Author Topic: BM Black Swan insurance fund proposal  (Read 6018 times)

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Offline xeroc

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This makes the market a little more complicated for outsiders but if it helps to get a stable peg we should give it a try.

further, BM thinks that unbacked usds will be very unlikely.

Offline tonyk

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I do not see the need for bitUSD_2

I don't pretend to understand everything here properly. But it seems that if there was a successful attack on BitUSD1 that drained the reserve fund and created a large amount of unbacked currency that BitUSD1 may go quite far away from a peg that resembles the value of a USD.

If you identified and corrected the cause of the attack you could start BitUSD2, which would start from scratch and be fully backed and therefore trade closer to a USD peg.

-It should be highly unlikely to have not fully backed bitUSD; 
-The unbaked/not fully backed bitUSD is not the end of the world;
-The proposed system provides a way to 'eat them up'/remove them over time.

On a different issue:
'fully backed and therefore trade closer to a USD peg.
'
'fully backed' is not the reason the peg holds...fully backed means backed by 2x BTSX.
 being backed by even 1 BTSX  for 1 Unit of value in bitUSD should be more than enough. (and this only happens in fast and huge drop in BTSX).

On a third issue (Probably the most important):
BM have consistently referred to such bitUSD as unbacked - in reality the bitUSD in existence are not individually backed. So if you have 99 USD backed 100% and you add 1 backed 0 % you actually have 100 bitUSD backed 99%. You do not have some backed and some not. The reason for that is that from holders perspective you do not hold backed or unbacked bitUSD, you just hold one that have the same qualities as the rest of them.




« Last Edit: August 17, 2014, 02:39:27 am by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

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Offline Empirical1

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I do not see the need for bitUSD_2

I don't pretend to understand everything here properly. But it seems that if there was a successful attack on BitUSD1 that drained the reserve fund and created a large amount of unbacked currency that BitUSD1 may go quite far away from a peg that resembles the value of a USD.

If you identified and corrected the cause of the attack you could start BitUSD2, which would start from scratch and be fully backed and therefore trade closer to a USD peg.

Offline tonyk

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I do not see the need for bitUSD_2
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline Empirical1

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Questions

1)  Each BitAsset will build & have  it's own Black Swan fund right?

2)  If there is an attack, that creates a lot of unbacked BitUSD but the cause of the attack is corrected.

I assume we could start a BitUSD2 on the same blockchain which starts from scratch with the fix implemented that can exist alongside BitUSD1?

3) Because not that it would be pretty, but this is such a new experimental area that I think the Blockchain could survive a BitUSD 'fault' in the first month. Especially now BTSX isn't bailing out the BitUSD.

What about calling it 'BitUSD Experiment' or something and if it holds up well for a month, then change the name, kind of what BitShares was planning to do with X?
« Last Edit: August 17, 2014, 01:36:51 am by Empirical1 »

Offline Empirical1

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I noticed BM proposed these changes in the dry run 15 thread which I quite like. What do you guys think?

https://bitsharestalk.org/index.php?topic=6949.msg93214#msg93214

Sending the market fees (USD) to an insurance fund rather than converting them to XTS and burning them as dividends or paying the funds to delegates would provide a more controlled way of insuring against price volatility.

Over time the network would end up accumulating a large balance of USD that it could hold in reserve.  If something happened then this reserve could be drained or even "go negative" for a while.   So if you assume a reasonable spread on market orders (buy/sell overlap) then it is very likely the market will have a large and growing balance of USD.

When a short is unable to cover, the network can just give up some of its own USD instead. 

So in a major price correction you just have to ask yourself what percent of the USD will be "uncovered", how long will it take the network to accumulate that percent, and how likely is it to occur.   

The event is most likely to occur as a result of an "attack" where someone tries to manipulate the price.  Increasing the reward for the attack by printing XTS makes the attack more likely.  If you can trigger a margin call and insure that your bid is very low then the potential printing is unbounded.

I think having BitUSD "unbacked" after such an event may be better at discouraging the attack.  The attackers prize would thus be limited to collecting the margin rather than printing unlimited XTS.   The market peg might still hold even with surplus USD floating around until enough fees are collected to take it out of circulation.

So... I am going to propose the following changes:
1) USD fees are never converted to XTS to be burned, they are kept as insurance on black swans
2) If the "current price" is greater than max bid, then we average in max bid.  If the current price is less than min ask, then we average in min ask.  This has the effect of using the median because you are essentially truncating outliers and limiting the effect a single block can have on the average price. 

Someone pointed out that FDIC insurance (printing XTS) may be ok for some bit assets (USD) it would be a major problem for other bit assets (Bit PPC) in the event the BitAsset lost the interest of the market participants.   This would result in a major problem where one "stale" bit asset that was still insured would be very insecure.
« Last Edit: August 17, 2014, 01:35:26 am by Empirical1 »