/or never list bitAssets. Too troublesome.

DEX is build for DEX not for CEX.
This is correct though.
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Offline Sapiens

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The debt would be replaced by Joe's collateral. So Joe's debt gets settled to Ana, his debt is 0, and Ana has 1000BTS instead of BitUSD. Joe gets to keep 500BTS that he was trading with + the profits he made on trading. That's in that scenario, if CEX is holding bitAssets and they get settled then yes they would have to swap funds for users, but that would be their problem to solve; DEX is build for DEX not for CEX.

Sounds like a plan to me. Simple and slick. Solves a lot of our problems and no pool implementation is needed.

Now, in the real scenario the whole bunch of 500 BitUSD will not be in the hands of Ana but of 100 diferent people, each of them with a certain amount of BitUSD. So, the distribution of the liquitated collateral would have to be in accordance.
« Last Edit: October 20, 2019, 01:10:44 am by Sapiens »

Offline pc

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It's not quite so simple, but possible. See BSIP-17 for some details.
Bitcoin - Perspektive oder Risiko? ISBN 978-3-8442-6568-2 http://bitcoin.quisquis.de

Offline Thul3

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The debt would be replaced by Joe's collateral. So Joe's debt gets settled to Ana, his debt is 0, and Ana has 1000BTS instead of BitUSD. Joe gets to keep 500BTS that he was trading with + the profits he made on trading. That's in that scenario, if CEX is holding bitAssets and they get settled then yes they would have to swap funds for users, but that would be their problem to solve; DEX is build for DEX not for CEX.

1.Delisting of all bitassets outside of DEX
2.Dumping of BTS for other stable coins on CEX
3.Dead market on DEX ,starting from ZERO

Offline Sapiens

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1.Delisting of all bitassets outside of DEX
2.Dumping of BTS for other stable coins on CEX
3.Dead market on DEX ,starting from ZERO

Pure FUD. BitAssets situation cannot possibly worsen. As of today, they are pegged to nothing but debtors whim. Yet, no delisting has happened and none of your 3 points have occurred.

The proposed protocol recovers peg, eliminates GS, avoids hurting all debtors because it can be implemented to liquidate only the very lowest CR position once its CR falls below 1. What else do you want?

Offline Thul3

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1.Delisting of all bitassets outside of DEX
2.Dumping of BTS for other stable coins on CEX
3.Dead market on DEX ,starting from ZERO

Pure FUD. BitAssets situation cannot possibly worsen. As of today, they are pegged to nothing but debtors whim. Yet, no delisting has happened and none of your 3 points have occurred.

The proposed protocol recovers peg, eliminates GS, avoids hurting all debtors because it can be implemented to liquidate only the very lowest CR position once its CR falls below 1. What else do you want?

At least open your eyes to whom i'm replying

Offline abit

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BitAssets situation cannot possibly worsen. As of today, they are pegged to nothing but debtors whim. Yet, no delisting has happened and none of your 3 points have occurred.
They aren't be delisted now simply because the current mechanism IS better.

The proposed protocol recovers peg, eliminates GS, avoids hurting all debtors because it can be implemented to liquidate only the very lowest CR position once its CR falls below 1. What else do you want?
* It does NOT keep/recover peg when BTS price is low enough.
* It's essentially automatic-GS, but not eliminates GS.

Please think carefully, if you're talking about the idea proposed by Sahkan.
One scenario: assuming there are 1 million accounts holding 1 million bitUSD, when there is one debt position with 1K USD to be forcefully liquidated, whose bitUSD will be forcefully converted to BTS? Unless you mean all of them, technically it doesn't scale well (performance-wise) if considered fairness.
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Offline Sapiens

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They aren't be delisted now simply because the current mechanism IS better.

Maybe is better for people who went into debt and are intending to never pay pack and transfer all their loses to others, but not for the ecosystem. Maybe is better for people who is paying their bills with BitCNY to counterparties that are unaware of the peg being lost, but not for Bitshares in long run. 

Quote
* It does NOT keep/recover peg when BTS price is low enough.
* It's essentially automatic-GS, but not eliminates GS.

As far as Bts is used as collateral, no mechanism on this universe will work if Bts price is low enough. And no, this is not GS Because in GS, positions are taken all at once, thence the 'Global' in GS.

This is different, one position is liquidated at a time and its collateral is shared between all BitAsset holders, who will now have a little less of that asset.

Quote
Please think carefully, if you're talking about the idea proposed by Sahkan.
One scenario: assuming there are 1 million accounts holding 1 million bitUSD, when there is one debt position with 1K USD to be forcefully liquidated, whose bitUSD will be forcefully converted to BTS? Unless you mean all of them, technically it doesn't scale well (performance-wise) if considered fairness.

In your example, and assuming Sahkan idea, each of the BitUSD holder will have 0.001 BitUSD converted to BTS, they won't even notice. There would be no GS, No low collateral positions to worry about. It's a pretty neat idea.

Offline binggo

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en...

This problem has been talked about long long time ago in CN forum, nothing is new, and we also have had some ideas to handle these.

If really care something, we should design one or two rotating positions for the backup witness to maintain the activity of backup witness.

The backup witnesses who has a certain weight of votes can product blocks alternate on the rotating position´╝îbut the rotating position only can get half Pay-per-block, alternate time is one day?


« Last Edit: October 21, 2019, 06:49:57 am by binggo »

Offline Thul3

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They aren't be delisted now simply because the current mechanism IS better.

Maybe is better for people who went into debt and are intending to never pay pack and transfer all their loses to others, but not for the ecosystem. Maybe is better for people who is paying their bills with BitCNY to counterparties that are unaware of the peg being lost, but not for Bitshares in long run. 

Quote
* It does NOT keep/recover peg when BTS price is low enough.
* It's essentially automatic-GS, but not eliminates GS.

As far as Bts is used as collateral, no mechanism on this universe will work if Bts price is low enough. And no, this is not GS Because in GS, positions are taken all at once, thence the 'Global' in GS.

This is different, one position is liquidated at a time and its collateral is shared between all BitAsset holders, who will now have a little less of that asset.

Quote
Please think carefully, if you're talking about the idea proposed by Sahkan.
One scenario: assuming there are 1 million accounts holding 1 million bitUSD, when there is one debt position with 1K USD to be forcefully liquidated, whose bitUSD will be forcefully converted to BTS? Unless you mean all of them, technically it doesn't scale well (performance-wise) if considered fairness.

In your example, and assuming Sahkan idea, each of the BitUSD holder will have 0.001 BitUSD converted to BTS, they won't even notice. There would be no GS, No low collateral positions to worry about. It's a pretty neat idea.

You got really a bad understanding when writing something like that

Offline sahkan

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The proposed protocol recovers peg, eliminates GS, avoids hurting all debtors because it can be implemented to liquidate only the very lowest CR position once its CR falls below 1. What else do you want?
* It does NOT keep/recover peg when BTS price is low enough.
* It's essentially automatic-GS, but not eliminates GS.

Please think carefully, if you're talking about the idea proposed by Sahkan.
One scenario: assuming there are 1 million accounts holding 1 million bitUSD, when there is one debt position with 1K USD to be forcefully liquidated, whose bitUSD will be forcefully converted to BTS? Unless you mean all of them, technically it doesn't scale well (performance-wise) if considered fairness.

 I am not saying it is not complex on a larger scale but you have to make choices. You can close positions based on age, size or percentage of holdings. Age is hard to determine and percentage does not scale well. So you can pick size as an example. Based on size you can liquidate from the largest stake or the smallest. If we decided to go with the smallest, we could:
1. potentially avoid force settling CEX because they would arguable hold the largest amounts
2. liquidate small bit asset holdings which might promote larger investments
3. and the most important we would be able to hold the bit asset peg as it was designed to do in the first place, no fake feeds!