Solution to High Volatility potentially breaking the BitUSD Peg

[bytemaster]

Ok so pretend this thread is titled "Solution to High Volatility potentially breaking the BitAPPL Peg". You didn't solve the problem.

The value for APPL will come from the value APPL produces. If BitShare Holders simply see no value in APPL, there can not possibly be a peg.

We of course cannot flood the market with a BitAsset for every company right away, because Bitshare holders simply do not have the collective market capitalization to match real world prices.

I suppose what you can do is create Precious Metal BitAssets, and then tie the BitUSD DIRECTLY to those BitAssets in terms of real world prices.

For instance, an ounce of silver costs 20 dollars. Therefore, you may purchase 1 BitSilverOunce for exactly 20 BitUSD. In addition, BitSilverOunce may not be purchased via any other method, thus tying the value of BitUSD to a virtual precious commodity (which is a lot more to say than for the actual USD).

We need to build this system from the ground up, and not worry so much about what the current "real world" pricing will be for the time being, because if you truly believe in this system, what you are dealing with right here right now WILL BE the 'real world'.

You don't seem to understand the mechanics or economics behind how BitShares X works.  You cannot resort to price fixing and the collective capitalization of BTS holders has nothing to do with begging BitAPPL to APPL.     You just need enough people willing to speculate on BitAPPL but the amount they each speculate is irrelevant.

[zavtra]

Ok so pretend this thread is titled "Solution to High Volatility potentially breaking the BitAPPL Peg". You didn't solve the problem.

The value for APPL will come from the value APPL produces. If BitShare Holders simply see no value in APPL, there can not possibly be a peg.

We of course cannot flood the market with a BitAsset for every company right away, because Bitshare holders simply do not have the collective market capitalization to match real world prices.

I suppose what you can do is create Precious Metal BitAssets, and then tie the BitUSD DIRECTLY to those BitAssets in terms of real world prices.

For instance, an ounce of silver costs 20 dollars. Therefore, you may purchase 1 BitSilverOunce for exactly 20 BitUSD. In addition, BitSilverOunce may not be purchased via any other method, thus tying the value of BitUSD to a virtual precious commodity (which is a lot more to say than for the actual USD).

We need to build this system from the ground up, and not worry so much about what the current "real world" pricing will be for the time being, because if you truly believe in this system, what you are dealing with right here right now WILL BE the 'real world'.

[toast]

The solution is simple, friends!

In reality, fiat currencies will not survive long-term. There is no viable reason to invest in BitUSD, because it is ultimately worthless.

The total number of BitUSD shares should be directly equivalent to the number of USD in circulation (say a few trillion, give or take 10 trillion, plus the total number of mass-produced counterfeits in circulation).

Perfect, now we know that in relation to BTS, USD is actually going to be worth very little. As more nations enter currency crisis, such solutions such as BTS will be seen as viable alternatives, and yet when people finally come into BTS, do you think the first thing they are going to buy will be BitUSD?

NO! That'd be like buying BitZimbabwe or BitGermanMark.

People will more likely be looking to invest directly in real companies such as BitAPPL, as well as DAC's such as Ticketcoin/Biticket.

Think real hard about it. BitUSD in fact should be the last thing we are even concerned about.

Ok so pretend this thread is titled "Solution to High Volatility potentially breaking the BitAPPL Peg". You didn't solve the problem.

[bytemaster]

1 BitUSD will eventually be worth 0 when the dollar dies, but 1 BTS will eventually be worth millions.   Future value and present value are two entirely different things.

[zavtra]

The solution is simple, friends!

In reality, fiat currencies will not survive long-term. There is no viable reason to invest in BitUSD, because it is ultimately worthless.

The total number of BitUSD shares should be directly equivalent to the number of USD in circulation (say a few trillion, give or take 10 trillion, plus the total number of mass-produced counterfeits in circulation).

Perfect, now we know that in relation to BTS, USD is actually going to be worth very little. As more nations enter currency crisis, such solutions such as BTS will be seen as viable alternatives, and yet when people finally come into BTS, do you think the first thing they are going to buy will be BitUSD?

NO! That'd be like buying BitZimbabwe or BitGermanMark.

People will more likely be looking to invest directly in real companies such as BitAPPL, as well as DAC's such as Ticketcoin/Biticket.

Think real hard about it. BitUSD in fact should be the last thing we are even concerned about.

[bytemaster]

The key to a successful crypto network is that as long as the rules of the transaction ledger are followed there is nothing to prosecute and all is fair.  If the rules allow manipulation by anonymous parties at a profit then the rules need to change.   Resorting to criminal prosecution of someone doing something 'by the rules' is a shortcut and we should strive to find a better solution.

I am working on this issue very much right now.  New thread will be dedicated to making the initial chain bullet proof.

[bitbadger]

I solved a major issue in the design of BitShares X as it relates to how we handle the case where the collateral is insufficient to back the short position and thus the result is unbacked BitUSD in circulation.    Considering the value of BitShares X is directly related to the degree to which the holders of BitShares X are willing to guarantee the purchasing power of BitUSD it seems that a decentralized Bank should take the same approach as their centralized counterparts...   Sell new shares in the bank to raise capital to cover the losses.   In effect all BTS holders would provide 'insurance' against the 50% discontinuity event that would blow out a short position and leave unbacked BitUSD.  The reason why BTS longs would insure the BTS shorts is because the entire value proposition of BitShares X is derived from the promise of BitUSD remaining pegged.   If the BTS holders can increase the value of BTS by providing this insurance against a very rare event, it should in turn increase confidence and thus increase the value of BTS.

This change would shift the losses that BitUSD holders would currently pay to the BTS holders and thus collectively BTS holders are backing all BitUSD and BitUSD holders have something with much lower risks in these rare events.

It is curious to see a proclaimed student of Austrian Economics turn to central bank intervention of markets. A liquidity problem seems like the real risk, and that is a market participation problem. Is it still correct that people get to own BitUSD from ownership of PTS (and now also AGS) at time of fork, and purchasing power increases 5% per year even though they never participate in the markets? If that is true then it seems natural that market participation would be a problem. People would hoard the stronger form of a currency (BitUSD) and trade the weaker one (USD). I presume I don't understand your plan because I don't see a market incentive to sell BitUSD as the market discovers it to have greater value than real USD.

Many replies to your post indicate a general understanding that your central bank intended to create new BTS as necessary to fund the taking long positions by the bank. It was interesting to see that some even liked the idea of devaluing BTS (which imbalances all other products) to attempt to balance one product. The way I read your post however is that you intend to create a central bank that people can invest existing BTS into. I much prefer that idea, but wonder how that too would work. Investment in this bank subjects capital to more risk; do you have a reward in mind for this risk, and where does this reward come from? Do you intend for the actions of this bank to be automated and not otherwise subject to moral hazard? How do you imagine events would play out if Gresham's Law causes BitUSD to become systemically more valuable than USD in a way that the bank can not compensate for? Do you imagine a bank for each product, or one bank for a group of products?

You may find this a useful perspective on central banking: http://www.cato.org/multimedia/events/31st-annual-monetary-conference-panel-1-100-years-fed-what-have-we-learned.

I do not think you understand what BitUSD is.  BitUSD is pegged to the dollar.  BitUSD are created by using BTS as collateral.  Going short BitUSD is essentially going long BTS.  Going long BitUSD is essentially going short BTS.  You are betting on how many USD will buy one BTS; or conversely, how many BTS will buy one dollar.  Same thing.  BitUSD should never differ much from the actual price of the actual USD.  If people want "good money" per your Gresham's Law reference, then they will have to go somewhere else, because that's NOT what BitUSD is designed to do.

bytemaster: I have been thinking about things and the need to make this absolutely bulletproof.  If it catches on as we hope it will, it will be subject to attacks.  People will be trying to break it constantly.  Attempts at market manipulation will be a daily occurrence.... and unlike Wall Street, access to the network is unlimited and anonymous.  So we have no recourse, no ability to find people's names and prosecute them if they intentionally foul things up.  Individual nodes will be hacked or DDOS attacked to reduce liquidity.  It does not take much DDOS power to derail a home PC with a consumer level ISP connection.

So... how is the Peer-to-Peer aspect of BTS implemented?  Are IP addresses printed in the transactions?  Is there a TOR-like system of IP obfuscation, or are all IP's in the clear?  What happens to the orders/positions generated by a user/node, if that node is knocked off the network?

[Liberty]

I solved a major issue in the design of BitShares X as it relates to how we handle the case where the collateral is insufficient to back the short position and thus the result is unbacked BitUSD in circulation.    Considering the value of BitShares X is directly related to the degree to which the holders of BitShares X are willing to guarantee the purchasing power of BitUSD it seems that a decentralized Bank should take the same approach as their centralized counterparts...   Sell new shares in the bank to raise capital to cover the losses.   In effect all BTS holders would provide 'insurance' against the 50% discontinuity event that would blow out a short position and leave unbacked BitUSD.  The reason why BTS longs would insure the BTS shorts is because the entire value proposition of BitShares X is derived from the promise of BitUSD remaining pegged.   If the BTS holders can increase the value of BTS by providing this insurance against a very rare event, it should in turn increase confidence and thus increase the value of BTS.

This change would shift the losses that BitUSD holders would currently pay to the BTS holders and thus collectively BTS holders are backing all BitUSD and BitUSD holders have something with much lower risks in these rare events.

It is curious to see a proclaimed student of Austrian Economics turn to central bank intervention of markets. A liquidity problem seems like the real risk, and that is a market participation problem. Is it still correct that people get to own BitUSD from ownership of PTS (and now also AGS) at time of fork, and purchasing power increases 5% per year even though they never participate in the markets? If that is true then it seems natural that market participation would be a problem. People would hoard the stronger form of a currency (BitUSD) and trade the weaker one (USD). I presume I don't understand your plan because I don't see a market incentive to sell BitUSD as the market discovers it to have greater value than real USD.

Many replies to your post indicate a general understanding that your central bank intended to create new BTS as necessary to fund the taking long positions by the bank. It was interesting to see that some even liked the idea of devaluing BTS (which imbalances all other products) to attempt to balance one product. The way I read your post however is that you intend to create a central bank that people can invest existing BTS into. I much prefer that idea, but wonder how that too would work. Investment in this bank subjects capital to more risk; do you have a reward in mind for this risk, and where does this reward come from? Do you intend for the actions of this bank to be automated and not otherwise subject to moral hazard? How do you imagine events would play out if Gresham's Law causes BitUSD to become systemically more valuable than USD in a way that the bank can not compensate for? Do you imagine a bank for each product, or one bank for a group of products?

You may find this a useful perspective on central banking: http://www.cato.org/multimedia/events/31st-annual-monetary-conference-panel-1-100-years-fed-what-have-we-learned.

[bytemaster]

Here is my thinking...

This attack is only made possible by the insurance system proposed in this thread which can create 'unlimited buying power'.   However, like all things there is diminishing marginal utility as buying power goes from 0 to infinity as the risk of such a market move triggering that kind of event goes to 0.   

So if we consider the likelihood of blowing out a 100% margin position to be very low... then if we provide network-wide insurance up of say 200% margin position then the probability of BTS falling from    1:1 to .25:1 is is more than 2x as unlikely as .5:1.   This puts an upper limit on the potential debasement by market manipulation or attempted short squeezes with thin markets.

Through normal operation BitUSD is taken out of circulation by market fees.   This will correct any small unbacked issuance over time.   Likewise, BTS is taken out of circulation from fees and will correct any new issuance required when a short is blown out.   

This is kind of like a limit on the FDIC insurance payout of $100K per account... in this case our limit is 4x the margin.

[jifehuang]

I have concern over short squeeze that it may be exploited by an attacker to manipulate the market. Suppose the attacker is holding plenty of xts and several bitusd. He can create an order asking 1 bitusd for 1M xts. Of course no one buys his bitusd right now.

Then he starts to buy in bitusd with his xts. By rapidly doing it, bitusd rises and margin calls are triggered and short squeeze more margin calls.  Eventually no bitusd is left for sale except for his, and margin calls are forced to buy his bitusd even though the asking price is ridiculously high.

Whether this will be successfully depending on market depth. If there are lots of bitusd listed for sell at one moment, the price for the attack will be high. However one cannot guarantee market depth at all times. It can be low sometimes, or if the attack holds lots of xts, he can still initiate the attack. Once the attack is initiated, most people may be watching instead of getting ready to catch the squeeze. More over, since margin calls are automatic, manual orders may not be added fast enough to catch the squeeze if they are not listed before the attack.

Remember that a few days ago, btc was down to 102 on btc-e? Isn't it an example of short squeeze? On traditional exchanges, most people are not playing margin account or stop buy/sell, so the implementation of short squeeze may not be easy. However on btsx margin accounts are everywhere, and short squeeze should be much easier to happen.

I have 2 ideas to solve this issue. One is to make the margin call an uncancellable limit order instead of market order. This should prevent chain effect from happening.
Second is put an up limit for bitasset every day or every certain number of blocks. This allows plenty of time for people to join to catch the squeeze.

This is called a short squeeze and if it happened there would be many people looking to enter new shorts (fully collateralized shorts) to make a profit and keep the price in line.   The challenge will be if the short squeeze happens all in one block.   I suspect there would be a large number of orders ready to catch any squeeze and put a stop to the rise.

[santaclause102]

...always thought about that: The BitAsset speculator would have to take into account not only the future price developement of his Asset but also the price developement of BTS. That would not be good for someone that is looking for a simple way to hedge something or an expert in Gold/Oil/whateverAssett who is not also an expert on the future developement of BTS price..

not a problem?

Not a problem.   

ok
can you or anyone elaborate on this?
... going short bitusd = going long bts. That's a bet in two ways with two variables that matter to the outcome of the bet... where is the fault in how I think about it?
 

[bitbadger]

The talk of robots has me thinking.  I am sure that many people will write their own robots to essentially act as market makers.  (Surely the robots mentioned previously would not be "official" in any way?  Thus creating a single point of failure...)  These privately-acting robots will always have buy orders of BitUSD at 0.99 and sell orders of BitUSD at 1.01, along with a good stock of BitUSD and BTS to adequately cover these positions.

Now there will be a good number of these critical market-makers.  Maybe even hundreds.... but a few hundreds of IP's, most of them presumably with non-redundant, non-hardened network connections, are not difficult to DDOS attack.  So what happens when critical market participants (who provide liquidity, have tons of orders in the system, and constantly generate new orders based on market conditions) suddenly drop off the network?  Is there a fail-safe somehow?  Because it seems like DDOS'ing the biggest market participants would be the first step in an attack on the market to try to break the buck.  Coupled with the fact that blocks are generated on a predictable schedule, I think there is a vulnerability there.  The blockchain itself would not be affected, but the transactions generated during the attack could unfairly distort the market. 

I suppose that slower block generation would act as somewhat of a fail-safe because of the network hashpower being knocked off, but I don't know enough about the BTS implementation of Proof-of-Stake to know if this will be meaningful or not.  I also know that the network is "Peer-to-peer" like all cryptos, but this term has many meanings.  Could a person theoretically discover every node on the network?  Or is it more like Tor, where the network is multi-layered and obscured?

[bytemaster]

The main difference of the special account and bm's solution is that the BitUSD which is used to cover the uncovered short position is not bought from the market, but took out from the former transaction fees.

Yes, you got me.
when the margin call execute, the current sell orders in the market get an absolutely power to make deal, these order get much benefit, it's unfair to others.
Bought from the market just lead  to unstable state:
the margin call execute -> buy a lot of bitusd from market -> price up -> more margin call  -> buy more -> price up -> more margin call .......
It's unstable feedback.

This is called a short squeeze and if it happened there would be many people looking to enter new shorts (fully collateralized shorts) to make a profit and keep the price in line.   The challenge will be if the short squeeze happens all in one block.   I suspect there would be a large number of orders ready to catch any squeeze and put a stop to the rise.   

[Markus]

The other solution is equivalent to that if the collateral is not enough, some BitUSD will be created directly to make a total cover. There's no more market transactions to do such a cover. That will lead to a less influence on the market.

That won't work. If the collateral is not enough there will be a surplus of BitUSD that has to be removed - not additional BitUSD to be created.

[toast]

The market will already take the locked up fees in the robot account into account as if the total XTS supply was lower. Destroying/creating and locking up / reallocating are the same thing when it comes to shares of a whole. Are you just saying one is less likely to cause problems because of exclusively psychological factors?

No. There's a little difference even considering the equivalence of destroying/creating and locking up/reallocating. Let's just use destroying and creating instead of the other two to make it more clear.

When margin call occurs, all the collateral bts is used to buy enough BitUSD to cover the short position. The current solution is that if the collateral is not enough, some bts will be created to buy BitUSD to make a total cover. 

The other solution is equivalent to that if the collateral is not enough, some BitUSD will be created directly to make a total cover. There's no more market transactions to do such a cover. That will lead to a less influence on the market.

Ah, I see - I assumed it was the second one (alt's suggestion?).