Support BitUSD Price by Forced Covering at a Profit

[tonyk]

This idea has been discussed in other threads, but the more I think about it the more critical I think it will be.  To describe what I am talking about lets start out with a simple example.

Alice and Bob decide to take opposite bets and one ends up with BitUSD the other is Short BitUSD. 
Immediately after this trade occurs Alice decides she wants out of her position, but Bob doesn't.
Alice has to shop around looking for someone else to take her BitUSD position... no takers.
Alice drops the price to 95%, 90%, 50% of the dollar .... still no takers. 

The value of the dollar hasn't changed during this time, there is just no BitUSD liquidity.  Bob hasn't actually made any money, he is just refusing to give up his position. 

So we have a situation where people are looking to exit their BitUSD position and they are willing to pay a fee to do so.   If the network knows the price then it is easy to implement this.  We simply change the terms of the short "contract".

Bob agrees that Alice has the option to exit her position at  $.90 per BitUSD at any time.  Bob makes money even though the dollar did not fall against BTSX and Alice is assured some liquidity should she need it.   

If we are going to rely on a price feed we can force covering any time the highest offer to buy BitUSD is less than 90% of the feed price.

Does this punish shorts?  I don't think it does.  I think it supports the peg by adding liquidity without adding any risk to the shorts. 

I think this added liquidity should come form which ever shorts are least collateralized.  This way the shorts which don't want to be forced into providing liquidity pre-maturely can avoid it by having a large surplus of collateral and thus making the entire network more secure. 

Under this system BitUSD is always worth at least $0.90 and the market makers / market will likely drive that to near $0.99- $1.01.

To expand on your simplified negotiation...  In addition to selling Alice the one bitUSD that Bob wanted to short, Bob must also place additional short/sell orders at slightly above the price feed (proposed rule is can't be below feed).  This is to stop Alice from just posting it for sale at a real high price and triggering Bob's margin call.  Alice then posts the dollar for sale just below the price feed.

Now all Alice has to do is wait and Bob will buy it back for $1...  This is because due to price movement one of two things will happen:

1) bitUSD rises and bob gets a margin call giving alice $1 worth of BTSX...
2) BTSX rises to the point that Alice's measly dollar is tying up a huge amount of valuable BTSX that Bob now can't use until he closes the position and he isn't getting enough leverage to be worth not closing.  So he will buy it back for $1.

-notice how the rule "no short selling below feed" immediately makes the market center around feed price.

A86, this does not explain how Alice gets $0.90, 10 seconds after she purchased the dollar.

[puvar]

My first impression is this is totally unnecessary.  Bob knows he has to buy back that dollar sometime, and there will be a lot of Bobs.  Alice knows if bob runs out of collateral he is forced to buy it back at fair price.

It also gives too much power to the price feed.  I wouldn't use the price feed for anything other than eliminating new shorts below the feed price.

I think the idea is that in Alice's mind she would be absolutely secure that she can sell at 90%, at all times. Just like the system bot proposal but without a bot.

That's nice an all for Alice. But Bob is screwed, going short is all about risk reward, and now we're cutting the reward for bob.

I agree. Suppose the market has equal chances to go in both directions (you don't really assume that it will always grow, do you?. Bob bets on BTSX, Alice bets on BitUSD. If BTSX goes down, nobody is forcing Alice to sell her BitUSD, so she gets more profit on average.

Also, don't forget about Bob, he can get into the same situation, suppose he wants to exit his short immediately, but there are no BitUSD sellers (or other shorters).

So it looks like a double punishment for shorters. The imminent consequence of this is fewer people willing to short, and as a result slower growth of BitUSD supply.

[mf-tzo]

It is not good arbitrage to exist for a long time, only in the beginning! This means inefficient and iliquid market, no serious investor will ever invest huge amounts of money and a bank run might happen and make all the bitassets move completely away from the peg and make them worthless

Crypto's can make huge profits but the reason bitcoin will eventually fail as well as all others altcoins is because it is a speculative bubble. BitsharesX should become the decentralized bank that brings stability to the cryptos and the same time one can use bitusd, biteur etc and have the cryptocurencies benefits by holding the stability of the dollar.

[davidpbrown]

Surely bitUSD is a safe haven for any perceived future drop in BTSX. While BTSX rises perhaps it'll be tempting not to buy bitUSD but to short it? So, between those two, you have a draw into bitUSD.

I'm not sure whether you need to control the market as much as sell the idea of it. I wonder there needs to be some ELI5 descriptions for those of us with less experience of financial markets; and those of us who've drunk too much beer :p

If ever there is a prospect of bitUSD being widely available on exchanges and used in the real world, it seems very likely it'll find its market. USD is an imposed consensus; bitUSD is a distributed consensus and as such it's not bitUSD==USD but the peg and the utility and the idea of bitXYZ acknowledging real world assets is a powerful one. Just add time.. not rules.

[liondani]

Please let the market move freely. Let people allow to make money with arbitrage. If there is no money to be made with arbitrage than people will not look at that market.

+5

[tonyk]

What would be great is having an BTSX:bitUSD market at bter.com. This way arbitrage would get a lot easier. One can buy bitUSD in the bitasharesx client and then sell it on bter for more bitshares and repeat this until prices are the same.

I Agree.

[/quote]

The usefulness of that will last exactly 5 second, I will personally will take care of that, and will not be alone...

[Agent86]

This idea has been discussed in other threads, but the more I think about it the more critical I think it will be.  To describe what I am talking about lets start out with a simple example.

Alice and Bob decide to take opposite bets and one ends up with BitUSD the other is Short BitUSD. 
Immediately after this trade occurs Alice decides she wants out of her position, but Bob doesn't.
Alice has to shop around looking for someone else to take her BitUSD position... no takers.
Alice drops the price to 95%, 90%, 50% of the dollar .... still no takers. 

The value of the dollar hasn't changed during this time, there is just no BitUSD liquidity.  Bob hasn't actually made any money, he is just refusing to give up his position. 

So we have a situation where people are looking to exit their BitUSD position and they are willing to pay a fee to do so.   If the network knows the price then it is easy to implement this.  We simply change the terms of the short "contract".

Bob agrees that Alice has the option to exit her position at  $.90 per BitUSD at any time.  Bob makes money even though the dollar did not fall against BTSX and Alice is assured some liquidity should she need it.   

If we are going to rely on a price feed we can force covering any time the highest offer to buy BitUSD is less than 90% of the feed price.

Does this punish shorts?  I don't think it does.  I think it supports the peg by adding liquidity without adding any risk to the shorts. 

I think this added liquidity should come form which ever shorts are least collateralized.  This way the shorts which don't want to be forced into providing liquidity pre-maturely can avoid it by having a large surplus of collateral and thus making the entire network more secure. 

Under this system BitUSD is always worth at least $0.90 and the market makers / market will likely drive that to near $0.99- $1.01.

To expand on your simplified negotiation...  In addition to selling Alice the one bitUSD that Bob wanted to short, Bob must also place additional short/sell orders at slightly above the price feed (proposed rule is can't be below feed).  This is to stop Alice from just posting it for sale at a real high price and triggering Bob's margin call.  Alice then posts the dollar for sale just below the price feed.

Now all Alice has to do is wait and Bob will buy it back for $1...  This is because due to price movement one of two things will happen:

1) bitUSD rises and bob gets a margin call giving alice $1 worth of BTSX...
2) BTSX rises to the point that Alice's measly dollar is tying up a huge amount of valuable BTSX that Bob now can't use until he closes the position and he isn't getting enough leverage to be worth not closing.  So he will buy it back for $1.

-notice how the rule "no short selling below feed" immediately makes the market center around feed price.

[mf-tzo]

What would be great is having an BTSX:bitUSD market at bter.com. This way arbitrage would get a lot easier. One can buy bitUSD in the bitasharesx client and then sell it on bter for more bitshares and repeat this until prices are the same.

I Agree.

The people who buy the bitUSD at bter can sell them for USD.

In theory yes but have you tried that? There is just no liquidity for bitusd currently...

[graffenwalder]

My first impression is this is totally unnecessary.  Bob knows he has to buy back that dollar sometime, and there will be a lot of Bobs.  Alice knows if bob runs out of collateral he is forced to buy it back at fair price.

It also gives too much power to the price feed.  I wouldn't use the price feed for anything other than eliminating new shorts below the feed price.

I think the idea is that in Alice's mind she would be absolutely secure that she can sell at 90%, at all times. Just like the system bot proposal but without a bot.

That's nice an all for Alice. But Bob is screwed, going short is all about risk reward, and now we're cutting the reward for bob.

[tonyk]

My first impression is this is totally unnecessary.  Bob knows he has to buy back that dollar sometime, and there will be a lot of Bobs.  Alice knows if bob runs out of collateral he is forced to buy it back at fair price.

It also gives too much power to the price feed.  I wouldn't use the price feed for anything other than eliminating new shorts below the feed price.

I think the idea is that in Alice's mind she would be absolutely secure that she can sell at 90%, at all times. Just like the system bot proposal but without a bot.

[mf-tzo]

I think that what BM describes is necessary at least in the beginning until we stabilse for a couple of months the peg. Otherwise I believe that people will start panicking whenever there is an exchange hacked, or a huge problem with the client or something really bad happens to bitcoin etc.. and start selling their BITUSDs at huge discounts...

Personally I think that Bitcoin will be soon go down...I don't have much experience as you guys do but I have a bad feeling it is going to $200 for whatever reason... If that happens within the next couple of months it will drive BTSX price down with it... Bitusd holders should have the security that whatever happens to bitcoin or any crypto their bitusd's will always be worth at least 0.9$. Otherwise no one will care to have bitsusd's and will just keep speculating about BTSX price on the external exchanges.

[okidoki]

My first impression is this is totally unnecessary.  Bob knows he has to buy back that dollar sometime, and there will be a lot of Bobs.  Alice knows if bob runs out of collateral he is forced to buy it back at fair price.

It also gives too much power to the price feed.  I wouldn't use the price feed for anything other than eliminating new shorts below the feed price.

Agreed... this is too much power for the price feed. Also one has to take into mind that the price feed will not be updated each second... so if there is a sudden drop n the price of bitsharesx the whole market gets screwed up.

Please let the market move freely. Let people allow to make money with arbitrage. If there is no money to be made with arbitrage than people will not look at that market.

Government solutions and regulation never work. Even if it sounds reasonable at first sight.

What would be great is having an BTSX:bitUSD market at bter.com. This way arbitrage would get a lot easier. One can buy bitUSD in the bitasharesx client and then sell it on bter for more bitshares and repeat this until prices are the same. The people who buy the bitUSD at bter can sell them for USD. Other people could arbitrage selling bitsharesX for USD and buying the bitUSD necessary for buying shares if the bitUSD price for the shares is lower...

[Agent86]

My first impression is this is totally unnecessary.  Bob knows he has to buy back that dollar sometime, and there will be a lot of Bobs.  Alice knows if bob runs out of collateral he is forced to buy it back at fair price.

It also gives too much power to the price feed.  I wouldn't use the price feed for anything other than eliminating new shorts below the feed price.

[vlight]

Seems fair.

But how exactly does "BitUSD is always worth at least $0.90 the value" ? Sounds like price fixing

Edit: nvm 

Edit2: can the market halt at $0.9 ?

[tonyk]

Having in mind that I suggested this action (in the opposite price movement direction), about 5 mo. ago...

What can I say...

'ugly but probably working solution'.

well... as the shorts are force closed in this case, it is even less ugly...