Interest on BitUSD - A Proposal for Review

[santaclause102]

Eventually, sometime in the future, when BitShares X is saturated (meaning there aren't any new people with wealth left to convince to adopt this system), BTSX growth should settle down and thus BitAsset interest rates will be forced to go down. I think some non-zero interest rate should still be possible then because the DAC is still able to earn revenue from transaction fees and market fees from operating the decentralized exchange.

first, arhag - thanks for your elaborate answer! this makes sense as long as BTSX can grow at decent rates.

"at saturation", the question becomes how much annual profit can BitsharesX potentially generate without getting involved into credit business. E.g. if annual profits can be at USD 2bn from operating a worldwide decentralised exchange, then perhaps market cap of USD 20bn sounds reasonable, with some non-negative interest still being paid on bitAssets. What I am pointing out, is that it would be difficult even in theory to get an order of magnitude bigger than that, unless BitsharesX gets somehow involved into extending credit - perhaps a decentralised lending union DAC... banking business has been primarily about credit throughout the civilised history, so it might be worth a thought. perhaps too early though, or BM already has answers

I guess that at different growth phases the distribution of trading fees to bitasset and btsx holders has to be newly established. Which brings up the question whether this can be somewhat decided by the market? Has this been thought about?

[kisa]

Eventually, sometime in the future, when BitShares X is saturated (meaning there aren't any new people with wealth left to convince to adopt this system), BTSX growth should settle down and thus BitAsset interest rates will be forced to go down. I think some non-zero interest rate should still be possible then because the DAC is still able to earn revenue from transaction fees and market fees from operating the decentralized exchange.

first, arhag - thanks for your elaborate answer! this makes sense as long as BTSX can grow at decent rates.

"at saturation", the question becomes how much annual profit can BitsharesX potentially generate without getting involved into credit business. E.g. if annual profits can be at USD 2bn from operating a worldwide decentralised exchange, then perhaps market cap of USD 20bn sounds reasonable, with some non-negative interest still being paid on bitAssets. What I am pointing out, is that it would be difficult even in theory to get an order of magnitude bigger than that, unless BitsharesX gets somehow involved into extending credit - perhaps a decentralised lending union DAC... banking business has been primarily about credit throughout the civilised history, so it might be worth a thought. perhaps too early though, or BM already has answers

[arhag]

Now when everyone gets excited about bitAssets paying interest, I would like to point out to macro-economical perspective---

Why is that bank deposit used to pay nominal interest throughout the most of the recent history?
- well, this is primarily because banks were lending money, received from savers, to businesses, property buyers etc. at somewhat higher interest rates than they paid out to the savers on deposits.

And why were most businesses and property buyers were able to pay those higher interest rates?
- well, that's primarily because there was some positive real growth in the economy, meaning nominal growth rates exceeded inflation rate, and corporate profits and household income growth exceeded the higher interest rate which was due to the banking sector. E.g. fiat USD from savings were put into productive use by extending credit for investment within the economy.

So, here my questions:
- how would credit business work with regards to BitsharesX?
- how can bitUSD be lent out to businesses or property buyers?
- how would credit risk in such system be managed?

I will try to formulate more thoughts on the topic in the near future.

I am not sure if I am understanding your question properly, but let me attempt to answer anyway. First of all, BitShares X does not have any lending functionality as it is typically understood (meaning requiring trust in how the lent money will be used to eventually pay back the debt). I hope a future DAC will enable that functionality (I have some thoughts on that subject here).

It is true in a sense, however, that just like a bank, BitShares X is taking deposits (BTSX bids) and is making use of them to hopefully earn profits (in this case from shorting BitAssets, and the profits mostly go to the people doing the shorting not the DAC itself), and perhaps with this new interest proposal will now be sharing some of those profits with the depositors (BitAsset holders) by giving them "interest".

I do like how you are focusing on where the actual growth is coming from. So where is the growth coming from in the case of BitShares X that allows for such high (expected) interest rates? The answer is that it comes from the expected increase in value of BTSX. As more people adopt the system, meaning transfer their wealth outside the blockchain into BitAssets, this should drive the market cap of BTSX up. Shorts and BTSX holders get to benefit from that price increase. Since shorts can get higher returns than just holding BTSX, there is an incentive to short if you are a BTSX bull rather than just holding. But there is competition for shorting (there is after all limited BitAsset demand). So shorts are forced to share some of their expected profits with the BitAsset holders to incentivize them to allow the shorts to happen in the first place, just like banks need to incentivize depositors with interest to allow the deposits to happen in the first place. As long as on average BTSX value keeps growing at high rates, a high interest rate on BitAssets can also be sustained. Eventually, sometime in the future, when BitShares X is saturated (meaning there aren't any new people with wealth left to convince to adopt this system), BTSX growth should settle down and thus BitAsset interest rates will be forced to go down. I think some non-zero interest rate should still be possible then because the DAC is still able to earn revenue from transaction fees and market fees from operating the decentralized exchange.

[santaclause102]

What is the status on how to decide which short will be executed when there is a short demand overhang (since we have the price feed which limits lowering prices for shorting bitUSD)? Or is that still completely open?

[kisa]

Don't be too sure... the Fed has pretty much quintupled (5x) the US monetary base since 2008. What happens when velocity picks up?

 I think history repeats itself all the time and we never learn..

 'History never repeats itself but it rhymes'
- Mark Twain

Now when everyone gets excited about bitAssets paying interest, I would like to point out to macro-economical perspective---

Why is that bank deposit used to pay positive nominal (and sometimes even positive real) interest throughout the most of the recent history?
- well, this is primarily because banks were lending money, received from savers, to businesses, property buyers etc. at somewhat higher interest rates than they paid out to the savers on deposits.

And why were most businesses and property buyers were able to pay those higher interest rates on their borrowings?
- well, that's primarily because there was some positive real growth in the economy, meaning nominal growth rates exceeded inflation rate, and corporate profits and household income growth exceeded the higher interest rate which was due to the banking sector. E.g. fiat USD from savings were put into productive use by extending credit for investment within the economy.

So, here my questions:
- how would credit business work with regards to BitsharesX?
- how can bitUSD be lent out to businesses or property buyers?
- how would credit risk in such system be managed?

Any thougts from the community? I will try to formulate some ideas on the topic in the near future.

[arhag]

Bytemaster, I would really appreciate your feedback on my proposal here. The idea is to let the market decide the effective interest rates (based on fees collected for the rewards program, not a separate prediction market) in a way that balances the long and short demand, while at the same time attempting to address Agent86's liquidity concerns due to short prices being created well below the peg in the current design. Also, Agent86, I would like feedback from you too.

I can understand where you might be going with it, but I still don't like it.  I like prioritizing shorts based on collateral not fees.  I think high collateral incentivizes shorts to cover quickly when profit from spread is presented.  It also naturally protects the market from short squeezes and flash crashes of BTSX.

I suppose I can understand that. Although I am not sure why you say the high collateral incentivizes shorts to cover more quickly than they otherwise would? Also, the main issue I have with your proposal is that prioritizing collateral does not to bring up BitAsset demand, it only reduces the shorting incentive. While this can achieve a better peg, I worry that it dries up activity in the BitAsset market. I guess you think that activity should go to the bond market instead in which case BitAsset demand stays low (just amounts used for spending and transactions) but BitAsset bond demand goes up (which to be fair does still increase BTSX value); that way it won't screw up the peg, BitAsset longs get the interest they desire, and short sellers get to satisfy their short desires. However, I have already explained why I think that is a less attractive option to BitAsset holders than simply getting interest on their balance. BitAsset bonds are not fungible like BitAssets themselves. Users have an extra personal responsibility of managing these bond assets to ensure proper returns. With rewards on balances (paid for by the fees of short profits) users just get returns on their balances by default without having to do anything other than just hold a balance. This is a much more attractive proposition for regular customers, which I think should more easily and quickly bring in value into the DAC than if the only option for interest was the bond market.

[GaltReport]

Don't be too sure... the Fed has pretty much quintupled (5x) the US monetary base since 2008. What happens when velocity picks up?

... People are still starving, unemployment is bigger than ever and people when they get some money they don't tend to invest or spend them or consume them, or buy a house or whatever to drive the real economy up as before but rather save them for a rainy day.....

100% Agree.

[mf-tzo]

Don't be too sure... the Fed has pretty much quintupled (5x) the US monetary base since 2008. What happens when velocity picks up?

Nothing...The fact that the FED is printing and printing money and stocks rise and rise has nothing to do with the real economy. People are still starving, unemployment is bigger than ever and people when they get some money they don't tend to invest or spend them or consume them, or buy a house or whatever to drive the real economy up as before but rather save them for a rainy day...Interest rates will never be 10%.

The only thing that will be again inevitable will be a new stock crash and come back to 2008 crisis.. Bitcoin and especially Bitshares X will skyrocket to the moon. The rest of people will be again bankrupt. Then we will have another QE and another and another until unfortunately in the end there will be a huge world war so things get back in order. I think history repeats itself all the time and we never learn.. By the end of this war everyone will be in cryptos...Not that this will change anything...People will start believing in a new financial order, a more "fair" economic system until we realise that in reality again some people with economic power manipulate everything for their interest..so the same shits will happen again and again and again until we are all dead...

Hmmm..let's see in a couple of years...Maybe this post will be famous for predicting the future...lol..



 

 
 

[Agent86]

Bytemaster, I would really appreciate your feedback on my proposal here. The idea is to let the market decide the effective interest rates (based on fees collected for the rewards program, not a separate prediction market) in a way that balances the long and short demand, while at the same time attempting to address Agent86's liquidity concerns due to short prices being created well below the peg in the current design. Also, Agent86, I would like feedback from you too.

I can understand where you might be going with it, but I still don't like it.  I like prioritizing shorts based on collateral not fees.  I think high collateral incentivizes shorts to cover quickly when profit from spread is presented.  It also naturally protects the market from short squeezes and flash crashes of BTSX.

[arhag]

1) cashing out interest once per day or once per year should yield the same return minus 364 transaction fees.   This will keep all balances "fungible" and reduce the cognitive load on deciding when to handle it.

Yes, good. So the rewards will be implemented in a way that addresses my concern here and drltc's concern here, correct? None of that quadratic dependence on time stuff.

Agent86... like always you are a very passionate debater who frequently convinces me of things.   I would like to explain why I don't like your proposal at this point in time.

I have had white board designs for how to reenforce the peg via 2 markets.   1 market sets the "premium" shorts must pay.. ie: the amount they must bid over the ask.  With this 2-market system the short interest would be curtailed by those speculating on the premium market.   The result would be a peg and automatic "interest" rate setting for BitUSD.

BitUSD would always be valued at $1 because the interest rate/risk premium would adjust to compensate for supply/demand/risk assessments of the market.

That said we have a MAJOR bootstrapping problem with all markets.  They require a network effect and high liquidity to function.  It is hard enough to find speculators on the BitUSD vs BTSX market let alone a "meta-market".   A system that requires 2 markets to function is way too difficult to bootstrap at the same time. 

A bitbond market would have similar problems.  A bond market is even more difficult to bootstrap than a pure prediction market, especially if there are different maturity dates, interest rates, that make them non-fungible.   

So while I do not want to dismiss your idea, I just do not think it is viable at this stage in the development of BitMarkets.

Bytemaster, I would really appreciate your feedback on my proposal here. The idea is to let the market decide the effective interest rates (based on fees collected for the rewards program, not a separate prediction market) in a way that balances the long and short demand, while at the same time attempting to address Agent86's liquidity concerns due to short prices being created well below the peg in the current design. Also, Agent86, I would like feedback from you too.

[pgbit]

...Finally, consider what would happen if, someday in the future, inflation goes high (which forces nominal interest rates to rise--they will need to be above inflation in equilibrium). Would interest on BitUSD still be competitive if traditional interest rates rise to 10%, 15%, 20%?

Therefore, BitUSD interest might be dynamically adjusted, based on an intuitive, honest and public algorithm - rather than being set at a constant 5%. This might ultimately influence confidence in a self-regulating system, as there would be less risk of knee-jerk corrections down the line.

[tonyk]

if traditional interest rates rise to 10%, 15%, 20%?

I doubt that anyone of us will still be alive when this day come...That's why we invest in cryptos...lol..

Don't be too sure... the Fed has pretty much quintupled (5x) the US monetary base since 2008. What happens when velocity picks up?

How about staying in bitGold?

[pendragon3]

if traditional interest rates rise to 10%, 15%, 20%?

I doubt that anyone of us will still be alive when this day come...That's why we invest in cryptos...lol..

Don't be too sure... the Fed has pretty much quintupled (5x) the US monetary base since 2008. What happens when velocity picks up?

[mf-tzo]

if traditional interest rates rise to 10%, 15%, 20%?

I doubt that anyone of us will still be alive when this day come...That's why we invest in cryptos...lol..

[CLains]

This is the moonshot idea!  is

Agreeing with simple and not "rewards."

Someone do a few back-of-the-envelope-calculations for interest on USD
given optimistic but reasonable x's, y's and z's please