Author Topic: BitUSD Market Maker - Proposal for Discussion  (Read 21654 times)

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Offline bytemaster

Many people have lost money due to margin calls from the $100M to $40M fall in BTSX value.    Volatility is the risk that shorts must be concerned about. 
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Offline kisa

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FUNNY THOUGHT: Just popped in my head, so silly I never saw this... BTSX will either succeed like crazy or go out in a bang. If it goes out like a bang, no matter how many BTSX I have, I get 0. If it takes off like crazy, I get money proportional to my holdings. In this game, I should leverage EVERYTHING I have as much as possible to get as many BTSX on margin as possible. If it goes up, i make a lot more than if I didn't leverage. If it goes down, I loss the exact same as if I did not leverage. The optimal move is to leverage and max out no matter what the BTSX-USD exchange rate.


who would give you a loan for buying BTSX "on margin"? unless the creditor believes nearly 100% in BTSX, in which case they are better off investing themselves ;) margin trading is usually available as long as margin not exceeded, e.g. for comparatively low volatility assets...

that's exactly my point: very few people will let you buy on margin, that's why bitUSD was trading so low (you had to pay a premium). And people didn't care they were paying a premium since if BTSX collapsed, they would get nothing either way.

agree this strategy would make sense in a binary one-period scenario. however, the reality is probably far from one-period binary. e.g. people pursuing that strategy would risk losing some bitshares, if BTSX went down somewhat to trigger margin calls, and then recovered. hasn't that happened already?

Offline santaclause102

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I didnt really participate in this discussion so it might be redundant.

But what if shorts can be executed at any price but all other trades are fixed to the price feed? Also the short trade redeems his collateral at the ratio of bitusd/btsx he actually shorted at. All other trades would be converting bitusd into btsx (which is how a merchant measures the value of a bitusd), what else?

Would there be an immediate arbitrate possibility? If so what about making it like fututre contracts that need a certain amount of time to be able to be converted back into btsx again? 
« Last Edit: September 04, 2014, 10:01:20 am by delulo »

Offline maqifrnswa

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FUNNY THOUGHT: Just popped in my head, so silly I never saw this... BTSX will either succeed like crazy or go out in a bang. If it goes out like a bang, no matter how many BTSX I have, I get 0. If it takes off like crazy, I get money proportional to my holdings. In this game, I should leverage EVERYTHING I have as much as possible to get as many BTSX on margin as possible. If it goes up, i make a lot more than if I didn't leverage. If it goes down, I loss the exact same as if I did not leverage. The optimal move is to leverage and max out no matter what the BTSX-USD exchange rate.


who would give you a loan for buying BTSX "on margin"? unless the creditor believes nearly 100% in BTSX, in which case they are better off investing themselves ;) margin trading is usually available as long as margin not exceeded, e.g. for comparatively low volatility assets...

that's exactly my point: very few people will let you buy on margin, that's why bitUSD was trading so low (you had to pay a premium). And people didn't care they were paying a premium since if BTSX collapsed, they would get nothing either way.
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Offline kisa

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FUNNY THOUGHT: Just popped in my head, so silly I never saw this... BTSX will either succeed like crazy or go out in a bang. If it goes out like a bang, no matter how many BTSX I have, I get 0. If it takes off like crazy, I get money proportional to my holdings. In this game, I should leverage EVERYTHING I have as much as possible to get as many BTSX on margin as possible. If it goes up, i make a lot more than if I didn't leverage. If it goes down, I loss the exact same as if I did not leverage. The optimal move is to leverage and max out no matter what the BTSX-USD exchange rate.


who would give you a loan for buying BTSX "on margin"? unless the creditor believes nearly 100% in BTSX, in which case they are better off investing themselves ;) margin trading is usually available as long as margin not exceeded, e.g. for comparatively low volatility assets...
« Last Edit: September 02, 2014, 03:41:49 pm by kisa0145 »

Offline maqifrnswa

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thanks tonyk starspirit MeTHoDx. BitSharesX is so different than anything out there, I'm trying to find the "easy" way of explaining some of these fundamentals.

BTSX = represents stake in infrastructure, does not rely on a working peg. The DAC pays dividends based on the usage of the infrastructure.
BitAssets = cryptocurrency representing the value of the representative asset. It depends on an accurate peg to a real world asset in units of BTSX.

Since BitAssets cannot be redeemed for the representative currency, then theoretically BitAsset value must be guaranteed by the system to be the equivalent value of BTSX. So the value of the BitAsset is leveraging the real-world profit that BTSX can generate in order to ensure the value. User must have confidenec in the BTSX-BitAsset system to enforce pegging.

I am very much a free-market person, but I think that in order for the BTSX market/exchange to be a free market, the system MUST have have rules to enforce pegging. For now, the feeds are a direct way by which people who can exchange BitUSD for real currency off chain (via exchanges) will have a value such that 1 BitUSD ~ 1 USD.

If you assume BitUSD is not a speculative currency but instead a 1:1 mapping of the underlying asset value (or at least bterUSD/exchangeUSD) - there should be no such thing as a USD BitUSD market. Once you take that assumption, then BTSX and the need for market pegging becomes a little clearer.

However, when you do not take that assumption that bitUSD:exchangeUSD=1:1, there are legitimate economic reasons why BitUSD might trade higher OR lower than USD (if BitUSD is seen as more/less convenient store of value than in USD due to lack of liquidity or potential for system failure loss). For now the liquidity and market makes BitUSD less convenient, and people want to leverage as much as they can.

FUNNY THOUGHT: Just popped in my head, so silly I never saw this... BTSX will either succeed like crazy or go out in a bang. If it goes out like a bang, no matter how many BTSX I have, I get 0. If it takes off like crazy, I get money proportional to my holdings. In this game, I should leverage EVERYTHING I have as much as possible to get as many BTSX on margin as possible. If it goes up, i make a lot more than if I didn't leverage. If it goes down, I loss the exact same as if I did not leverage. The optimal move is to leverage and max out no matter what the BTSX-USD exchange rate.

For this reason there MUST be a market peg enforced externally for the indefinite future!
« Last Edit: September 02, 2014, 02:52:44 pm by maqifrnswa »
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Offline starspirit

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Kind of. Apart from standard volatility, failure risk needs to be considered. Every BitAsset shares the risk of BTSX failing, but BTSX can still survive if any particular BitAsset fails because of the value in the platform. A BitAsset is more likely to fail because there is no underlying value or redeem-ability that can be called upon should the consensus fail to hold the peg. Therefore any BitAsset will likely bear a discount relative to its peg price to compensate.

If the BitAsset peg provably succeeds in the long run, then failure risk disappears, and holding either BitAsset or BTSX will both have volatility risks commensurate with their respective return potentials.

Offline Method-X

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In their current form, BitAssets do not represent a claim on anything. BTSX represents a claim on the infrastructure that has and is being developed. So BitAssets are inherently more risky than BTSX. BitAssets holders therefore need higher compensation for this risk.

Hmmm do you mean they are riskier in terms of risk / reward? If BTSX goes to zero, both BitAssets and BTSX are worthless while if BTSX quadruples in value, the holders of BitAssets get none of that gain? Thus, the BitAssets are riskier?

Offline starspirit

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In their current form, BitAssets do not represent a claim on anything. BTSX represents a claim on the infrastructure that has and is being developed. So BitAssets are inherently more risky than BTSX. BitAssets holders therefore need higher compensation for this risk.

Offline tonyk

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The problem for me is that even though BTSX is a great investment on a risk/reward basis for BTSX holders it is probably the riskiest place in the world to store any derivative value in the form of BitAssets for the next 3 months.

If we don't recognise that there is a very big risk premium associated with owning BitAssets at this stage and let shorts compensate longs for that risk in some form then there will be very little demand for BitAssets imo.

honest academic question: why are bitassets more risky than BTSX? at first glance they should have identical risk, if one fails they both fail. If they have identical risks, then there is value in bitUSD only if 1 bitUSD today is reasonably worth 1 bitUSD tomorrow.

Great question!

The answer is that if pegged/collectivized asset fail. BTSX is still the leading decentralized exchange where companies, with open eyes for the future, like Overstock, can list their assets.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline Empirical1.1

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The problem for me is that even though BTSX is a great investment on a risk/reward basis for BTSX holders it is probably the riskiest place in the world to store any derivative value in the form of BitAssets for the next 3 months.

If we don't recognise that there is a very big risk premium associated with owning BitAssets at this stage and let shorts compensate longs for that risk in some form then there will be very little demand for BitAssets imo.

honest academic question: why are bitassets more risky than BTSX? at first glance they should have identical risk, if one fails they both fail. If they have identical risks, then there is value in bitUSD only if 1 bitUSD today is reasonably worth 1 bitUSD tomorrow.

Simple example to demonstrate the risk profile -

Lets say there is a 50% chance BTSX succeeds and goes up 400% in 3 months and a 50% chance it fails sometime within 3 months.

If I own 1 BitUSD now, in 3 months I will either have circa $1 worth of value or no value. Ergo $1 worth of BitUSD is only worth $0.50 now using the above extreme example. 

If I own $1 BTSX now, in 3 months I will either have $4 of value or nothing. Ergo $1 worth of BTSX is worth $2 in the above example.

(However you equate the risk profile of BTSX in your own mind, BitAssets take a a lot of risk and none of the reward.)

Edit this is assuming a sudden failure.
« Last Edit: September 01, 2014, 09:47:27 pm by oasis »

Offline maqifrnswa

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The problem for me is that even though BTSX is a great investment on a risk/reward basis for BTSX holders it is probably the riskiest place in the world to store any derivative value in the form of BitAssets for the next 3 months.

If we don't recognise that there is a very big risk premium associated with owning BitAssets at this stage and let shorts compensate longs for that risk in some form then there will be very little demand for BitAssets imo.

honest academic question: why are bitassets more risky than BTSX? at first glance they should have identical risk, if one fails they both fail. If they have identical risks, then there is value in bitUSD only if 1 bitUSD today is reasonably worth 1 bitUSD tomorrow.
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Offline Empirical1.1

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The problem with an options market at this stage is that it is no more likely to correlate to the pegged value than BitUSD for the same reasons - lopsided supply/demand and it requires a developed social consensus. Secondly, an options market will not be divorced from the BitUSD market, as they are linked through arbitrage. A lot of option sellers for example will want to hedge their position by taking the offsetting delta position in the BitUSD market. So the price pressures between the two are inextricably linked. Thirdly the available liquidity will be spread between options and BitUSD, leading to less liquidity in BitUSD. All in all, I don't see how adding options at this stage adds anything but complexity.

The problem for me is that even though BTSX is a great investment on a risk/reward basis for BTSX holders it is probably the riskiest place in the world to store any derivative value in the form of BitAssets for the next 3 months.

If we don't recognise that there is a very big risk premium associated with owning BitAssets at this stage and let shorts compensate longs for that risk in some form then there will be very little demand for BitAssets imo.


Offline starspirit

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The problem with an options market at this stage is that it is no more likely to correlate to the pegged value than BitUSD for the same reasons - lopsided supply/demand and it requires a developed social consensus. Secondly, an options market will not be divorced from the BitUSD market, as they are linked through arbitrage. A lot of option sellers for example will want to hedge their position by taking the offsetting delta position in the BitUSD market. So the price pressures between the two are inextricably linked. Thirdly the available liquidity will be spread between options and BitUSD, leading to less liquidity in BitUSD. All in all, I don't see how adding options at this stage adds anything but complexity.

Offline Empirical1.1

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So what where does this leave us?
New BitUSD should only be created when there is demand for it at prices at or above parity.
All USD should be guaranteed a buyer at 90% parity.  This limits the risk to the downside.

Potential Problem: There will be little demand for BitUSD at prices at or above parity in the short term < 3 months.

1. I feel there is at least a 1/2% utility difference that comes from the cost and effort of converting BitUSD.
2. The wallet just being released has bugs etc. this introduces a risk premium that must be accounted for.
3. The problem BM already identified 'BitUSD vs USD will not track well in an immature market because BitUSD-deniers will not buy BitUSD and neither will believers.'

A market determined mechanism that incentivises BitAsset creation is needed in my opinion.

Potential solution: Bring the options contracts into the BitUSD creation mechanism by having shorts compete at parity (or slightly above*) by the fee they are willing to pay to longs.

Of course the problem is if shorts competed via fees that were paid immediately obviously BitUSD would track at parity less fees.

The Twist- Fees are payable in BTSX and are only redeemable after you have held the BitAsset you bought for at least 3 months
(If you sell your BitUSD before 3 months the fee gets paid to the network or the insurance fund.)

-Because the fee is paid in BTSX, the better BTSX does, the more their fee is worth so now people are incentivised to hold their BitAsset even if they think BTSX will do well. (This is important because even with traders tightening the range the peg will fluctuate considerably based on the short term fortunes of BTSX, this dampens that considerably so adds more stability.) 

-People selling before 3 months will be adding to the security of the network and appeal of BitAssets because their fees will add to the insurance fund.

This system will find a level that encourages BitAsset creation whereas at the moment there will be very little BitAsset demand.
This delayed gratification also discourages selling and so limits supply of BitUSD with no incentive attached.  (Shorts looking to cover will find very little BitUSD for sale driving the price of BitUSD (with no BTSX fee attached) up very close to the peg.)

(* I would actually like shorts to compete at the $1.01 level for BitUSD creation vs. the $1 level so that BitUSD with no incentives is worth $0.99-$1 vs. $0.98-99)

As BitAsset demand increases the fee will eventually become negligible.