Topic: Pirate v2.0: Unravelling the Bitshares Ponzi - page 5. (Read 12706 times)

Ponzi schemes have a formal definition in economics. Every economics PhD is familiar with the so-called "no Ponzi condition".

The no Ponzi condition says that the present value of future debt obligations must be finite.
If not, it is a possible for a firm or government to issue an infinite quantity of debt. This ability to issue infinite debt is called a ponzi scheme.

Bitshares promises to issue interest bearing BTC denominated debt called bitBTC. These bitBTC can be held by creditors indefinately.

This implies that bitshares is a ponzi.

To see why imagine a pure BTC economy. BTC are in fixed supply and are the only form of money in use.
In this economy, BTC must appreciate at an annual rate precisely equal to the economic growth rate. This economic growth rate is also the economy's risk free real interest rate, r. This is a deflationary economy. The nominal interest rate denominted in BTC is equal to 0 and the inflation rate is equal to -r.

Let's introduce a bitBTC into our economy. bitBTC earn strictly positive interest through txn fees. Call this interest rate q > 0.
Let's assume the BTC price of 1 bitBTC is constant over time.

Now consider an investment strategy of buying 1 bitBTC worth of debt an holding it for t years.
This yields a bitBTC payoff of after t years of (1+q)^t bitBTC. The BTC payoff is also (1+q)^t BTC for a 1 BTC investment.

As measured in BTC, the present value at time 0 of this future debt obligation is also (1+q)^t

The no ponzi condition says that the present value of this debt has to remain finite as t goes to infinity. Otherwise, a ponzi scheme exists.

However we now that for any q> 0, (1+q)^t goes off to infinity as t goes to infinity. Therefore, bitshares violates the no ponzi condition.

Ecnonomsts call anything that violates the no ponzi condition a ponzi scheme.

Thus when I refer to bitshares as a ponzi scheme I am going by the textbook definition I was taught in school.
It is the only definition of a ponzi scheme that I know.

To repeat: anyone offering to pay you a positive interest rate on your btc forever[\b] is running a ponzi scheme. Didn't you aleady know that? Since bitshares cannot force you to give up your bitBTC or its share of txn fees, they are promising positive interest for eternity. If you go through the thread you can see that I was very careful to verify these points. I got hemming and hawing as a response. There is a reason for this. The fact that bitBTC pay positive interest and cannot be seized is a smoking gun.

The 2007-9 Financial Crisis happened...
Not because very dodgy Quantitive Analysis was widely applied...
But the reason WHY it was.

For decades...
Washington/American culture evolved to "every American has a RIGHT to own a home"...
And countless Govt policies were shaped to allow indigent Americans to buy real estate...
Wall Street simply provided the methodologies and markets Washington needed.

No serious Wall Street player was under the illusion that it wasn't TOTAL BULLSHIT...
And no one went to jail in the end.

Just another bubble among dozens in recent history...
So no reason to indict a century old Financial System...
That produced and sustains the most prosperous country in history...
And replace it with a crypto-currency fetish.

If/when the Bitcoin Bubble pops...
Wired will pen a clone article about the "craziness" of Satoshi Nakamoto and his disciples.

Okay, if the "prediction market" is a cover, then presumably the "in game productive activities" of CoffeeMUD players in my MUDgoldat40 idea would also be, in much the same way, maybe even in exactly the same way, a cover, right?

So that what MUDgoldat40 would really be doing is simply printing play-money with which to reward players who buy in-game "gameprofitinstruments" from in-game shopkeepers or dealers or shops or whatever?

The third prong of the trilemma is, as I suggested earlier, possibly of interest (pun intended?) there, inasmuch as if the number of MUDgoldcoins in existence increases then the exchange rate(s) of MUDgoldcoins vis a vis other currencies that aren't "inflating" their "money supply" at the same rate might possibly change / might well change?

Or is the big difference between MUDgoldat40 and the bitshares/bitwhatevers proposal fundamentally the fact that MUDgoldat40 proposes to print more MUDgoldcoins instead of to obtain existing MUDgoldcoins from some players and use those to reward other players?

(If the MUD used a blockchain for its goldcoins, and a hard cap on the total number that will ever exist much like Bitcoin has a hard cap on how many will ever exist, would that "fix the problem"?)

-MarkM-

The 'prediction market' is a cover.

You are creating financial instruments, (e.g. bitUSD, bitBTC, etc.), right?

Obviously, there is going to be a financial market.
Financial market equilibrium implies that the long-run value of bitBTC in terms of BTC is 0.
I know this. You know this. Any undergraduate who has taken international economics or international finance knows this.

You are telling people they can earn a risk-free (or extremely low risk whatever) return without any direct involvement in the prediction market at all.
You know this is a lie.

This is called a ponzi scheme. It is illegal.

If it is not a ponzi scheme, then I suggested a contract that enables you to earn essentially free money.
If it is a ponzi scheme, then I suggested a contract that enables your investors to earn essentially free money.

You are not at all interested in my contract because you are 100% aware of what you are doing.
You realize that the contract turns the tables on you.

If not, then why not promise to offer the contract and get me to go away?

Once you have offered my contract as an option for investing in bitshares (prominently displayed whereever you discuss bitshares with the public), I will delete this thread. I will delete any of my posts about bitshares in other threads. I will politely ask anyone quoting my posts to delete their posts. To the extent that I can, I will remove all records of my hatred for bitshares from the internet. I will agree not to bring up bitshares again. As long as you keep to your end of the agreement.  

Now it sounds reminscent of Satoshi Dice, which evidently was quite sustainable; plus it also gives some of the gamblers some of the transaction fees of the blockchain it is played on.

What it has to do with dollar or bitcoin pegs is not really evident in this latest description of it, but maybe the use of the term peg was distracting, especially given that it could call to mind the dreaded trilemma.

Use of the term interest was also maybe acting as a distraction, inasmuch as that, too, is a word that comes up in the "impossible trilemma".

Now we have gambling, in a form known as a prediction market, plus some people other than miners getting portions of the transaction fees of the underlying blockchain.

If Satoshi Dice is anything to judge by, lack of transactions on which to charge fees does not sound massively likely, though I guess that depends on how much gamblers happen to like this particular game and how well the gambling site aka prediction market is marketed.

Presto, no "interest", no "peg", just people betting on whether other people will bet high(er?) or low(er?)...

They aren't even betting on what the value of dollars or "whatevers" is going to be really, are they? Aren't they really only betting on how much other people will bet that it is going to be? So ultimately the "whatever" is merely a word/label/textstring, some bettors will bet higher for one "whatever" than they will for some other "whatever", so if you happen to know what a particular textstring/label I am here calling a "whatever" means in the language or culture or subculture of a particular batch of bettors that could help you guess what they are going to bet that other people will bet that that particular "whatever"'s value is going to be?

Couldn't you thus have, say, bitPoundsOfFlesh, and Shylocks will bet different amounts on it than non-shylocks, for example? In effect having a prediction market to predict what the given population of gamblers is going to bet that they collectively are going to think is the most profitable amount to bet on bitPoundsOfFlesh?

-MarkM-

Cunicula, keep attacking that straw man because it won't get you anywhere.   So, let me break it down one more time:

1) Assuming BitShares has non-0 value... something that is true for many alt-coins today.
2) Someone holding bitshares is neither harmed nor hurt by the 'stock split' every block which appears like dividends.
3) Someone holding bitshares profits from every transaction fee earned by the network. 

Thus I have created an asset that pays a positive return based upon legitimate profit by offering a legitimate service. 

Party A decides to post that interesting bearing asset as collateral for a short position in BitBTC.
Party B decides to buy the long position in BitBTC with an equal amount of this interesting bearing asset.

A & B must agree on the exchange ratio.

There are now 2x the value of BTC held in the form of an interest bearing asset as collateral.  The interest from the collateral is paid to the holder of BitBTC.

If the market moves against A, the miner will cover giving B the opportunity to sell their BitBTC for BitShares at the new higher price and thus B ends up with more BitShares + Interest and the market value of these BitShares + Interest is greater than the BTC.   Assuming the prediction market dynamics work.

Nothing unsustainable about this arrangement.

That is a separate issue and introducing it confuses things.  

For the sake of argument, suppose that in 6 years everyone believes that the system is 100% sustainable on technical grounds (i.e. there are no problems with cryptography, any of the programming, no competitors, or risk from government etc.).

They will still be issuing interest on bitBTC at this time. It is encoded in the mining algorithm.

The interest parity condition implies that bitBTC will steadily depreciate against BTC.

I claim they are 100% aware of this now. Their entire path to profitability rests on convincing you otherwise.
They mine/buy bitshares very early, they create bitBTC using these bitshares and market them as risk-free BTC interest, they use a reserve fund to temporarily fix the bitBTC price, you (and many others like you) trade your BTC for their bitBTC, once people stop doing this they stop backing up the bitBTC market price. You end up with worthless 'bitBTC', they end up with your BTC.

That is the whole project. The 'prediction market' is just a cover. Maybe they are 'friends of the Sultan' too?

  

Disclaimer: Not taking sides, just flushing out a question.

I find this notion of risk free investment curious. There is inherent risk by holding assets in BitShares. There is the risk that the system won't be up to snuff and will fail, that is huge risk; or perhaps some other force will bring down the network. How can you not account for these when you critique the efficacy of the system? Or are you saying that doesn't matter when you build the model?

edit: i was waiting for that personal jab. nice one! you just can't keep your hands to yourself, can you? regardless, you bring up a good point with the forever statement, that needs clarification.
double edit: i have no money in this system. i am a voyeur, just curious of the possibilities.

LOL... Sustained forever, huh. Shit they invented a money printing machine called a DAC. Everybody go buy one.

What a tool you are.

Did you help fund this? If so, talk to your lawyer about limiting your legal liability should (that is when) things go sour.

It is probably too late to recover your money. You can likely avoid jail by disassociating yourself from them. If you are already part of a criminal conspiracy, consider coming forward to the SEC now. Maybe you can come to some sort of arrangement.
 

The best way to prove your good faith is via the following arrangement.

You offer sophisticated investors (i.e. wealthy individuals) the option to enter into the following legally binding contract:

It seems like a great deal for you.

1) The market price of bitBTC in terms of BTC is supposed to remain approximately constant over time.
If so, surely you can find a future period in the next five years when the price is similar to current price, no?
If the price is volatile, that is actually helpful for you. You can just repurchase during downswings in the market earning a tidy profit. If the price is exactly constant, well you can't earn any profit, but you don't take any risk.

2) The investor is depositing x bitBTC worth of capital in your prediction market. Somehow this is generating returns, right? Normally you pay 100% of these returns to the investor, but now the investors is generously offering to give 95% of his returns to you, keeping only 5% for himself.

3) If you don't think investors will take you up on this, you can also offer the regular deal as another option (100% of the interest, but no repurchase agreement). Investors can just choose whichever deal they like best. At worst, people will just not do the repurchase agreement deal. At best, you will end up owning almost all the bitshares in existence while simultaneously attracting more capital investment than under the original arrangement. Seems like a win in every direction for you.

What about the investor?
He earns a guaranteed risk-free return on his BTC. Sure it is only 5% of the extremely low risk return you were initially offering, but the investor gets a lot of piece of mind. He doesn't have to worry about the pesky BTC/bitBTC exchange rate anymore.

What if you run?
Well, you could put up some collateral (e.g. your homes) and use a formal legal arrangement. Or you could find a trusted escrow to hold on to a BTC deposit from you. Then the investors won't have to worry about you skipping town.
As long as the issue of you absconding is taken care of, I would place all the BTC I own in this investment without a second thought.
 
If you promise to offer this contract via trusted escrow for regular guys or via collateral and formal legal arrangements for sophisticated investors, then I will never say anything negative about bitShares again. (as long as you make good on your word)

So how about it? Are you willing to do this for me and other potential investors? If not, please explain why not.

The reason why it can't work forever is that the global supply of marks is finite. How big it grows really depends only on their marketing skills. I'm in Malaysia right now. They just hauled some local Ponzi operators off to jail. Their scheme was convincing marks that they were relatives of the Sultan of Johor and therefore could use gov't connections to earn riskless returns.
Funny how the stories behind ponzis are so culture-specific.

We will just have to see how these guys sell their story of being able to generate perpetual riskless returns from some "speculators" paying for a "prediction market." Expect them to generate a lot of spurious transactions in the prediction market to lend credibility to their revenue generation story.

Eventually money leaving the system exceeds money entering the system.
At this point there is no incentive for the operators to maintain the price of 1 bitBTC at 1 BTC anymore.
They now suffer net losses by doing this instead of net gains.

At this point, the price of a bitBTC goes to zero. The early "investors" win and the late investors lose. Zero sum.
It is like any other bubble, but because there is no underlying value creation (I.e. the existence of the product is a fraud) the price drops to zero instead of the pre-bubble valuation.

It has already been said by bytemaster:

and cunicula this is what I expected you to say - and you are right , but the important thing is to break it down:

so if i'm Jon on the street , if the "extra" is being derived from a) a simple rise in asset value or b) a new issuance of currency .

why not just invest in the asset ?

as the asset is distributed and digital , with a blockchain.


you see this scam worked with gold etc , but if you go back i explained why it won't with Crypto .  

Hi bytemaster

I'm glad you joined in , true , but that's not what I asked , i asked where does it come from , the "interest" the "work" .

I'd just it to be said here in plain English , so as to not avoid the question :

where does the extra BTC in the scenario quoted above derive from .

** just read the read of the page - but this is still relevant

More in reference to events like these:

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

As someone who has made 2,000,000 trades on Wall Street over 20 years...
And about 2,000 this week as a Market Maker in about 150 stocks...
It's completely nonsensical statements like this = pure FUD...
That often show how OUT-OF-DEPTH engineers are when trying to re-invent the Financial Markets.

Ripple is an example of this = something Reuters might have been doing in the 90s.

You guys are gonna be running elaborate simulations on a Testnet...
In order to divine information a good Margin Clerk could give you in 15 minutes.

Also, I would standardize using either 150% or 50% to address the same thing.

--------------------------------------------------------------------------

From the White Paper:

2. by a miner who enforces a margin call when the value of the backing falls to less than
150% of the value of the BitUSD....

If the miner is forced to exercise a margin call, the network assess a 5% transaction fee in order
to motivate market participants to proactively manage their margin. If the market moves so fast
that the margin is insufficient...

Many fast markets are manufactured...
So miners will incentivized to game this market to accumulate FAT fees?


 

MercSuey,  thanks for your rational response.  Charles and I take great pride in honesty, integrity, and making the world a better place we would certainly hate to hurt anyone. 

The problem with most models on Wall Street are the same problems that cunicula has with all of his fancy math.  This is why we use austrian principles and theory of value rather than mainstream economic models.  For starters we have the following principles:

1) prices are historical data and cannot be used to calculate or 'measure' value because prices can be arbitrarily manipulated.  An existing price represents only the agreement between two market participants at one point in time and could be a 'straw exchange' and thus meaningless.
2) margin call is based upon the buy/sell spread which proves that 100% of the market believes the price should be below the lowest ask and above the highest bid.
3) all value is relative and individualized, you cannot add, subtract, multiply, or divide prices to calculate new prices. 
4) You cannot compare value systems of any two individuals except after a trade has occurred, and that comparison is only valid at the very instant of the trade.
5) All trades are voluntary and occur at a market price with 1 exception, the margin call.  But the user subject to the margin call chose to take that risk and the settlement of the margin call is based upon the lowest ask.

Given all of these systems we are not attempting to 'model' the economy or economic behavior, we have merely created a trust-free way of buying/selling positions in a relatively simple market.  The result is that we avoid 99.9% of all problems with the wall street systems which ultimately attempt to replace market forces and voluntary trades with equations and computer models in a manner that market participants have no way of understanding.

Okay, great.  My issue is the economic assumptions you have made, based on my own experience in the industry.  Isn't it always the 'economic assumptions' that are blamed when a model blows up in the end?  But you address it below...and I'll take a closer look at the white paper, thanks for the link.


Launching it this way seems very necessary, given the assumptions made.  This is good.


revision:  (By the way, my profile is publicly available on the CB website.  I wasn't being an internet tough guy at all.  Lets view this as an exercise in testing integrity....because this forum can really suck sometimes, and completely new ideas can immediately seem dishonest.)


Point (3) was why I was looking forward to seeing how your project turns out....the industry as a whole needs better exchange model(s).



In all honesty, cunicula annoys the shit out of me.  But there is still the issue of how well can your testnet experiment stress the model.  Just because it passes your tests doesn't mean the potential for extremes is nonexistent.  My questions at C3 were going to be with regards to HOW you were going to test/simulate market extremes.   And how well will the mining process financially justify (or 'backs' the bitAssets, to use cunicula's verbiage) market action at these extremes. Because lets face it, every model that blew up passed some kind of initial testing.  

Again it is difficult to understand what he is attacking, but the genesis appears to revolve around the ROI of holding onto a BitAsset. The dividends are like interest on a bond and as long as volatility of the derivative is low, over time most positions will result in a positive return.

We are making some economic assumptions based upon this paper alongside other works:

http://www.brookings.edu/~/media/research/files/papers/2012/6/13%20prediction%20markets%20wolfers/13%20prediction%20markets%20wolfers.pdf


It is an exercise in mechanism design and some theory explained in the paper above. This said, we are making economic assumptions in some cases about the nature of the market pegs and thus are launching a TestNet first to test our ideas. Bounties can create market incentives to break the system if possible. Again, we are not premining nor accepting anyone's money other than our VC partners. The TestNet does not contain real money. So we are basically being attacked for running an experiment with our own money.


First let's agree this could be better stated Second, I agree about scams in this market, which is why from day one we started this process with principles:

(1) Don't premine BitShares
(2) Test everything in the open domain
(3) Build the communication and reputation system first in the event we need to adopt a better exchange model

Our goal is to build a prediction market that serves as a decentralized p2p exchange for all cryptocurrencies and an effective way to facilitate fiat to CC transactions. Should the BitShares standard fail, the infrastructure we have built can adopt a different implementation. This is why I take such enormous umbrage to these allegations. They are both misguided and fundamentally dishonest. Our company is trying to build several extremely complex products and we are doing it off of our own money and time in the open domain.