Topic: What's wrong with DLCFDs? (Read 324 times)

it doesnt back the price

it backs the value.. a number that always sits below the price which when the price crashes the price comes down to value and stops at value and wont go below value

value is not the price. the price is volatile and moves above value and below premium
value moves more steadily but you wont find it measured/displayed on any exchange market chart

emphasis: it does not back the price.. so no contradiction

so no the cheapest mining cost on planet does not back the price it backs the value
if you were to measure the difference between the price and the value and represent it as a % its called the store of value
right now value is at ~$48k, and market price is ~$67k meaning store of value is 71%

individuals however have a different sentiment of acquisition cost evaluation based on many factors including their local electric costs. and yes many do decide if they think bitcoin is worth mining or just buying. i do laugh how you feel no one makes any determinations on if its worth mining or buying and just thinks the market just affects the market and its then the market that affects peoples sentiment afterwards

you keep trying to circle the discussion back to the demand and supply of the market determines everything.. heck you even stated how you think that its the market price now that determines if people mine...
.. no one just decides to mines one day based on that days market price... they instead plan the next 2 years worth of investment. and their main decision is not the market. its actually their local electric costs.. so no the market does not decide mining or buying. their electric costs calculate a ROI expectation of if they should they get miners(many geolocations just say no continuously) and/or then decide if its actually cheaper to then buy on the market based on their electric cost differences dependant on geolocation and such

as for supply
the market supply yet again is not based on the near 20m coins ever created. heck its not even based on the couple million coins deposited in exchanges. nor based on how many coins are mined that day.. its actually based on the small micro orders of an exchange market orderbook. which is where sometimes whales put in medium* size order WALLS to control the sentiment to display a thick wall order where people think the MARKET wont eat through to move in a certain direction

heck it doesnt need a large order wall these days nor large supply of coin to change a sentiment that the price wont go up.. even sellers know this. they can sell coin for fiat. buy altcoin with that fiat, sell altcoin to get btc again(its called arbitrage) and then put that same amount that they just arbitraged back into the btc sell orders to fight the buyers from pumping
*we no longer even need whale orders of 1k coin to create walls..

so even the supply arguments are irrelevant due to things like arbitraging

.. anyways we are diverging into too many economic category discussions..

but all in all due to many factors outside of the "supply demand" highschool dropout math dummy understanding.. a CFD will never be able to stabilise bitcoins price

CFD design is to work between 2 parties or in geo-locked locations of mutual agreement. however globally they dont work well and would have too many different contracts of different rates that it wont stabilise the price

That's a contradiction. The "low" in your case would be clearly a "minimum", and thus this would be the same concept as a "backing". If you don't like the word "backing", then ok, I don't oppose the concept of a "window", but the "low" is the same as a backing, because you argument that it cannot fall below the "minimal mining cost in the world".
My opinion is that there is no "low", nor a "window", not for "a period", not even if we say that this period is a single block interval. Given the conditions, the price could instantly crash below the "low".

We had such deep crashes (50%) in a very short time (few hours) in 2013. The reason why we don't see this anymore has imo nothing to do with mining (e.g. due to mining professionalization) but with increased liquidity, i.e. "more people willing to buy" even in dips.

And you continue to ignore the supply side.

But anyway, we're coming to the same conclusion, that the price cannot be stabilized, at least not algorithmically, and here I fully agree. So let's not longer derail the discussion about DLCFDs. If you want you can create a thread about your price theory based on mining cost differences, and I would probably participate, but I think not many would agree.

Just a small addition:
Of course "the market" are these aggregated factors and/or sentiments of people. I think you got triggered by words like "market", "supply" and "demand", when they are only descriptions of aggregated decisions and sentiments, as you wrote correctly. Market isn't an automatism. It's always about social phenomenons.

again the production cost DOES NOT BACK THE PRICE

the price is temporary... its volatile

the production cost sets a wider window of where the low and highs could be tested over a period..
the window of value/premium is not a number of "price"

ok so even if we totally locked the mining hashrate and difficulty to never change ever again fixing the cost per region. the window would be still wide and the price inbetween will still change and wiggle and test the boundaries of the value/premium edges.
so again the price cannot be stabilised even if we stabilised other factors outside of the market

even if we fixed the market deposit supply of both coins being sold(supply) and fiat deposits to buy(demand) the price can still change because even if there was a numeric limit on deposits.. the human sentiment of whom deposited would still affect the price
so again even before coin or cash hits the market people have a notion of what they want to set
so again the market does not set the market. many factors outside of the market impact the market before the market even sets a price

the production cost of value/premium window is about global cost differences.. if you took all world potential acquisition costs and sentiments the very last top price someone is willing to pay is the top potential ATH premium
if you took all world potential acquisition costs and sentiments the very last bottom price someone is willing to sell is the lowest potential bottom value

which in pacific islands would have high costs so people in that region WONT be miners and are not miners right now. the cost to mine is too high so they are the buyers. the pacific island regions are happy to buy at any price up to a point of many hundreds of thousands because compared to mining any price right now is cheaper
the pacific islands do not set the PRICE.. they set the premium ATH the price COULD reach IF tested.

the production cost of value/premium is about global cost differences.. which in icelandic/slavic region would have low costs so people in that region would be miners and are not buyers right now. the cost to mine is low so they are the sellers. the regions are happy to mine and then sell down to the value/cost amount
the icelandic/slavic regions do not set the PRICE.. they set the VALUE (periodic new bottom) the price could reach IF tested.

there is no way to control the price unless you segregate the world into regions and close off international trade. then different exchanges using "contracts" allocated and locked to only perform in a certain region where each region would set regional prices to be more stable(creating multiple different price points across the planet that cant cross over).. but thats the big IF that i cannot see ever happening.

I agree with this part of the post, because yes that's exactly the point: the supply can't be elastic enough to really contract in case of a significant demand decrease. And of course you are also correct that the "coins in circulation" is not the same than the "market supply".

That's of course also a problem for algorithmic stablecoins like Dai: they can only modify the "coins in circulation" variable, never the "market supply", and thus they rely on a complex (and probably gameable) safety net of incentives and counter-incentives. A simpler CFD-like stablecoin concept called BitShares can be considered "failed" at this point, even if the price of BitUSD still tends to return to dollar parity but the swings are too large for it to really work.

But I continue to believe that the factor you mentioned of the mining cost is really tiny in comparison to other factors. And my opinion is that Bitcoin's difficulty mechanism would affect this equation too strongly: imagine Satoshi dumped his coins or due to a bug Bitcoin falls to 1% of its current value, 90% of all miners go bankrupt, and "production cost" due to difficulty changes crashes to 10% too. We can thus never rely on the production cost "backing" the Bitcoin price in any meaningful way.

In addition, your "local mining cost theory" only affects the demand side, not the supply side. The supply side is equally important. What's about those who invested or mined early and now are searching for the best moment to either sell or buy something expensive with their Bitcoins? I think in your theory also reflects a particular maximalist view I don't agree with: that Bitcoin will grow eternally and demand is always the dominant factor.

I would argue that such a "contract" affecting the BTC unity price would not even work if there was a geolocation limit to a single city (with a monopolized energy distributor, i.e. that "all cost of mining would be the same"). The other factors I mentioned are too strong to counter-balance supply and demand fluctuations.

But private CFD contracts like DLCFDs of course work, because they are only agreements between two parties how to re-distribute a sum of Bitcoins.

The only problem I see with DLCFDs is that they can never hedge against an extremely drastic crash. For example, to be able to hedge against a 75% crash before the deadline, the "long" side of the contract ("Bob" in the example I gave before) would have to contribute three times the Bitcoins of the "short" side ("Alice", i.e. the party needing a stable price). If the price crashes 75%, then in this contract all BTC would go to the "short" side, but if it crashes 80%, the short party will already suffer a loss even if it gets all the Bitcoins, and if it crashes 100% (e.g. due to a bug in Bitcoin's code), a DLCFD would not help at all.

As we still have 75% swings like the FTX crash showed, thus DLCFDs should never have a market for timeframes of more than 1-2 months. If I wanted a DLCFD to hedge against a 75% crash in a year, being myself the short side, then I would have to pay a premium so high that I would already lose a significant part of the value, and the DLCFD becomes pointless.

the whole silly "supply demand" buzzword of the market and d5000/highschoolers notions are about the market sets the market and nothing outside of the market is a factor(supply demand of the market sets the market)

for instance the notion that d5000 says the market sets peoples sentiments of if they should mine or buy on market
for instance the notion that the market supply today sets the notion of the markets demand today

none of which is true at all for bitcoin.. but is more so true for the altcoins/tokens that have no underlying creation costs

before people even make a order, they make decisions. and the GLOBAL sentiment is not based on todays market price but on different peoples different factors.. people set their own notion of value premium (not the market price) before even deciding what PRICE to buy/sell

value is not price. value is a separate number outside the market. the market simply at some point periodically tests the latest value sentiment where no one on the globe wants to sell coin for

again before people even make an order on the market. or buy hardware.. they make decisions
such as peoples knowledge of mining cost sets the most they intend to invest to either buy hardware and mine or just invest via the market

because people think ahead EG knowing mining is like a 2 year cycle of running hardware to get ROI they are not thinking about the temporary market price today. they are looking at many aspects of bitcoin such as periodic and long term growth of difficulty, hashrate and also what half of the market 4 year cycle the economy is in

there is alot more into the economics due to global variances that are involved. bitcoins market is not judged purely on bitcoins market

in short its not a sentiment of the markets supply demand sets the price of the market which then sets the premium value sentiment of the global economics

its the other way round

...

point being and why i mention it in this topic.
due to bitcoins economics outside of the market due to global value premium sentiment differences.. trying to 'contract' a price to stabilise the global market price wont ever happen due to factors outside of the market price that then affect the market  due to real world costs before the market even sets a price

again contracts would only work if there were geolocation walls to have contracts only function in certain area's where their market price then sets at one level. but in another area they would then have a market at another level and it would only work if there was the wall to not allow cross over so that the markets can stabilise within their locked geolocations.. in short a contracted thing cant work to stabilise the global single market price.

So to summarize you say that mining cost determines or at least has a big influence on the Bitcoin price, because people compare mining cost all the time with the current market price and buy when the market cost is lower than the mining cost, right?

The thing is that this view ignores that the main influence is actually the other way around. Bitcoin price determines the plans of miners: will I scale up? Or will I divest or diversify my business into AI and cloud because scaling up currently makes no sense? In another discussion I concluded that the mining market currently is bloated, i.e. the cost/profit relation is quite high and it's likely that miners will scale down / divest in the next months. However most of the time it's the other way around: due to other market forces (see below) the price goes up (in the mid/long term) and miners actually scale up due to that.

And really ... how many people think about buying mining hardware (or some kinds of shares from mining businesses) nowadays when they think about how to profit from Bitcoin? While some wealthy individuals and companies  probably do that, I would wildly guess that at least 95% of the market doesn't.

Nobody wrote that actually in this discussion

The demand is driven by a lot of different factors. Currently I think it's mainly mid-term price expectations, i.e. "will I profit in 6 months or 1 year if I buy Bitcoin now?" -> if the answer is yes, then the demand is increased by one buyer. Or at the contrary "will I be better off if I sell now than holding?" or even "did I reach the goals of my investment in BTC, e.g. because now I can buy a house with my $1000 investment 5 years ago?" -> these two persons go to the supply side.

But underlying to these questions are different assumptions how the market will behave in this timeframe. And here we could cite, for example:

- fundamental assumptions about continued adoption (as digital gold or currency or for which usecase, doesn't matter here)
- technical analysis
- awareness / fads: "are we in an euphoria/FOMO phase or in a fear/bearish phase? Can I ride this wave (up or down)?"

And also what you write yourself:

So market depth is also part of the equation. It's extremely complex, and that is also why we have such a high volatility: because nobody has created a magic formula giving each of these assumptions a value and a weight, to know if Bitcoin currently is "fairly priced", overvalued or undervalued.

Mining cost is a factor which can perhaps, for a very small group of people interested into a Bitcoin-related investment, trigger the decision "mining or buying". But my assumption is that the group of people, even whales, taking other things into account like those I listed above is much larger. In addition, this is only a group which could add slightly more demand (via mining or buying) but never to the market supply, because the miner supply as we all know is static, so it doesn't matter how many miners are mining.

Bitcoin can experience stability but that is only sometimes and not permanently. Most assets in this world are not stable, which means there are still some who are. In the crypto world, we literally have stable cryptos here. I am referring to cryptos like Tether and USDC. Being decentralized can be one of the reasons on why Bitcoin is volatile because there is no one to regulate its price.

Another thing would be on why Bitcoin is highly volatile is due to its small and limited supply. Simply buying and selling, won't shake the price much but it must be done in larger volumes. I can only believe more if we are talking about whales here.

funnily you say supply is static while arguing the price is volatile.. thus.. wait for it... NO coincidence, correlation, consequence, causation can be found between the supply vs price

its not about the mining supply!!
is about the economic mentality/sentiment of assessing costs/profit even before mining or buying or spending or selling

for instance before even going on vacation.. you see 2 locations that are 5 star rated. both have a pool and offer inclusive meals.. but the costs are different.. the choice is then nothing about how many hotel rooms are vacant to be able to book(supply) nor is it about "omg they have been fully booked all year but now have a room we can rent so we must go book it before its gone"(demand).. people make choices for many other reasons outside of supply/demand of hotel vacancy/popularity

if people learning about bitcoin found out that they can only mine in the pacific islands at many hundreds of thousands.. they wont mine instead they would see it costs $XXXk to mine before even buying any asics.. and then see the market offers a wayyyyyy cheaper option. and they would happily buy from the market at the discount all the way up above old ATH should the market move in that direction. they would be the ones continuing to buy no matter what, and just not mine. because the market offers a good price compared to mining.. and i have not even mentioned about how many coins are on the market or are inside a mining pool ready to dish out to miners as a reward

if people learning about bitcoin found out that they can mine in the icelandic/slavic area cheaply at under $50k they would be the ones investing in hardware to mine. this then causes the hashrate to rise which causes other miners costs to rise due to competition whereby those that had costs of say $60k to then be pushed to $70k costs switching that middle group from mining, to become market buyers

and none of this is about mining supply of coin

also the whole "supply/demand" silly notion many were taught in kindergarden is bad math bad business education..
lack of supply does not = demand and abundance of supply does not mean less demand or less in price
there are more
for instance there is an abundance of iphones but there is a limited supply of nokia phones.. but that does not mean nokia wins the supply/demand game

there are many more layers to economics then the foolish simplicity of 'supply/demand'
actual cost of creation/original acquisition has more involved in setting the window range which the price sits within

its not a simple kindergarden "supply/demand" 2 word shout out.. there is many depths and levels that go into what effects the demands, and what affects supply and what effects economics outside of those 2 words

for instance not all 19.Xm are on the markets.. so the markets does not play to the whim of all coins in circulation.
there is also a matter about even if there was just 1m coins deposited on a market. the order amounts per price, the increments between orders and many other aspects affect the price

for instance
if we just had 20 coins on the sell side
4   $63750.00             4    $63750.00           19       $63750.00
4   $63749.99             4    $63747.00           0.25    $63749.99    
4   $63749.98     vs     4    $63744.00    vs    0.25    $63749.98
4   $63749.97             4    $63741.00           0.25    $63749.97
4   $63749.96             4    $63738.00           0.25    $63739.96

the 3rd column would be a bigger wall meaning the price may not even fill to empty all the 19 coins at 63.75k
the 2rd column would move coins price down to 63.738 faster than the 1st column which only moved down to 63,749.96 selling the same coins

yep 3 different price consequences even with the same market supply.. so its not about supply nor demand when there are 20 coins on supply/ and 20 coins on demand .. the prices change due to more then just supply/demand..

also
if there are people in the world willing and able to buy at higher prices than $64k due to having local mining costs known to be several hundred thousand.. the price has all possibilities to go up higher then current ATH
however smart traders using walls can prevent the price going up without needing to have huge whale supply by arbitrage marketing a small amount repeatedly in cycles to keep filling market orders to keep it from rising without needing any huge supply to sell off nor need to quash the demand..

there are many things beyond just shouting "supply/demand" like its some magic word you learned that makes you think you have learned he secret mythical knowledge of economics..

Disagree here fundamentally. Mining cost differences are irrelevant imo, because the BTC price is caused by supply/demand dynamics. The supply increase by miners is fairly static, even if hashrate went down 50% in a few weeks because many miners couldn't afford the "cost" of mining anymore, the block creation would stabilize again due to the difficulty mechanism, so there would only be a negligible effect on the coin supply - this is even more the case as the miners' supply currently is less than 0.5% of the total supply on the market.

PoS coins are equally volatile. You could argue that they follow Bitcoin's price, but that's not always so. They have their own boom bust cycles.

What is true is that the PoW mechanism doesn't allow a "flexible" supply like it would be necessary for a "stability mechanism" in the vein of Dai or Bitshares. This would need not only a more flexible block reward but also a kind of permanent burning mechanism, like in the Basecoin concept.

But Bitcoin's stabilization could be achieved via other means, mainly increased liquidity, which can potentially increase drastically if the scalability problem is solved and BTC can be used more comfortably as a currency for payments. Layer-2 or "subnetwork" development (LN, sidechains) would thus contribute to stability.

@antidamnation : I don't see that much a difference from how Dai currently works to your system. What would be the advantage? (In reality this should be discussed in the altcoin forum, as this can't be applied to BTC and is also not directly related to DLCFDs.)

the reason bitcoins volatility cant stabilise is due to PoW.. more specifically the worldwide cost differences between mining

for instance right now icelandic/slavic countries can mine 1btc for $48k we call this the base VALUE cost of world mining
for instance right now pacific island countries can mine 1btc for $400k we call this the top cost PREMIUM of world mining

the market price swings inbetween that window.. depending on who enticed to buy and sell and who and why and where they are from

in 2021-2022 the window was between 15k-75k which is why the markets tested the tops and bottoms of that window

right now we have some whale traders causing walls to keep the price below $75k(so that their bot algos can continue to function) until next years ATH season, which can go upto the current $400k premium should there be enough world wide traders willing to buy to the top

people in pacific islands that can only mine at $400k cant profit from mining so they are the willing buyers that will buy at any price as its cheaper than mining so they are the happy traders willing to bring the price up..
people in icelandic/slavic countries can mine real cheap so willing to sell cheap so they are happy to sell and keep the price down while still profiting

in short due to bitcoin being a world wide currency with different costs for different regions means different sentiments of willingness to buy/sell at different levels the market can fluctuate.

this topics concept of special contracts CANNOT work for bitcoin unless they close off lock coins of geolocation trading to regions whereby regions can only trade within themselves and not globally.. if there was a regional lock then prices within the region can stabilise but only if those traders had no access to the wider price ranges of global trade.. EG pacific islands stuck trading only between themselves would see them able to stabilise their allotments of coins between each other at a premium range of the window due to their dynamics.. where as icelandic/slavic countries would have cheap bitcoin costs circulating in their locked markets.. however the world market would still be variant if there was a world market still existing

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other coins/tokens that have no real production/mining/minting/staking cost.. can be manipulated to be stable as they have no real world underlying value/premium effects affecting the market and so people can play with their market using contracts and agreements and do anything without it affecting real world costs and users.

I’ve been thinking about the Dai stablecoin and how it maintains its value through over-collateralization. Normally, a single user locks up more crypto collateral than the value of the Dai they generate. But what if two parties could collaborate on this?

Here’s the idea:

Party A wants to use Dai as a currency and puts up $100 worth of collateral.
Party B provides an additional $50 worth of collateral to ensure over-collateralization.
In this setup, if the price of the collateral goes up, Party B benefits from the increased value. Could this kind of collaboration work within the current MakerDAO system? Is there any other system implementing it? And if not is it possible to implement such a system?

I don’t think it’s that no one cares but rather it is too complex that everyone is being driven away. Its complexity offers many risks. It’s not exactly the simplest thing to do just implementing DLCFD. Not everyone in the bitcoin community is tech savvy and until DLCFD remains too much to understand for the common people, it will not be adapted by said common people.
The risk of failure and manipulation is still quite high despite the many ways one can think of to finally solve oracle reliability. It is very much vulnerable to attacks especially that it relies on centralized databases.

Yes, this would in theory be definitely possible, because you could require more than one oracle signature in the contract. In the DLC whitepaper on page 6 the implications are explained: It is possible that the oracles disagree by a few dollars about the price and then the contract becomes invalid. For example, one oracle could provide the signature for a price of 60000 $ and another one for 59990$. This depends how fine the granularity of the contract is.

This does of course not mean that the coins are lost, but they would be then returned to the owners with a timelocked branch of the transaction in the original proportion.

I guess you could however for example require 10 oracles and if 6 of them agree on the price then the contract becomes valid. This would minimize the risk, the transactions would be bigger but if everything is arranged via LN this does not matter.

No, in the case of Bitcoin this is not possible, not even for Ethereum itself (=the Ether currency). As I wrote, DLCs are simply agreements between two parties. The party in the "short position", i.e. the party requiring a stable value (Alice in my example) would be able to preserve the value of their coins, but with the cost of not benefitting from a possible price upside.

You could however create a token based on the CFD (contract for difference) concept on a turing complete smart contract platform like Ethereum. This was to my knowledge first implemented with the BitShares platform in 2014 or 2015, and Dai now also uses a similar mechanism.

They can't use stablecoins like USDT because of the risk of being blocked by a central authority, which is especially problematic for people in sanctioned countries. Physical dollars aren't a good option either, as governments can restrict their circulation.
Additionally, since Bitcoin's price tends to rise over the long term, Alice is more likely to gain value from the contracts compared to just holding Bitcoin.

but in theory it's possible to implement such a mechanism. Am I right?

Can multiple oracles be used to mitigate the risk, or is it limited to a single oracle per contract?

As d5000 explained with examples Carol the middleman has to be trusted although she can't steal the funds but can disrupt the deal. Besides this trust issue, I don't think there is a need for anything else to conclude that why this has not been implemented already. And speaking of fold who are betting on Bitcoin's long-term price, which I think is not a bet because it is totally based on analysis, and people who have a strong desire for stable digital money, they can use any for example USDT, and there are dozens of other stable digital currencies that they can use and can easily make such deal/contracts.

Why do you think people are craving for digital currencies and help me understand how this is going to help people betting on Bitcoin's long-term price.

In contrast to most others in this thread I do consider DLCs an interesting technology. There was some buzz 1-2 years ago about it but it seemed then the euphoria died down a bit.

There was a thread here last year and I opened one in Spanish but not much interest has been shown.

Discreet Log Contracts (and in particular DLCFDs) are not so much about stabilizing the Bitcoin price but about giving people the possibility to hedge against price swings, similar to options. Basically there is one party who wants to leverage their long position and the other party who wants to get a stable value, renouncing to profit from price swings.

Just synthetizing the concept:

- Alice wants a stable price, Bob wants to leverage the position, Carol is an oracle knowing the current price in USD. So they agree on a contract that, when the contract expires (e.g. after 30 days), Alice will receive Bitcoins for the same value in USD than at the contract's start, while Bob will receive the remaining coins (minus a fee for Carol). If Bitcoin goes up, Bob will receive more Bitcoins.
- Alice and Bob create an address with a Bitcoin Script contract which includes a signature from Carol (see below) and transfer funds F to it, in the simplest case 50% of the funds are provided by Alice and 50% by Bob.
- Then Alice and Bob sign several off-chain transactions where the funds get divided, after expiration, according to a proportion like the terms of the contract, i.e. where Alice always receives the same value in USD, for different Bitcoin prices (e.g. for a price of 50k, 51k, 52k ... up to 80k).
- Once the deadline arrives Carol (the oracle) provides a signature which corresponds to the proportion which distributes the funds correctly for the current Bitcoin price. i.e. where Alice gets a BTC amount which corresponds to the USD value of her initial transfer to the multisig address.

Carol has to be trusted to not cooperate neither with Alice nor Bob, otherwise she could provide a signature for the "wrong" price. But Carol can't steal funds.

Why are these contracts not more popular? I honestly don't know. It's possible that the high on-chain fees in the last year have delayed their acceptance. But these contracts are also possible using Lightning - however Lightning currently is also stagnating.

In Discreet Log Contracts, the oracle does not have any direct incidence on the Bitcoin price (like in Dai for example). Its function is to "post" the current Bitcoin price so the two parties who engage in the DLC can settle their contract. But it's a purely private contract between two parties, see above

I get it. I'm well aware of Oracle's trust issues. But think about it: there are folks out there betting on Bitcoin's long-term price, and people in high-inflation countries who crave stable digital money. This got me thinking—there's a real opportunity here for both sides!

The below link was the best I could find about DLC:
https://river.com/learn/terms/d/discreet-log-contract-dlc/

I don't know much about ItchySats, I think they've just implemented the idea.