Long+Short basket currencies

[markm]

Well presumably the price they name must at least be on the correct side of the strike?

So long person must name at least strike, and short person must name at most strike?

Maybe you can run through your example again but this time with it being the case that the prices they can get out in the world are below their strike price not above it?

-MarkM-

[nimda]

Well presumably the price they name must at least be on the correct side of the strike?

So long person must name at least strike, and short person must name at most strike?

Maybe you can run through your example again but this time with it being the case that the prices they can get out in the world are below their strike price not above it?

-MarkM-

If I understand you correctly, you mean something like this (let's just use MtGox now; I think the arbitrage scenario has been established):

1. Bob and Alice create a CFD for 1 Bitcoin, beginning at $5. Bob takes the short, Alice takes the long.
2. Bitcoin drops to $4. Alice wants to cheat Bob; she claims it's at $6
3. Bob says "sure, it's at $6." He pays her $1 (the difference).
4. Since Alice named the price, she must accept the trade. Bob buys 1 BTC for $4 and sells it to her for $6. She sells it back to the exchange for $4.
5. Math. Bob sends MtGox $4, Alice 1 BTC, and Alice $1; he receives $6 and 1 BTC from Alice. This is a profit of $1, which makes sense because he "won" his short.
Alice sends MtGox 1 BTC and Bob $6; she receives 1 BTC from Bob, $1 from Bob, and $4 from MtGox. This is a loss of $1, which makes sense because in truth, the exchange rate fell, so her long position should be losing.

Really, the party can name any price for exercise (even a negative price ) and it will still work out properly.

In the case that there really are two different prices (say 2 different local markets or something), then it's possible for both parties to profit; this profit comes from the arbitrage.

[markm]

Awesome, so the site mediating this has no skin in the game, it can just charge its standard per-API-call usage tokens fee for use of its functionality and not care how much value Bob and Alice are wagering and exchanging.

Unfortunately I don't see how to call this thing an asset and put it on a market in my server though.

Unlike the basket currency concept it does not seem amenable to being a token that people can buy and sell.

-MarkM-

[nimda]

It could be implemented this way:
- Alice advertises a CFD at X price (spot)
- Bob agrees to the contract. He takes the short.
- It is Alice's CFD, so she will be naming the price. This is specified in the contract. (Obviously, this could be the other way around)
- At contractually-specified intervals, (this part can be done by a bot) Alice publishes a price to the server.
- Bob sells 1 BTC to Alice at that price. The "losing" party sends the "winning" party the difference. These two transactions are designed to cancel out, so Alice's published price is always above X.

But what is really happening (cancel out the dollars) is:
- At intervals, Bob sells 1 BTC to Alice for X (spot at time of contract)

And really, the whole appeal of CFD's is that they can be done on margin, and for that, one needs an oracle. Therefore, it's probably best for the sale to be done as a means of dispute resolution; it's better for the parties to agree on the price. Still, even one dispute would require a trade at the full value of the contract... and as that's probably not feasible, we're back to our problems:
- Baskets: "backdrop" problem means that if the price changes too much, coins can be less than worthless yet discarded for 0.
The backdrop also means it's not done on any kind of margin/leverage; in fact it's quite the opposite. The backdrop must be several times the value of the asset being traded, so to make a little profit from your longcoin or shortcoin, you need a lot of money.
- CFD's (traditional): relies on an oracle
- CFD's (with dispute resolution): again takes a lot of money to make a little profit
- CFD's (repetitive futures contract): again, lots of money, little profit
- Futures contract: Aha! we might be getting somewhere... it can't be done on margin (an account in the red will just be thrown away), but it could work...

I'm not very familiar with Open Transactions. Can it hold money in escrow? Can it hold fiat? If so, we could use trade-able "futurecoins":
- A futurecoin pair is created at $10 by a user. In order to hold a long or short position (an unbalanced coin), a user's account must have enough money to fulfill the contract. Thus, the user deposits 1 BTC.
- The user sells the longcoin to someone with $10 in their account.
- Several things can now happen. Both people can hold their coins, and a sale at $10 will be executed when the contract ends. The first user could buy the longcoin back on the open market, and when the contract ends, no transaction will take place. Buying the balancing coin would also allow the user to withdraw his money. So would selling the unbalanced coin, so perhaps this would encourage liquidity

I'm not sure futures were meant to be an asset

Of course, there are also options, but without an oracle (MPEX relies on an oracle), all options sold must be covered. If you are selling a PUT option, you must have fiat*put price*quantity on the exchange, and if you are selling a CALL option, you must have BTC*quantity on the exchange. However, only the original seller must have sold it covered; if I buy a PUT option from you and sell it to someone else, you still hold the obligation. I can use bananacoins to short BTC, without having BTC or fiat on the exchange this way: I buy the PUT from you with bananacoins and wait for it to appreciate.

The long+short basket currencies does have one major strongpoint: there's only one of it. Futures, CFD's, and options all have a strike price or something like it, so in a low-liquidity market, they're hard to trade. The baskets, however, are only two things: a longcoin and a shortcoin, and these can be valued by the market.

That does beg the question, however: "Who backs the long- and short-coins?" Why is a litecoin-longcoin worth 15 LTC + 1 BTC? If they can only be redeemed from the issuer as pairs, the 15 and -15 LTC don't really exist except in the minds of the traders. There is no real reason to value a longcoin more than a shortcoin except the concept; it's like a piece of paper which SAYS it's worth 1 BTC + 15 LTC, but it's only worth what others will pay. Bitcoin is worth only what others will pay, but it doesn't state in the transaction "this is worth 3 bales of hay" or whatever. It seems to me that the issuer must also buy-back individual long- and short-coins, or else the system is indistinguishable from two halves of a key which must be put together to open a lock: why should one half be worth more than the other?

[markm]

In people's minds one half should be worth more than the other, but getting them to agree that their half is worth less than the other guy's half could be a problem.

Leverage is not something we can do without securely escrowed or held collateral unless we have soldiers and/or police and/or lawyers in place on the planet where the collateral is located that can and will go get us that collateral in the event of a default.

In the game we can in fact have units of army and navy, and even nuclear missiles and so on, so in game contexts we can maybe allow collateral to be something we do not have in our vault. But in "real life" if it ain't in our vault we should assume Tom WIlliams and/or Pirateat40 has it.

All this really means is leverage is for the relatively rich.

The leverage I am thinking might be realistic to provide is the collateral/leverage account setup, whereby your broker maintains for you a nym that holds stuff of yours that the broker is willing to accept as collateral and the broker loans you stuff up to a value of some fraction (maybe half) of the value they think your collateral they have custody of is worth.

So compared to that, the basket long+short coins didn't look that bad really.

This matter of how to actually cause markets to value the longcoins and shortcoins appropriately is interesting though, Hmm...

-MarkM-

[nimda]

Obviously trading on margin / leverage isn't really feasible for the markets we're talking about. The best we can strive for, then, is 1:1 trading. A long/short basket does much worse than this, and so do the various CFD ideas. The futurecoins and options work 1:1, which is good. Additionally, both futurecoins and options can be traded as assets, but again, they don't work so well in an illiquid market.

This matter of how to actually cause markets to value the longcoins and shortcoins appropriately is interesting though, Hmm...

I think the only way to do it is to have the issuer (or some market-maker) accept longcoins and shortcoins separately.

[markm]

This matter of how to actually cause markets to value the longcoins and shortcoins appropriately is interesting though, Hmm...

I think the only way to do it is to have the issuer (or some market-maker) accept longcoins and shortcoins separately.

Maybe the platform could afford to do that on an alternating-type basis.

That is, it accepts them one at a time, and each time only of the type it didn't accept the previous time.

This could be smoothed out somewhat by having users offer the coins for sale, the marketbot then being able to look at both markets to check it can make a pair, and if doing so is within what it thinks (oops, maybe needing an oracle to do its thinking for it) is a worthwhile price it buys a pair.

Thus its buying activity basically broadcasts to the markets what its oracle is telling it is worth buying, which again brings us back to oracles.

It seems possible that if the interest on leverage loans is high enough, and such loans are popular enough, a brokerage doing the collateral/leverage accounts could build up enough collateral of its own that it might be able to provide larger leverage ratios to smaller borrowers, maybe even eventually to the point that small enough loans requested by frequent enough customers could even reach 1:1

For example if a specific customer has borrowed 100 of something at 1% per such loan 100 times, then the brokerage has already received 100 from them in fees, thus might be willing to risk some of that by offering an increase in leverage on loans that small or smaller.

Futurecoins maybe could be done as baskets the way assassination markets and such work. Basically someone interested in betting on a true/false proposition buys a basket of two coins, an itwasfalsecoin and an itwastruecoin. They then sell either of those to someone wanting the one they themselves do not want. When history reveals whether "it" was true or false, the house buys back either the true or the false but not both, the other becoming worthless.

Presumably the coins would then be retired while new but similar baskets are issued offering much the same bet but covering a new span of time.

Unfortunately this again needs an oracle, and oracles introduce liability as to whether the oracle might from time to time, ever, or always lie.

(LIARbility, hee hee.)

-MarkM-

[nimda]

This matter of how to actually cause markets to value the longcoins and shortcoins appropriately is interesting though, Hmm...

I think the only way to do it is to have the issuer (or some market-maker) accept longcoins and shortcoins separately.

Maybe the platform could afford to do that on an alternating-type basis.

That is, it accepts them one at a time, and each time only of the type it didn't accept the previous time.

This could be smoothed out somewhat by having users offer the coins for sale, the marketbot then being able to look at both markets to check it can make a pair, and if doing so is within what it thinks (oops, maybe needing an oracle to do its thinking for it) is a worthwhile price it buys a pair.

Thus its buying activity basically broadcasts to the markets what its oracle is telling it is worth buying, which again brings us back to oracles.

What if the longcoin could be split further? I.e. the issuer/house/platform will pay for the longcoin in backdrop + asset?
Then each basket is:
(((1 BTC) + (15 LTC)) + (1 BTC - 15 LTC))
Now the market has to value the longcoin more than the shortcoin. I see no way to "game" this system, but do you?

It seems possible that if the interest on leverage loans is high enough, and such loans are popular enough, a brokerage doing the collateral/leverage accounts could build up enough collateral of its own that it might be able to provide larger leverage ratios to smaller borrowers, maybe even eventually to the point that small enough loans requested by frequent enough customers could even reach 1:1

For example if a specific customer has borrowed 100 of something at 1% per such loan 100 times, then the brokerage has already received 100 from them in fees, thus might be willing to risk some of that by offering an increase in leverage on loans that small or smaller.

Unfortunately, in a market with anonymous consumers, anyone could seek to recoup their fees by scamming the lenders.

Futurecoins maybe could be done as baskets the way assassination markets and such work. Basically someone interested in betting on a true/false proposition buys a basket of two coins, an itwasfalsecoin and an itwastruecoin. They then sell either of those to someone wanting the one they themselves do not want. When history reveals whether "it" was true or false, the house buys back either the true or the false but not both, the other becoming worthless.

Presumably the coins would then be retired while new but similar baskets are issued offering much the same bet but covering a new span of time.

Unfortunately this again needs an oracle, and oracles introduce liability as to whether the oracle might from time to time, ever, or always lie.

Again, the oracle problem comes into play. I prefer my futurecoin idea above. Options don't need an oracle either.

(LIARbility, hee hee.)

hee hee

[markm]

What if the longcoin could be split further? I.e. the issuer/house/platform will pay for the longcoin in backdrop + asset?
Then each basket is:
(((1 BTC) + (15 LTC)) + (1 BTC - 15 LTC))
Now the market has to value the longcoin more than the shortcoin. I see no way to "game" this system, but do you?

I hadn't planned to implement the long and short coins as baskets themselves but simply to buy back pairs aka completed baskets for the value of the backdrop, since the actual long and short parts cancel each other.

Maybe though people holding shortcoins might have an incentive to simply not offer them for sale until some mythical pie in the sky time when they will be worth the full amount of the backdrop, the stuff it is short on having vanished away to zero value.

So I can see how having a time limit by which they have to be redeemed in order for the entire shortcoin to not become worthless could be useful.

But if having to tie up capital in the form of backdrop is as big a problem as you seemed to have earlier thought maybe tying it up indefinitely in the hope the thing you shorted will become worthless, or even just in the hope it will some year or decade become worth less than it was when you bought the basket or the shortcoin, is unlikely?

I wonder how much of a problem it would actually be to have a few scrooges who keep hoarding shortcoins, more and more and more shortcoins, and "never" selling them?

Since the longcoin can never go down in value to less than the value of its backdrop, the house/platform presumably should always be able to buy the longcoins back for that amount if no one else is willing to offer more.

Again, the oracle problem comes into play. I prefer my futurecoin idea above. Options don't need an oracle either.

Yes but options maybe require some special programming, if only in the form of smart contracts that take any needed collateral into the custody of the contract itself (which Open Transactions smart contracts can do); they might not be amenable to being implemented simply as tokens people can trade on the markets like any other tokens?

(This idea of trading like any other token is also part of why I prefer not to have to resort to having expiry dates on tokens.)

-MarkM-

[nimda]

What if the longcoin could be split further? I.e. the issuer/house/platform will pay for the longcoin in backdrop + asset?
Then each basket is:
(((1 BTC) + (15 LTC)) + (1 BTC - 15 LTC))
Now the market has to value the longcoin more than the shortcoin. I see no way to "game" this system, but do you?

I hadn't planned to implement the long and short coins as baskets themselves but simply to buy back pairs aka completed baskets for the value of the backdrop, since the actual long and short parts cancel each other.

I know, but this method makes the market actually value them properly. The longcoin can be redeemed for its parts, the shortcoin can be redeemed for its backdrop by paying the short part, and the two can be redeemed together for the backdrops.

Maybe though people holding shortcoins might have an incentive to simply not offer them for sale until some mythical pie in the sky time when they will be worth the full amount of the backdrop, the stuff it is short on having vanished away to zero value.

That'd be a silly thing for them to do, but it's no loss to the issuer.

So I can see how having a time limit by which they have to be redeemed in order for the entire shortcoin to not become worthless could be useful.

This is the most fundamental flaw of the basket. The shortcoin can become a liability and simply be discarded.

But if having to tie up capital in the form of backdrop is as big a problem as you seemed to have earlier thought

It's actually 2 separate problems:
- The shortcoin can have a negative value
- It's not economical to be long 15 LTC by tying up 1 BTC; instead, why not just buy the 15 LTC? This is the "worse than 1:1 leverage" part.

maybe tying it up indefinitely in the hope the thing you shorted will become worthless, or even just in the hope it will some year or decade become worth less than it was when you bought the basket or the shortcoin, is unlikely?

It's still no loss to the issuer.

I wonder how much of a problem it would actually be to have a few scrooges who keep hoarding shortcoins, more and more and more shortcoins, and "never" selling them?

It wouldn't be a problem if the longcoin and shortcoin were themselves baskets, as I said above:
(((1 BTC) + (15 LTC)) + (1 BTC - 15 LTC))

Since the longcoin can never go down in value to less than the value of its backdrop, the house/platform presumably should always be able to buy the longcoins back for that amount if no one else is willing to offer more.

The house should offer the backdrop + asset for longcoins, and the house should sell the backdrop for (shortcoin + asset).

Again, the oracle problem comes into play. I prefer my futurecoin idea above. Options don't need an oracle either.

Yes but options maybe require some special programming, if only in the form of smart contracts that take any needed collateral into the custody of the contract itself (which Open Transactions smart contracts can do); they might not be amenable to being implemented simply as tokens people can trade on the markets like any other tokens?

(This idea of trading like any other token is also part of why I prefer not to have to resort to having expiry dates on tokens.)

-MarkM-

- Alice creates 5 CALL tokens: buy 1 LTC for 0.003 BTC. The platform holds 5 LTC.
- Alice sells the 5 tokens to Bob. He sells 3 to Chris.
- Note that the platform didn't require any collateral from Bob.
- LTC price rises to 0.006. Bob exercises his 2 tokens. His tokens are removed from existence, 0.006 BTC is sent to Alice, and 2 LTC are sent to Bob.
- Afraid of a further rise in price, Alice buys 1 of her tokens and exercises it. She buys the LTC from herself, removing the token from existence.
- Alternatively, if her own tokens are unavailable, she buys an identical token (9.12.LTC.0.003) and holds it. The platform allows her to "link" it to one of her issued tokens.
-- Thus when Chris exercises one of her tokens, Alice's account takes the BTC sent to it by Chris and uses it to exercise the one she bought; both are removed.
- LTC crashes and the last token Alice issued (held by George) expires.

It seems to me that it would work.

[markm]

- Alice creates 5 CALL tokens: buy 1 LTC for 0.003 BTC. The platform holds 5 LTC.

Lets try to avoid individualised smart contracts if we can. For example, litecalls tokens could cost one litecoin each, bought from the house. She still gets five tokens for five litecoins, but there is no need for an entire smartcontract per token with an internal variable storing a litecoin.

The weakness here would be either a proliferation of hundreds or thousands of different types of token, one per strike price alice might propose, OR it being entirely up to alice how much she chooses to tell bob she is willing to honour the proposal at.

Yuck. I still think this cannot really be done as simple permanent tokens people can obtain from the house and eventually sell back to the house.

Instead we are faced with an entire smart-contract per each individual call, whether in this case that will be one call good for five litecoins or five calls good for one litecoin each.

- Alice sells the 5 tokens to Bob. He sells 3 to Chris.
- Note that the platform didn't require any collateral from Bob.
- LTC price rises to 0.006. Bob exercises his 2 tokens. His tokens are removed from existence, 0.006 BTC is sent to Alice, and 2 LTC are sent to Bob.
- Afraid of a further rise in price, Alice buys 1 of her tokens and exercises it. She buys the LTC from herself, removing the token from existence.
- Alternatively, if her own tokens are unavailable, she buys an identical token (9.12.LTC.0.003) and holds it. The platform allows her to "link" it to one of her issued tokens.
-- Thus when Chris exercises one of her tokens, Alice's account takes the BTC sent to it by Chris and uses it to exercise the one she bought; both are removed.
- LTC crashes and the last token Alice issued (held by George) expires.

It seems to me that it would work.

All that automatic sending of stuff back and forth and vanishing of tokens is basically smart contract stuff not tokens.

Each "exercise" would be the causing of a script built into a contract to be run, with the money to be transfered to or from whoever possibly having to be stored in the contract all along. Or it would be multiple scripts, such as bob "buying" the contract being bob storing assets into it as collateral ready to be sent on to alice if he exercises the contract.

It might well make sense to create some kind of special-purpose platform in which abstractions tailored specifically to this type of thing exist than to go through all the overhead of a smart-contract per coin, which could get really heavy load if someone decided to exercise many thousands at once,

To be able to put such things on the markets, meaning, to be able to offer to sell them for any asset, their price cannot be built into them it must be something the market decides. Having to have a market for each possible strike price proliferates the number of markets massively, since any asset can be paired with any asset to form a market at any power of ten scale.

So you'd end up with markets like "strike price 0.003 litecoin calls offered for sale for 0.002 Ixcoin calls in lots of one",  "strike price 0.003 litecoin calls offered for sale for 0.002 Ixcoin calls in lots of ten", "strike price 0.003 litecoin calls offered for sale for 0.002 Ixcoin calls in lots of a hundred" and so on for all possible pairs of assets, which would include all possible strike prices of all altcoins' calls and all shares' calls and so on and so on.

Take a look at the number of markets we already have just in having ten or twenty coin and share assets each of which can be traded at any integer scale of ten against each of the others...

By contrast, sure if any alice and any bob can get together somewhere and negotiate some specific deal they can figure out how to code into a smart contract they can do so. It is just kind of awkward to expect any specific deal they come up with to be a mass-sellable item tons of other people will be interested in bidding on (since at the very least they might well prefer a tiny difference in the strike price, which makes the entire thing a totally different product...)

-MarkM-

[nimda]

- Does not require an oracle
- Is not too specific
- Makes sense to actually buy -- offers up to 1:1 leverage

Pick two

[markm]

How about Bob and Alice each incorporate and do IPOs, Alice running her Litecoin Shorting Corp and Bob running his Litecoin Longness Corp, and sell shares? People betting litecoin will go long will buy Bobcorp, people betting it will go short will buy Alicecorp, and part of the fiduciary responsibility that Alice and Bob take on is minimising loss / maximising profit for their shareholders?

Shares can trade on any markets, and Bobcorp and Alicecorp can even work out any kinds of leverage either between them or with various other corps, or issue bonds to obtain leverage, or whatever they in their fiduciary capacities and vast wisdom and experience determine to be the most effective means of profiting from the fall of litecoin in the one case or the rise of litecoin in the other?

-MarkM-

[nimda]

How would AliceCorp go about shorting litecoin?

[markm]

Borrow it from Bobcorp and sell it, maybe?

Bobcorp should be eager to earn more Litecoin by loaning it at interest?

Maybe at some arms length if Bobcorp prefers to think itself to be investing in litecoin based corps rather than to be helping Alicecorp short Litecoins.

But heck Bobcorp likely doesn't hold all the litecoins, right? So maybe borrow from someone else.

Actually General Credit Corp is kind of hoping to be able to fill the role of loaner of a wide variety of assets...

-MarkM-

[nimda]

But unlike all of the other vehicles we've been discussing, that method opens up the risk of default. What if Litecoin goes up by 10X? The BobCoin litecoin bulls could lose money.

[markm]

Bulls profit if it goes up, It should be it going down that would be bad for Bobcorp.

But defaults seem to me to simply emphasise the need for collateral.

Tying up a bunch of your capital might be real bad if you are small, but maybe at some "too big to fail" kind of scale having at least half one's capital tied up as secure collateral might actually make sense, at least better sense than being leveraged so that the tipping point / butterfly's wing needed to bring your entire edifice and maybe much of the nation / society is operates in down is small/sensitive?

-MarkM-

[nimda]

Bulls profit if it goes up, It should be it going down that would be bad for Bobcorp.

Not if Alicecorp can't fulfill its obligations on the loan.

But defaults seem to me to simply emphasise the need for collateral.

Where would this collateral come from? Shareholders' homes?

If Alicecorp's shares are sold in BTC, and Alicecorp borrows LTC from Bobcorp, but LTC price rises 1000x, there's no way Alicecorp can pay back the loan; the BTC won't cover it.

[markm]

In that case the platform/house certainly should not cover it, and maybe should warn Bob against taking so much risk.

Maybe there is some middle ground between hedging versus loss thus not losing or gaining, and gambling.

-MarkM-

[fellowtraveler]

I'm not very familiar with Open Transactions. Can it hold money in escrow?

Yes.