Author Topic: New to BitsharesX - some questions  (Read 13139 times)

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Offline bytemaster

Everything but the futures contract is fantastic.  It is more of a margin call.
What about "contract for difference"? As understood here:
http://en.wikipedia.org/wiki/Contract_for_difference
I'm not sure if there exists such thing as "margin call contract". Contract for difference looks to me as the best analogy. We could then refer people to the explanation offered by wikipedia.

Btsx held as collateral cannot be used to buy the usd required to cover manually.   Shorts must maintain extra. Btsx so they can still afford to cover.
Ok, let me fully understand it. Let's assume Bob has had enough and wants to close his short position in bitUSD (i.e. cover manually).
What happens to the btsx held as collateral in this case?
It surely doesn't belong to Bob because he never paid for it. I thought it could be used by the system to buy back the bitUSD issued to the world. But you say it's not the case. Please expand on this.

Now that I am at a keyboard I can go into a tad more detail.   When Bob wants to get his collateral back, he must buy USD using OTHER BTSX.  Then once he has USD he can pay off his loan and get 100% of the collateral back.    This was a simplifying implementation because in theory it would be legit to use the collateral.   I like to think of this as a Hard & Soft collateral requirement.   Hard collateral cannot be touched.  Soft collateral is not "required" but is generally wise for a user to keep around.

In the event that price goes against the short, then the Hard collateral is used. 


For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline tonyk

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Pretty good read!
Until you hit  point 4. (although in 3. Alice is not actually short btsx; )

On p.4 on:
-We cannot use futures contracts to try to explain a short position!
-if anything short position is a more basic term than futures contract.

This kind of puts us in an never ending position to try to explain something with something even more complicated. i.e. We get to p.4, now we have to write another article explaining how futures work; having skipped the short position explanation we will inevitably run into something needing explanation with something even more involved.

Plus, there is not much too complicated to Bob's position... he is just short bitUSD.

Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

jakub

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Everything but the futures contract is fantastic.  It is more of a margin call.
What about "contract for difference"? As understood here:
http://en.wikipedia.org/wiki/Contract_for_difference
I'm not sure if there exists such thing as "margin call contract". Contract for difference looks to me as the best analogy. We could then refer people to the explanation offered by wikipedia.

Btsx held as collateral cannot be used to buy the usd required to cover manually.   Shorts must maintain extra. Btsx so they can still afford to cover.
Ok, let me fully understand it. Let's assume Bob has had enough and wants to close his short position in bitUSD (i.e. cover manually).
What happens to the btsx held as collateral the "frozen btsx" in this case? (by "frozen btsx" I mean the btsx that originally belonged to Alice)
It surely doesn't belong to Bob because he never paid for it. I thought it could be used by the system to buy back the bitUSD issued to the world. But you say it's not the case. Please expand on this.
« Last Edit: August 25, 2014, 01:24:37 pm by jakub »

Offline Empirical1

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Can anyone give me more insight into this problem I'm having understanding the peg

https://bitsharestalk.org/index.php?topic=7416.msg99591#msg99591

Problem: Bob is so bullish on BTSX he is willing to pay a premium to short BitUSD. Without interest rates this premium will be reflected in the BitUSD price itself. Given how bullish people are on BTSX atm it could trade very far below the peg

Another alternative is to vastly increase the collateral required as you short further from the peg to discourage this.

Offline vegolino

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I really enjoyed reading this.
Thank you Jakub  +5% +5%

Offline bytemaster

Everything but the futures contract is fantastic.  It is more of a margin call.


Btsx held as collateral cannot be used to buy the usd required to cover manually.   Shorts must maintain extra. Btsx so they can still afford to cover. 
For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline GaltReport

Here is my take on the concept of Bitshares X. I hope it can be useful for those who are still a bit confused. If I got something wrong please let me know so I'll edit and fix it.

First a few definitions to avoid ambiguity:

1. "Bitshares X" is a Decentralized Autonomous Company (DAC). Bitshares X being a DAC is not crucial here so if you are not familiar with the concept of DACs then for now you can think of it as a money payment business similar to PayPal or Visa.

2. "btsx" is a share in the Bitshares X business. You could think of it as a currency unit but for now it is easier to think of it as a share in a business.

3. "bitUSD" is a concept that does not have a direct analogy in the current financial system so it might be a bit difficult to grasp at first. bitUSD is an asset that represents as many btsx as there are needed to be worth one USD. So if the current market price of btsx is 0.028 USD per btsx then one bitUSD represents 35.71 btsx (=1/0.028). If the price moved to 0.050 USD per btsx then one bitUSD would represent 20.00 btsx and so on.


The primary purpose of the Bitshares X system is the ability to generate bitUSD (and other similar assets like bitEUR, bitGold etc). bitUSD is useful because (by definition) it has the same purchasing power as fiat USD and at the same time is as easily transferable as bitcoin.

So how can bitUSD come into existence? In essence by matching into pairs two kinds of people:
- those who prefer stability (i.e. they prefer avoiding losses even if it means the possibility of renouncing gains)
- and those who prefer the risk (i.e. they prefer to have the chance to earn profits even if it means the risk of incurring losses).
As we will see in the next section the side effect of this matching happens to be our primary purpose: the bitUSD.


Imagine two people: Alice and Bob. Each of them owns a balance in btsx (in other words both have a long position in btsx). And for both of them the base currency is USD (which means they have bought their btsx with USD and their main concern is valuation of btsx in terms of USD).

Let's assume that Alice prefers stability and is worried that the value of her btsx [relative to USD] might fall soon and she would like to hedge against it: she wants the value of her btsx [relative to USD] to be maintained in case the market price of btsx falls. In other words she would like to hedge her long position in btsx.

Bob has the opposite view: he is confident that market price of btsx will rise soon and he would like to take advantage of his prediction: he wishes he had more btsx than he already has so that he could profit from the predicted price rise even more. In other words he would like to leverage his long position in btsx.

If btsx was a standard crypto-currency Alice in order to execute her hedge would have to sell all of her btsx and keep her wealth in USD for a while (at least until she decides the danger of btsx falling further in value [relative to USD] is over and it's safe to convert her wealth back into btsx).

Also, if btsx was a standard crypto-currency Bob in order to take advantage of his prediction would have to borrow USD (or in some other way get USD funds) and buy the extra btsx to increase the amount of btsx he already has and then he would have to hold this increased amount of btsx for a while (at least until he decides his prediction of btsx rising further in value [relative to USD] is no longer valid and then to reduce his btsx holding to its original size and sell the extra btsx to pay back his USD debt).

But maybe there is a smarter way to do this. Consider this:
Let's assume Alice finds Bob and says "Hey, Bob, I know you like the risk so here are my btsx, please take care of them. I don't care how many btsx will be left when I come to get them back. All I care is that they maintain their value in the future as it is now."
And Bob says: "That's fine, I'll be glad to do that. So I am taking your btsx and here is a receipt you need to show me in the future to claim your btsx back. I cannot promise how many btsx will be left but I can promise that their dollar value will be as it is today."
Both parties should be happy to make a deal because this way they both get what they initially wanted: Alice is hedged in case the market price goes down and Bob is able to keep the profits from Alice's btsx in case the market price goes up. Obviously the opposite is also true: Alice will have to give up any gains on her btsx in case the market price goes up and Bob will have to cover (using his own btsx) Alice's loss in valuation on btsx in case the market price goes down.
And here comes the final trick: we can see that Alice's part of the deal with Bob has a constant revaluation in terms of USD so we can package it as a separate asset and call it "bitUSD". What's more, we can make it transferable to other people - this is possible as from Bob's perspective it doesn't really matter who the counter-party is, all he really cares for is that his part of the deal is unchanged.

So how can the above relationship be implemented inside Bitshares X? Let's try to translate it into more financial terms:
1. Alice's and Bob's complementary needs are matched together by the system inside Bitshares X. This can be easily done through the standard bid/ask matching.
2. Alice converts her btsx into bitUSD. In other words she goes long bitUSD and short btsx. We can also say she sells her btsx for bitUSD. Now she is free to do with her bitUSD whatever she wants: she can keep it or sell it (for fiat USD or btsx) to anyone who is willing to buy. This way bitUSD is released into the world.
3. The amount of btsx received from Alice gets "frozen" inside the system and now we need Bob to take care of its value. By taking up this role Bob becomes the actual issuer of the bitUSD that Alice has released into the world. We can say he goes short bitUSD and long btsx.
4. To perform his part of the deal, inside the Bitshares X system Bob enters a long position in a futures contract for the amount of the "frozen" btsx (the short position in this contract is taken by the system itself). The futures contract refers to the market price of btsx. Bob will be using his own btsx as a means to cover any losses in case the market price goes against him (i.e. it goes down).
5. Bob just like Alice can easily free himself from the deal but in a slightly different way than Alice. To terminate his part of the deal he needs to buy on the market the same amount of bitUSD that he has issued and once he does that two things happen simultaneously:
- the futures contract is terminated (with Bob forced to accept any losses or profits resulting from the contract)
- Bob's short and long position on bitUSD cancels out and this amount of bitUSD ceases to exist


EDIT: I now think the final section would be more precise with this modification:

5. Bob just like Alice can easily free himself from the deal but in a slightly different way than Alice. To terminate his part of the deal Bob communicates his will to the Bitshares X system and as a result the following things happen simultaneously:
- The futures contract is terminated with Bob forced to accept any losses or profits resulting from the contract.
- The "frozen" btsx is used by the system to buy for Bob on the market the same amount of bitUSD that has been initially issued by him. The important thing is that it does not need to be "the same" bitUSD he has issued: it can be any bitUSD existing in circulation. 
- As a result Bob has now both long and short position in bitUSD. Bob's short and long position in bitUSD cancel out and this amount of bitUSD ceases to exist.
6. In case things go wrong for Bob and he gets close to running out of his own btsx to support the futures contract the system automatically terminates the contract for him as described in 5.

This is great stuff. The setup story is great, easy to read and reflects  real situation. Only suggestion would be to explain the part  of  what you do in bitshares more simply and directly...for example:

"2. Alice converts her btsx into bitUSD. In other words she goes long bitUSD and short btsx. We can also say she sells her btsx for bitUSD..."

Is this the same as saying "Alice uses her BTSX to buy bitUSD"?  If so, it would be  simpler to just say it that way.  Don't need to even mention long/short if it's not needed in order to put do the transaction in BitShares.


Offline xeroc

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Can we add this to the Market_Peg article on the wiki? It would fit perfectly!

Anyway, I am going to ref this thread on the reddit BitShares FAQ

pls for the great explanation

jakub

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jakub  +5%
really nice one. maybe someone of I3 and DACsun will consider and "steal" it and use it. i liked especially

Thanks. I am happy you liked it. The main objective was to make it simple (even at the risk of oversimplifying).
If I got something wrong please let me know so we can avoid spreading misconceptions.

It surely needs to be extended to cover market peg as it's been rightly suggested here:

It still needs an added explanation of the reasoning behind why we expect the price of BitUSD on the decentralized market (in terms of BTSX) to track the price of USD (in terms of BTSX) on outside centralized exchanges. In other words, why will BitUSD be market-pegged to USD.

I am more than willing to offer it to I3 and DACSun if they like it.
« Last Edit: August 25, 2014, 12:07:38 pm by jakub »

Offline Shentist

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jakub  +5%
really nice one. maybe someone of I3 and DACsun will consider and "steal" it and use it. i liked especially

Quote
But maybe there is a smarter way to do this. Consider this:
Let's assume Alice finds Bob and says "Hey, Bob, I know you like the risk so here are my btsx, please take care of them. I don't care how many btsx will be left when I come to get them back. All I care is that they maintain their value in the future as it is now."
And Bob says: "That's fine, I'll be glad to do that. So I am taking your btsx and here is a receipt you need to show me in the future to claim your btsx back. I cannot promise how many btsx will be left but I can promise that their dollar value will be as it is today."
Both parties should be happy to make a deal because this way they both get what they initially wanted: Alice is hedged in case the market price goes down and Bob is able to keep the profits from Alice's btsx in case the market price goes up. Obviously the opposite is also true: Alice will have to give up any gains on her btsx in case the market price goes up and Bob will have to cover (using his own btsx) Alice's loss in valuation on btsx in case the market price goes down.
And here comes the final trick: we can see that Alice's part of the deal with Bob has a constant revaluation in terms of USD so we can package it as a separate asset and call it "bitUSD". What's more, we can make it transferable to other people - this is possible as from Bob's perspective it doesn't really matter who the counter-party is, all he really cares for is that his part of the deal is unchanged.

first or best explanation so for

Offline Pheonike

Nice explanation, easy to follow.

Offline arhag

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Here is my take on the concept of Bitshares X. I hope it can be useful for those who are still a bit confused. If I got something wrong please let me know so I'll edit and fix it.

First a few definitions to avoid ambiguity:

1. "Bitshares X" is a Decentralized Autonomous Company (DAC). Bitshares X being a DAC is not crucial here so if you are not familiar with the concept of DACs then for now you can think of it as a money payment business similar to PayPal or Visa.

2. "btsx" is a share in the Bitshares X business. You could think of it as a currency unit but for now it is easier to think of it as a share in a business.

3. "bitUSD" is a concept that does not have a direct analogy in the current financial system so it might be a bit difficult to grasp at first. bitUSD is an asset that represents as many btsx as there are needed to be worth one USD. So if the current market price of btsx is 0.028 USD per btsx then one bitUSD represents 35.71 btsx (=1/0.028). If the price moved to 0.05 USD per btsx then one bitUSD would represent 20.00 btsx and so on.


The primary purpose of the Bitshares X system is the ability to generate bitUSD (and other similar assets like bitEUR, bitGold etc). bitUSD is useful because (by definition) it has the same purchasing power as fiat USD and at the same time is as easily transferable as bitcoin.

So how can bitUSD come into existence? In essence by matching into pairs two kinds of people:
- those who prefer stability (i.e. they prefer avoiding losses even if it means the possibility of renouncing gains)
- and those who prefer the risk (i.e. they prefer to have the chance to earn profits even if it means the risk of incurring losses).
As we will see in the next section the side effect of this matching happens to be our primary purpose: the bitUSD.


Imagine two people: Alice and Bob. Each of them owns a balance in btsx (in other words both have a long position in btsx). And for both of them the base currency is USD (which means they have bought their btsx with USD and their main concern is valuation of btsx in terms of USD).

Let's assume that Alice prefers stability and is worried that the value of her btsx [relative to USD] might fall soon and she would like to hedge against it: she wants the value of her btsx [relative to USD] to be maintained in case the market price of btsx falls. In other words she would like to hedge her long position in btsx.

Bob has the opposite view: he is confident that market price of btsx will rise soon and he would like to take advantage of his prediction: he wishes he had more btsx than he already has so that he could profit from the predicted price rise even more. In other words he would like to leverage his long position in btsx.

If btsx was a standard crypto-currency Alice in order to execute her hedge would have to sell all of her btsx and keep her wealth in USD for a while (at least until she decides the danger of btsx falling further in value [relative to USD] is over and it's safe to convert her wealth back into btsx).

Also, if btsx was a standard crypto-currency Bob in order to take advantage of his prediction would have to borrow USD (or in some other way get USD funds) and buy the extra btsx to increase the amount of btsx he already has and then he would have to hold this increased amount of btsx for a while (at least until he decides his prediction of btsx rising further in value [relative to USD] is no longer valid and then to reduce his btsx holding to its original size and sell the extra btsx to pay back his USD debt).

But maybe there is a smarter way to do this. Consider this:
Let's assume Alice finds Bob and says "Hey, Bob, I know you like the risk so here are my btsx, please take care of them. I don't care how many btsx will be left when I come to get them back. All I care is that they maintain their value in the future as it is now."
And Bob says: "That's fine, I'll be glad to do that. So I am taking your btsx and here is a receipt you need to show me in the future to claim your btsx back. I cannot promise how many btsx will be left but I can promise that their dollar value will be as it is today."
Both parties should be happy to make a deal because this way they both get what they initially wanted: Alice is hedged in case the market price goes down and Bob is able to keep the profits from Alice's btsx in case the market price goes up. Obviously the opposite is also true: Alice will have to give up any gains on her btsx in case the market price goes up and Bob will have to cover (using his own btsx) Alice's loss in valuation on btsx in case the market price goes down.
And here comes the final trick: we can see that Alice's part of the deal with Bob has a constant revaluation in terms of USD so we can package it as a separate asset and call it "bitUSD". What's more, we can make it transferable to other people - this is possible as from Bob's perspective it doesn't really matter who the counter-party is, all he really cares for is that his part of the deal is unchanged.

So how can the above relationship be implemented inside Bitshares X? Let's try to translate it into more financial terms:
1. Alice's and Bob's complementary needs are matched together by the system inside Bitshares X. This can be easily done through the standard bid/ask matching.
2. Alice converts her btsx into bitUSD. In other words she goes long bitUSD and short btsx. We can also say she sells her btsx for bitUSD. Now she is free to do with her bitUSD whatever she wants: she can keep it or sell it (for fiat USD or btsx) to anyone who is willing to buy. This way bitUSD is released into the world.
3. The amount of btsx received from Alice gets "frozen" inside the system and now we need Bob to take care of its value. By taking up this role Bob becomes the actual issuer of the bitUSD that Alice has released into the world. We can say he goes short bitUSD and long btsx.
4. To perform his part of the deal, inside the Bitshares X system Bob enters a long position in a futures contract for the amount of the "frozen" btsx (the short position in this contract is taken by the system itself). The futures contract refers to the market price of btsx. Bob will be using his own btsx as a means to cover any losses in case the market price goes against him (i.e. it goes down).
5. Bob just like Alice can easily free himself from the deal but in a slightly different way than Alice. To terminate his part of the deal he needs to buy on the market the same amount of bitUSD that he has issued and once he does that two things happen simultaneously:
- the futures contract is terminated (with Bob forced to accept any losses or profits resulting from the contract)
- Bob's short and long position on bitUSD cancels out and this amount of bitUSD ceases to exist.

That was a very well done explanation of some of the market mechanics and motivations of the market participants.

It still needs an added explanation of the reasoning behind why we expect the price of BitUSD on the decentralized market (in terms of BTSX) to track the price of USD (in terms of BTSX) on outside centralized exchanges. In other words, why will BitUSD be market-pegged to USD.

Market participants who believe that BitUSD will be market-pegged to USD will see an arbitrage opportunity when there is a significant difference between the prices of BitUSD on BitShares X and USD on some other centralized exchange. If BitUSD is undervalued relative to USD, then believers will expect the BTSX that USD can purchase to decrease on the centralized exchange and/or the BTSX that BitUSD will purchase will increase on the decentralized exchange. Thus, they can buy BTSX on the centralized exchange using USD, and then sell it on the decentralized exchange for BitUSD. The added bid pressure for BitUSD on the decentralized exchange (as many market participants act to take advantage of this arbitrage opportunity) will cause the price of BitUSD on the decentralized exchange to rise (fulfilling the believers' expectations). On the other hand, if the situation was reversed so that BitUSD is overvalued relative to USD, a similar arbitrage opportunity exists except this time it results in ask pressure (selling BitUSD for BTSX) which reduces the price of BitUSD. This is a negative feedback loop which should stabilize the price of BitUSD around USD (again assuming the market participants believe in the market-peg).

So why would the market participants believe in the market-peg anyway? First, it is important to note that if market participants believe in the market-peg it makes the market-peg actually work (as described above) which gives participants even more confidence to believe in the peg. Second, if the vast majority market participants believe in the market-peg, a lone contrarian who bets against the peg will on average lose money (because they do not have enough money to manipulate the consensus of the market). Thus, contrarians will have no incentive to bet against the peg, which means they will either become believers of the peg or not participate in the market at all. The mechanisms of BitAssets makes it behave like a filter to weed out all the market-peg non-believers. Third, I assumed that the majority of the market participants already believed the peg for the prior to be true. It is important to get initial consensus that a particular BitAsset will track the price of a particular real world asset. For example, why would BitUSD track the value of USD rather than gold or Euros? The answer is that just by the name alone (and short description in the ledger) people will converge to the belief that a BitUSD is meant to track the price of USD and nothing else because it is a Schelling point. There is no other rational choice given that the only information market participants have about BitUSD is the description that says it represents the value of 1 USD and the fact that all the market participants want the market-peg to work since otherwise BitUSD would be worthless.

Finally, it is necessary to discuss what happens in black swan events. This mechanism only works (at least in theory, we will see soon enough whether any of this theory actually works) if the volatility of BTSX isn't too great with respect to the assets tracked by BitAssets issued in the DAC. In a black swan event, the value of BTSX drops very quickly relative to the value of an asset being tracked by one of the DAC's BitAssets. In this case, there is a limit to how much of the value the BitAsset can track. Beyond a certain price, the BitAsset cannot track the real world asset price because it does not have a high enough value in BTSX held as collateral to back that BitAsset. I like to think of it like the DAC automatically forcing BitAsset holders to trade their BitAssets for BTSX at the highest possible price the DAC can support. Just because BitAssets cannot track the drastic price increases of real world assets in these (hopefully) rare events, it doesn't mean there isn't any value in holding the vast majority of BitAssets that will be available on BitShares X. I guess we will have to wait and see how rare these types of black swan events really are, but people should remember that we do have the option of increasing the minimum reserve for shorting if BTSX volatility necessitates it.
 
Edit: Took out comment on Schelling point due to a post by AsymmetricInformation. I need to think about it more before updating. I think it is appropriate to make the disclaimer that I am a complete novice in game theory.
« Last Edit: August 26, 2014, 07:05:42 pm by arhag »

Offline puppies

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Here is my take on the concept of Bitshares X. I hope it can be useful for those who are still a bit confused. If I got something wrong please let me know so I'll edit and fix it.

First a few definitions to avoid ambiguity:

1. "Bitshares X" is a Decentralized Autonomous Company (DAC). Bitshares X being a DAC is not crucial here so if you are not familiar with the concept of DACs then for now you can think of it as a money payment business similar to PayPal or Visa.

2. "btsx" is a share in the Bitshares X business. You could think of it as a currency unit but for now it is easier to think of it as a share in a business.

3. "bitUSD" is a concept that does not have a direct analogy in the current financial system so it might be a bit difficult to grasp at first. bitUSD is an asset that represents as many btsx as there are needed to be worth one USD. So if the current market price of btsx is 0.028 USD per btsx then one bitUSD represents 35.71 btsx (=1/0.028). If the price moved to 0.05 USD per btsx then one bitUSD would represent 20.00 btsx and so on.


The primary purpose of the Bitshares X system is the ability to generate bitUSD (and other similar assets like bitEUR, bitGold etc). bitUSD is useful because (by definition) it has the same purchasing power as fiat USD and at the same time is as easily transferable as bitcoin.

So how can bitUSD come into existence? In essence by matching into pairs two kinds of people:
- those who prefer stability (i.e. they prefer avoiding losses even if it means the possibility of renouncing gains)
- and those who prefer the risk (i.e. they prefer to have the chance to earn profits even if it means the risk of incurring losses).
As we will see in the next section the side effect of this matching happens to be our primary purpose: the bitUSD.


Imagine two people: Alice and Bob. Each of them owns a balance in btsx (in other words both have a long position in btsx). And for both of them the base currency is USD (which means they have bought their btsx with USD and their main concern is valuation of btsx in terms of USD).

Let's assume that Alice prefers stability and is worried that the value of her btsx [relative to USD] might fall soon and she would like to hedge against it: she wants the value of her btsx [relative to USD] to be maintained in case the market price of btsx falls. In other words she would like to hedge her long position in btsx.

Bob has the opposite view: he is confident that market price of btsx will rise soon and he would like to take advantage of his prediction: he wishes he had more btsx than he already has so that he could profit from the predicted price rise even more. In other words he would like to leverage his long position in btsx.

If btsx was a standard crypto-currency Alice in order to execute her hedge would have to sell all of her btsx and keep her wealth in USD for a while (at least until she decides the danger of btsx falling further in value [relative to USD] is over and it's safe to convert her wealth back into btsx).

Also, if btsx was a standard crypto-currency Bob in order to take advantage of his prediction would have to borrow USD (or in some other way get USD funds) and buy the extra btsx to increase the amount of btsx he already has and then he would have to hold this increased amount of btsx for a while (at least until he decides his prediction of btsx rising further in value [relative to USD] is no longer valid and then to reduce his btsx holding to its original size and sell the extra btsx to pay back his USD debt).

But maybe there is a smarter way to do this. Consider this:
Let's assume Alice finds Bob and says "Hey, Bob, I know you like the risk so here are my btsx, please take care of them. I don't care how many btsx will be left when I come to get them back. All I care is that they maintain their value in the future as it is now."
And Bob says: "That's fine, I'll be glad to do that. So I am taking your btsx and here is a receipt you need to show me in the future to claim your btsx back. I cannot promise how many btsx will be left but I can promise that their dollar value will be as it is today."
Both parties should be happy to make a deal because this way they both get what they initially wanted: Alice is hedged in case the market price goes down and Bob is able to keep the profits from Alice's btsx in case the market price goes up. Obviously the opposite is also true: Alice will have to give up any gains on her btsx in case the market price goes up and Bob will have to cover (using his own btsx) Alice's loss in valuation on btsx in case the market price goes down.
And here comes the final trick: we can see that Alice's part of the deal with Bob has a constant revaluation in terms of USD so we can package it as a separate asset and call it "bitUSD". What's more, we can make it transferable to other people - this is possible as from Bob's perspective it doesn't really matter who the counter-party is, all he really cares for is that his part of the deal is unchanged.

So how can the above relationship be implemented inside Bitshares X? Let's try to translate it into more financial terms:
1. Alice's and Bob's complementary needs are matched together by the system inside Bitshares X. This can be easily done through the standard bid/ask matching.
2. Alice converts her btsx into bitUSD. In other words she goes long bitUSD and short btsx. We can also say she sells her btsx for bitUSD. Now she is free to do with her bitUSD whatever she wants: she can keep it or sell it (for fiat USD or btsx) to anyone who is willing to buy. This way bitUSD is released into the world.
3. The amount of btsx received from Alice gets "frozen" inside the system and now we need Bob to take care of its value. By taking up this role Bob becomes the actual issuer of the bitUSD that Alice has released into the world. We can say he goes short bitUSD and long btsx.
4. To perform his part of the deal, inside the Bitshares X system Bob enters a long position in a futures contract for the amount of the "frozen" btsx (the short position in this contract is taken by the system itself). The futures contract refers to the market price of btsx. Bob will be using his own btsx as a means to cover any losses in case the market price goes against him (i.e. it goes down).
5. Bob just like Alice can easily free himself from the deal but in a slightly different way than Alice. To terminate his part of the deal he needs to buy on the market the same amount of bitUSD that he has issued and once he does that two things happen simultaneously:
- the futures contract is terminated (with Bob forced to accept any losses or profits resulting from the contract)
- Bob's short and long position on bitUSD cancels out and this amount of bitUSD ceases to exist.

nice write up
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jakub

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Here is my take on the concept of Bitshares X. I hope it can be useful for those who are still a bit confused. If I got something wrong please let me know so I'll edit and fix it.


First a few definitions to avoid ambiguity:
1. "Bitshares X" is a Decentralized Autonomous Company (DAC). Bitshares X being a DAC is not crucial here so if you are not familiar with the concept of DACs then for now you can think of it as a money payment business similar to PayPal or Visa.
2. "btsx" is a share in the Bitshares X business. You could think of it as a currency unit but for now it is easier to think of it as a share in a business.
3. "bitUSD" is a concept that does not have a direct analogy in the current financial system so it might be a bit difficult to grasp at first. bitUSD is an asset that represents as many btsx as there are needed to be worth one USD. So if the current market price of btsx is 0.028 USD per btsx then one bitUSD represents 35.71 btsx (=1/0.028). If the price moved to 0.050 USD per btsx then one bitUSD would represent 20.00 btsx and so on.


The primary purpose of the Bitshares X system is the ability to generate bitUSD (and other similar assets like bitEUR, bitGold etc). bitUSD is useful because (by definition) it has the same purchasing power as fiat USD and at the same time is as easily transferable as bitcoin.

So how can bitUSD come into existence? In essence by matching into pairs two kinds of people:
- those who prefer stability (i.e. they prefer avoiding losses even if it means the possibility of renouncing gains)
- and those who prefer risk (i.e. they prefer to have the chance to earn profits even if it means the risk of incurring losses).
As we will see in the next section the side effect of this matching happens to be our primary purpose: the bitUSD.


Imagine two people: Alice and Bob. Each of them owns a balance in btsx (in other words both have a long position in btsx). And for both of them the base currency is USD (which means they have bought their btsx with USD and their main concern is valuation of btsx in terms of USD).

Let's assume that Alice prefers stability and is worried that the value of her btsx [relative to USD] might fall soon and she would like to hedge against it: she wants the value of her btsx [relative to USD] to be maintained in case the market price of btsx falls. In other words she would like to hedge her long position in btsx.

Bob has the opposite view: he is confident that market price of btsx will rise soon and he would like to take advantage of his prediction: he wishes he had more btsx than he already has so that he could profit from the predicted price rise even more. In other words he would like to leverage his long position in btsx.

If btsx was a standard crypto-currency Alice in order to execute her hedge would have to sell all of her btsx and keep her wealth in USD for a while (at least until she decides the danger of btsx falling further in value [relative to USD] is over and it's safe to convert her wealth back into btsx).

Also, if btsx was a standard crypto-currency Bob in order to take advantage of his prediction would have to borrow USD (or in some other way get USD funds) and buy the extra btsx to increase the amount of btsx he already has and then he would have to hold this increased amount of btsx for a while (at least until he decides his prediction of btsx rising further in value [relative to USD] is no longer valid and then to reduce his btsx holding to its original size and sell the extra btsx to pay back his USD debt).

But maybe there is a smarter way to do this. Consider this:
Let's assume Alice finds Bob and says "Hey, Bob, I know you like the risk so here are my btsx, please take care of them. I don't care how many btsx will be left when I come to get them back. All I care is that they maintain their value in the future as it is now."
And Bob says: "That's fine, I'll be glad to do that. So I am taking your btsx and here is a receipt you need to show me in the future to claim your btsx back. I cannot promise how many btsx will be left but I can promise that their dollar value will be as it is today."
Both parties should be happy to make a deal because this way they both get what they initially wanted: Alice is hedged in case the market price goes down and Bob is able to keep the profits from Alice's btsx in case the market price goes up. Obviously the opposite is also true: Alice will have to give up any gains on her btsx in case the market price goes up and Bob will have to cover (using his own btsx) Alice's loss in valuation on btsx in case the market price goes down.
And here comes the final trick: we can see that Alice's part of the deal with Bob has a constant revaluation in terms of USD so we can package it as a separate asset and call it "bitUSD". What's more, we can make it transferable to other people - this is possible as from Bob's perspective it doesn't really matter who the counter-party is, all he really cares for is that his part of the deal is unchanged.


So how can the above relationship be implemented inside Bitshares X? Let's try to translate it into more financial terms:

1. Alice's and Bob's complementary needs are matched together by the system inside Bitshares X. This can be easily done through the standard bid/ask matching.
2. Alice converts her btsx into bitUSD. In other words she goes long bitUSD and short btsx. We can also say she sells her btsx for bitUSD. Now she is free to do with her bitUSD whatever she wants: she can keep it or sell it (for fiat USD or btsx) to anyone who is willing to buy. This way bitUSD is released into the world.
3. The amount of btsx received from Alice gets "frozen" inside the system and now we need Bob to take care of its value. By taking up this role Bob becomes the actual issuer of the bitUSD that Alice has released into the world. We can say he goes short bitUSD and long btsx.
4. To perform his part of the deal, inside the Bitshares X system Bob enters a long position in a futures contract for the amount of the "frozen" btsx (the short position in this contract is taken by the system itself). The futures contract refers to the market price of btsx. Bob will be using his own btsx as a means to cover any losses in case the market price goes against him (i.e. it goes down).
5. Bob just like Alice can easily free himself from the deal but in a slightly different way than Alice. To terminate his part of the deal Bob communicates his will to the Bitshares X system and as a result the following things happen simultaneously:
- The futures contract is terminated with Bob forced to accept any losses or profits resulting from the contract.
- The "frozen" btsx is used by the system to buy for Bob on the market the same amount of bitUSD that has been initially issued by him. The important thing is that it does not need to be "the same" bitUSD he has issued: it can be any bitUSD existing in circulation. 
- As a result Bob has now both long and short position in bitUSD. Bob's short and long positions in bitUSD cancel out and this amount of bitUSD ceases to exist.
6. In case things go wrong for Bob and he gets close to running out of his own btsx to support the futures contract the system automatically terminates the contract for him as described in 5.


EDIT: The last section has been modified according to bytemaster's suggestions:

1. Alice's and Bob's complementary needs are matched together by the system inside Bitshares X. This can be easily done through the standard bid/ask matching.
2. Alice converts her btsx into bitUSD, i.e. she sells her btsx for bitUSD. And now she is free to do with her bitUSD whatever she wants: she can keep it or sell it (for fiat USD or btsx) to anyone who is willing to buy. This way bitUSD is released into the world.
3. The amount of btsx received from Alice gets "frozen" inside the system and now we need Bob to take care of its dollar value. By taking up this role Bob becomes the actual issuer of the bitUSD that Alice has released into the world.
4. To perform his part of the deal, inside the Bitshares X system Bob enters a long position in a contract for difference* for the amount of the "frozen" btsx (the short position in this contract is taken by the system itself). The contract refers to the current market price of btsx. To make sure Bob will deliver on the contract he is required to place his own btsx as collateral which will be used by the system to cover the losses in case the market price of btsx goes against him (i.e. when it goes down).
*http://en.wikipedia.org/wiki/Contract_for_difference
5. Bob just like Alice can easily free himself from the deal but in a bit different way than her. To terminate his part of the deal Bob uses his own btsx to buy on the market the same amount of bitUSD that has been initially issued by him. The important thing is that it does not need to be the same bitUSD he has issued: it can be any bitUSD existing in circulation. Once Bob has bought back the bitUSD the system releases the "frozen" btsx and they are passed to him - this should compensate him for the btsx he had to spend to buy back the bitUSD.
6. Now that Bob has equal long and short positions in bitUSD the following things happen simultaneously:
a. The contract for difference is terminated. Whatever is left from the collateral is returned to Bob - this way he is forced to accept any losses or profits resulting from the contract.
b. Bob's long and short positions in bitUSD cancel out so they can be safely removed from the system. And when this happens the amount of bitUSD initially issued by Bob ceases to exist.
7. In case things go wrong for Bob and the collateral gets close to being insufficient the system automatically uses the "frozen" btsx to buy back the bitUSD on Bob's behalf and the system unwinds Bob's position using the sequence of events described in [6].
« Last Edit: August 25, 2014, 10:23:38 pm by jakub »

Offline tonyk

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The short position holders are free (as in allowed), as of now, to use more than 2x collateral.

The more slowly moving average price is giving them more time to do so.

The only real issue I see is the way this 'collateral increase' is designed to work as of now. I do not know if this is the final version but at least in the 'How to trade bitUSD Guide', the explanation was that this is done not directly, but rather by partly covering your short position.
 In flush crash it is not convenient (if at all possible) way to do this, IMHO!
« Last Edit: August 23, 2014, 07:40:36 pm by TheOnion »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.