Topic: 0.5 BTC Bounty - Creating a Fiat/Bitcoin Exchange without Fiat Deposits (Read 4157 times)

I have thought about this recently and from a 'revenue stream' perspective, crypto-gold is worth 2x BitShares, however there is also a risk component and exchange rate fluctuation.     Based upon the 'bid-ask' price used to establish the initial exchange, I would expect it to trade at a slight premium to gold simply because it pays interest.    The point is that the premium fluctuate with the average margin and thus always be 'correlated to gold'.   In effect, any premium is a 'constant' offset and generally predictable.   

You could perform a thought experiment.   Suppose the exchange rate between gold and Bitshares was 100 BS to 1 G, then 1 G would pay dividends equal to 200 BS and if the dividend rate were '10%'  then that means 1G would pay 20 BS  / year.    Now if the exchange rate changes by 20% then the 'risk' of holding 1G vs BS is greater than the dividend advantage.   As a result, I concluded that despite 2x the dividend rate it would not have 2x the value in the market except for those playing short-term trades.   The conclusion I draw is that the dividend advantage would serve to generate liquidity.

Hi bytemaster,

A few questions (quotes from the whitepaper):


So why would anyone ever short (create) crypto-X currency?


This is just stating your opinion that convergence will happen.  I think that you essentially believe that crypto-Gold per BS will converge to be near Gold per BS because people want a crypto-Gold.

But I believe that for convergence to happen you must have a force within the bitshares system that drives the price of crypto-Gold towards that of Gold.  Is there this force (did I miss it)?

Given the 2x backing requirements, wouldn't the value of crypto-Gold be "driven" towards 2oz gold?

I want to clarify how this works:  Why you short crypto-USD you are 'creating' crypto-USD.  To 'cover' you must buy back crypto-USD with BitShares and thus 'destroy' the crypto-USD.   End result, no fiat ever had to exchange hands and yet someone was still able to take a position in USD.    Thus trading paper-fiat is entirely outside the scope of this exchange, but the presence of this exchange makes it easier to trade paper-fiat for crypto-fiat.

First of all, the exchange does not deal in "dollars" but "dollar IOUs"  that are backed by BitShares with a 2x margin.   Therefore, when someone 'shorts' dollars they 'owe the network' the dollars and so long as they do not cover they are incurring opportunity cost in lost dividends.   Likewise, if the exchange rate moves against them the network will automatically cover their position. 

The end result is that the exchange never has to confirm any fiat transfers. 

The 'fiat' is exchanged for crypto-USD either in-person, via Nash X, via OTC, or via Escrow.  The *purpose* of this exchange is not to facilitate actual fiat transfers so much as to create crypto-USD that tracks the value of USD and thus enables people to exchange it without risk and thus increase the viability of 'local-bitshares' as well as the demand for the currency.   Once you have crypto-USD you can trade it for crypto-Gold, BitShares and BitCoin.

Yes the bounty is still good.

Is offer still available?

How can they (the exchange owners) check whether the fiat money was transferred? This is the key. If the BTC seller denies receiving the money, and is lying, he gets to keep the BTC and the fiat.

I have created a much more complete white paper that should answer your questions: http://the-iland.net/static/downloads/BitSharesWhitePaper.pdf

You can update your collateral at any time by creating a transaction that takes your position + extra collateral and generates an output with additional collateral.

From the white paper:
Economics of BitShares
   BitShares attempts to arrange for all actors to act proactively to ensure that collateral requirements are met even during the most extreme market fluctuations.  To illustrate how these market forces will interact with the BitShare block-chain rules lets consider some example market situations.


Rapid Fall in BitShare Value
   If the value of a BitShare starts to fall rapidly against crypto-Gold, then all shorts in the system will be faced with a ‘squeeze’ which will force them to buy proactively before their margin is called.  If their margin is hit, then they will suffer a 5% fee or worse, complete loss of their collateral.   The result of this short-squeeze is that the value of ‘crypto-Gold’ would rise dramatically above market value causing even more shorts to face margin calls.  This would create an opportunity for new shorts to enter market with full collateral backing their new position.  These new shorts would profit when the price settles down after the short-squeeze is over.    As a result all market participants will be pro-active about monitoring the price and their collateral which should result in the minimal amount of volatility. 

Rapid Rise in BitShare Value
   If the value of BitShares rises rapidly against crypto-Gold, then all shorts would have an opportunity to cover their positions at a profit.  If they fail to cover their position then the result will be opportunity costs associated with maintaining more than the required margin and crypto-Gold paying even higher dividends.


Connecting Gold to Crypto-Gold Price
  All market participants have something to gain if a common understanding can be reached that crypto-Gold is an IOU for a 1oz gold coin.  However, initially there will be no ‘trust’ in what crypto-Gold actually means.  As a result market participants will start out placing orders with a wide spread.  As the market depth increases the spread will also decrease until a price is reached that has market consensus and is near parity with gold. 

What happens if a sub-currency goes ‘no-bid’?
  The first thing that must be understood is that a sub-currency always has value proportional to the dividends backing it.  Therefore, the short-position incurs a constant opportunity-cost by not covering.   Likewise, the long is still receiving a revenue stream that has value independent of the value of a BitShare and therefore ‘above-market’ interest rates will attract new buyers to that sub-currency which means that all sub-currencies are always ‘liquid’ based solely on relative interest rates.   As a result no sub-currency will ever go ‘no-bid’. 
   For this reason the early adopters face limited (if any) risk in being the first to purchase crypto-Gold.  They would be trading BitShares at 10% APR for crypto-Gold that paid twice the BitShares-per-block and therefore profit even if they are the only buyer.  When it comes time to ‘unwind’ this one trade, the price will be determined by whom ever wants the liquidity more.  If the short wants to stop the bleeding opportunity cost, they will be forced to buy back at a higher price.  If the long wants to convert to another asset then they may sell at a lower price.   Either way, it is unlikely that there would ever only be two players in any given sub-currency market based only on the opportunity to ‘profit’ from higher interest rates.


What happens if there is a market crash that causes margins to be insufficient?
  In this event the longs will be paid out via dividends with the capital from the defaulted short positions.  The market would then re-establish at the lower price with new collateral.   Only the most severe crash in the value of BitShares could trigger such an event as it is unlikely that any other asset class could ‘rise in value‘ relative to a stable BitShare value that fast.   Market participants will select margin requirements based upon their estimate of volatility and as a result receive sufficient interest to justify their risk.

  If BitShares lose all value it would be a complete collapse of the entire system and everyone would lose.  This would be a very unlikely event barring an breach in the block-chain algorithm or encryption.    Early adopters would receive higher interest rates due to the smaller monetary base and therefore be compensated for taking a greater risk.   Those who come later will have much more confidence in the algorithm and therefore receive a lower dividend rate.

Operationally, I think you should edit your first post and put the latest rules up there.  Also provide a basic summary of the bitshares system & dividend rules before getting into the exchange rules.

Some questions (assuming cUSD crypto-currency that is supposed to track USD):

1. How do you change your collateral?  Either due to a falling USD->BS price or a rising one?  You should certainly be able to bolster the collateral BS so a liquidation does not occur... and if your collateral value rises tremendously it only seems fair to be able to pull some of it out.

2. How is the price of BS->USD (value of the collateral) determined?

I checked out this link, read the first post carefully and skimmed the others.  All I see there is wishful thinking along the lines of "AtiP is a particle that repels matter.  This is what we could build with it.  Whitepaper forthcoming..." 

Just because you can define it does not mean that you can DO it.

Investors:

      I have decided to no-longer pre-mine the shares because I believe it will undermine trust.  I have also decided to stop taking direct investment and only seek to work with those who value the idea on its own merits.   Everyone will have equal opportunity to profit from this when it goes live.   

     So, instead I would encourage everyone who wants this to succeed to help find bugs and/or fund bounties and development for its own sake and not for pre-mined shares. 

     Those who have already invested I will personally mine the required shares for you.

      Bounty still exists for bugs in algorithm.

The DS proposal was a bad first step forward and was complex and flawed.  I have suffered from having a hard time explaining my original ideas.

This new idea is simple to explain and is not 'bug fixes' on the old idea... if it were merely 'bug fixes' I would not have paid out 10 BTC to TheZerg.   The new design is based entirely upon the model used by traditional brokerages and simply uses a crypto-currency as backing. 

I am moving forward with a team of people who have come to understand the idea and will attempt to explain it to anyone who will listen. 

I have flushed out many new 'rules' for the block-chain based upon vectors of attack identified by TheZerg in the prior chain.  The economics behind the new system is essentially the same as a brokerage that allows people to 'naked-short' with collateral.    Naked-shorting is generally considered bad in traditional markets because those engaged in the naked shorting have a license to print the USD backing that position and therefore can manipulate the price of gold/silver without limit.   Under BitShares there is significant opportunity cost for holding a short position AND the backing of that position cannot be printed out of thin air.   

Why did you abandon your original DS Share thread?

Why are you trying to peg the value of shares to specific currencies? For that, CV Tokens would work much better, assuming they are possible to implement. (Croesus says he was just anthropomorphising the network to avoid confusing the economic side of things.)

Your DS shares have value in themselves if they allow you to "short" the value of bitcoin.

BTW, I don't think any decentralized coloured coin proposals will work: they essentially try to get people to value bit-dust.

To answer your question why nobody can explain to you in simple terms why your ideas won't work: You don't appear to clearly explain your ideas. In an effort to make sure I was understanding your DS share concept correctly, I walked through a contrived example. When the results were not what you expected, you claimed I was mis-understanding the concept and opened an new thread that appeared to tack on CV-Tokens (poorly).

What concerns me is that this latest proposal appears more complex than the last. I hope the extra rules follow logically from a sound design, rather than being bugfixes that may introduced new unexpected behavior.

Here is a basic video that introduces the concept:  http://www.youtube.com/watch?v=-8ZJ3xTDwbI 

The target audience is people who do not even know bitcoin so it includes a minute or introduction to Bitcoin that you may just skip.

More to come.

So here is a challenge, how can a group of people decide in a decentralized manner what currencies are represented by what crypto-Currency?

Lets start with a simplifying assumption:  the first version of the client only enables support for a dozen well known currencies.  These currencies are
hard-coded into the client and therefore everyone knows what they should represent.

The first users of the system would have to establish precedent by buying and selling USD, Gold, and Silver.  Theses early adopters would be taking
some risks, but these risks could be mitigated by observing the bid/ask spread prior to placing their bid.   For example, the first 'bid' might be extremely low, and
the first ask would be very high.  Eventually the market will negotiate a price because it is in everyones interest to reach a consensus.  Every party
to the exchange "wants" consensus that crypto-USD represents an agreement to pay USD.   No one wants to 'go first', but then again someone, like me,
might just go first because I know the market will eventually converge on an understanding.  I also know that there are out-standing bid/asks that would
allow me to reverse my position at a "known" loss.   

The real question is this:  how would the participants of the system sabotage the consensus building effort?  Do they place a bid out-of-line with the
USD or Gold label?   Do they bid too low and no one accepts?   Do they bid too high only to risk losing money?  They would have to 'bet' the market would
do something other than come to an agreement.   There are only two safe ways to 'play' this market:  assume it will reach consensus *or* assume no one will
try to reach consensus.   

Fortunately, this consensus building effort would probably settle out within the first day or two of operation, if not almost immediately.  Once it has momentum,
every party will be investing according to what they thing everyone else will do.  There is only one *safe* assumption and that is to assume everyone else will bid
according to the actual exchange rate.

I think that any block chain will be too slow for high-speed trades and the two chains would have to be synchronized.   The marginal improvement of having a separate bid/ask chain would still not yield a system with enough performance to justify the cost.

Given that bytemaster has offered a bounty for attacks on his exchange system, I'd like to mention briefly here that he has met his commitments on the 10 BTC bounty that he offered for the prior system.

I haven't had time to really digest this new system, but in glancing over them I exceeded myself and had what I think is actually a constructive idea so I thought I'd share it:

Maybe the system should comprise 2 independent block-chains that none-the-less work together.  First,  a bid/ask (offer) chain with much lower difficulty (blocks found every minute, say), and a slower chain that handles filled transactions and "normal" block-chain transfers.

The advantages are:

1. The complete history of unfilled bid/asks is unimportant.  So the bid/ask chain could be checkpointed every few days and old data deleted.
2. The system would be more useful if bids/asks changed faster then the transactions.

Yes, I am responding to myself... I couldn't help but notice how beautiful and elegant these market forces are!  Because shorts are forced to automatically cover once their margin reaches 50% this short squeeze could result in the price of cUSD being bid UP by up to 50% creating a huge selling opportunity.   Shorts would then anticipate this squeeze and thus provide additional collateral to avoid taking a loss during the squeeze!   Elegant!

If the value of Bitshares falls in half, then all cUSD will bid up in a short-squeeze.   This will causes holders of cUSD to sell for BS and take a profit.  New players will come on the market and short at the short-squeeze high and provide the new collateral.  They will then profit when the price falls back to parity where they may cover their position in order to free up their collateral.

Ok, I dug deeper into wikipedia and have concluded that your analogy is very apt and much appreciated.    

There are many ways in or out.   You could only ever deal with $USD and cUSD provided you could trade with people who have cUSD balances.