My core value system is centered around property rights and my economics are Austrian.
The problem this thread has is that everyone is talking past each other and that is understandable given how hard it is to internalize the market mechanics and then explain what you know to others.
The primary assumption is that there exists a crypto-asset with no counter party and a non-zero value. IE: bitcoin, Nxt, and BTSX.
The secondary assumption is that the volatility of this asset is within some reasonable range. 200% initial collateral seems to be reasonable, but it could easily be 400% if the volatility called for it.
Given these assumptions we then assume there are two individuals in the free market that want a "contract for difference". Contracts for difference are well established and proven and even used in counter party. One person is given price stability and the other is given leverage.
If you assume the contract for difference was settled by a 3rd party price feed then it is clear how it would work.
So given those initial fundamentals we can slowly build up to BitAssets. The first step is to take the same contract and remove the 3rd party price feed and instead use Nash Equilibrium. Both parties will want to exit at some point and thus have to agree on a price in the future. Assuming they were both equally wanting to exit their position the price they would agree at would be the "fair price". Now clearly if there are only two parties to the trade they may not want to exit at the same time. So you allow the "long" side to sell his position to others and you allow the "short" side to cover with anyone.
If someone wants to be a stubborn jerk and not settle then that is fine.... eventually a margin call will be triggered. The peg will fluctuate as the relative demand for longs vs shorts settling causes the peg to have a settlement premium sufficient to motivate settlement.
I think it is fairly clear that if there is a price feed from a trusted source that was used to enforce settlement then the system would work to the extent that you could trust the feed. The hypothesis is that this price feed is irrelevant given a market full of speculators and market makers willing to hold until a short voluntarily covers at a fair market price.
I hope that through this perspective I have shown what the economic incentives are and how the core principles are sound. All that remains to be seen is whether "market consensus and speculation" is enough to enforce a peg via a "decentralized price feed" or "prediction market" mechanic. My understanding of game theory and economic incentives tells me this will work, but even if I am wrong I know that price feeds can be used as a "trusted" judge on the "smart contracts for difference". It is an entirely different game to trust someone to produce a fair feed (or 101 someones) than to trust someone to maintain a vault full of gold.
The problem this thread has is that everyone is talking past each other and that is understandable given how hard it is to internalize the market mechanics and then explain what you know to others.
The primary assumption is that there exists a crypto-asset with no counter party and a non-zero value. IE: bitcoin, Nxt, and BTSX.
The secondary assumption is that the volatility of this asset is within some reasonable range. 200% initial collateral seems to be reasonable, but it could easily be 400% if the volatility called for it.
Given these assumptions we then assume there are two individuals in the free market that want a "contract for difference". Contracts for difference are well established and proven and even used in counter party. One person is given price stability and the other is given leverage.
If you assume the contract for difference was settled by a 3rd party price feed then it is clear how it would work.
So given those initial fundamentals we can slowly build up to BitAssets. The first step is to take the same contract and remove the 3rd party price feed and instead use Nash Equilibrium. Both parties will want to exit at some point and thus have to agree on a price in the future. Assuming they were both equally wanting to exit their position the price they would agree at would be the "fair price". Now clearly if there are only two parties to the trade they may not want to exit at the same time. So you allow the "long" side to sell his position to others and you allow the "short" side to cover with anyone.
If someone wants to be a stubborn jerk and not settle then that is fine.... eventually a margin call will be triggered. The peg will fluctuate as the relative demand for longs vs shorts settling causes the peg to have a settlement premium sufficient to motivate settlement.
I think it is fairly clear that if there is a price feed from a trusted source that was used to enforce settlement then the system would work to the extent that you could trust the feed. The hypothesis is that this price feed is irrelevant given a market full of speculators and market makers willing to hold until a short voluntarily covers at a fair market price.
I hope that through this perspective I have shown what the economic incentives are and how the core principles are sound. All that remains to be seen is whether "market consensus and speculation" is enough to enforce a peg via a "decentralized price feed" or "prediction market" mechanic. My understanding of game theory and economic incentives tells me this will work, but even if I am wrong I know that price feeds can be used as a "trusted" judge on the "smart contracts for difference". It is an entirely different game to trust someone to produce a fair feed (or 101 someones) than to trust someone to maintain a vault full of gold.
Hi bytemaster,
thank you for coming over here and providing these underlying assumptions.
Besides from having problems to understand all this (not my metier - so even if I understand the terminologies one by one, understanding their interplay is extremely hard), as people pointed out tinkering with the money supply seems like the feed being the FED.
The biggest problem here is that Average Joe (regarding financial instruments) does simply not understand what you mean by short, long, margin call, Nash equilibrium, contract of difference, peg, a short covers, settlement premium, etc. etc. and now we got Average Joe relying on somebody who, first, is able to understand all of that, AND second, is even able to change the bitUSD supply.
Those two observations lead to the question what is this bitUSD asset about and where is the difference to the current monetary system we have? Because as it seems (or at least the perception is) that financial investors, speculators and banksters are misusing the current system in order enrich themselves just because they can and understand the system; whereas Average Joe does not.
Am I correct that if bitUSD is really peggable by the USD, it would allow to build an economy around that cryptocurrency much faster than with Bitcoin or Nxt because merchants can be sure to have stable prices?