Perhaps the following is why tracking ETFs are known to lose value during periods of volatility, because they roll over short-term futures contracts usually daily.
I need to think more deeply about this and the math. This was just off the top-of-my-head, as I just quickly read the first half of your whitepaper a couple of hours ago. Someone sent me a PM with a link to this thread.
11. It is presumed that the market will try to maintain the market value of the BitAsset proportional to the price changes in its designated asset. I have some doubt in this concept. Has it ever been tested before? Economics 101 says price is determined where the
marginal supply and demand curves meet. Ignoring the proposed dividends relative to interest or leasing rates of designated assets, and relative value of holding an asset proxy in a decentralized digital store versus holding the real asset, the supply is the distribution of people who think the price will go down, relative to the premium and time-preference offered. The demand is the distribution of people who think the price will go up, relative to the premium and time-preference offered. Thus if you want the BitAsset to track the designated asset, then the expiration period should be relatively short, so that the secular price trend of that asset is not biasing the supply and demand and instead you have fairly balanced expectations for relative exchange (BitShares <-> designated asset) price moves in either direction over the short-term. I am not confident that I have captured all the math that would apply. Should we be looking at models of options, e.g.
Black-Scholes?