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.
There are probably some pairs though where that is ridiculously unlikely. For example GRouPcoin generates 50 coins per block forever whereas BiTCoin generates less coins per block over time, so the idea that a GRouPcoin would ever "really" be worth more than a BiTCoin seems a bit of a stretch. Basically though all this problem does is provide a floor under losses from shortness.
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.
The "why" here, I suspect, is that you are not merely going long, you are going long while someone else goes short. So what you are really buying, over and above what you'd get by simply buying the litecoins, is someone else going short by the amount you go long. A different kind of short than a person achieves merely by selling you litecoins, as they are basically trying to sell you litecoins they do not have. (Is that "naked" shorting, maybe?)
I do not know how useful it is to have someone else go nakedly short in something you are bullish on. But maybe it is better than having someone go non-nakedly short on it as they would by selling you the thing? Since basically you are trying to create debt denominated in the thing you are bullish on, which in turn if the debt is not defaulted on ought to end up becoming, at some future time, a demand for the thing? (Since the debtor will eventually hopefully be looking to pay back their debt.)
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))
The problem I see with that basket is, what the heck is a negative fifteen litecoin? Some kind of debt instrument?
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).
Hmm maybe. I suppose one way to implement that would be to have another basket currency made of (shortcoin & asset) that the house can buy on markets, and to either create yet another basket currrency made of (backdrop & asset) that the house can offer for longcoins or to compute from the exchange rates of the backdrop and the asset against other things a price in any actually existing asset at which the house will buy longcoins.
Hmm.
Maybe the mutually exercise-able option concept might work better?
Basically we both agree on a strike price and volume and expiry date and up until the expiry date either of us can exercise the option. Basically we would be trading calls for puts.
Such an approach might need some kind of bot or something though as when it was discussed before someone seemed to imagine only the person "in the money" would exercise it, whereas upon reflection it seems to me that the party who is headed out of the money might also wish to exercise it to stop their loss, resulting in the in the money party needing to set up another similar deal again as soon as possible to continue/extend their gain.
-MarkM-
EDIT:
<knotwork> I suppose you could make it use granular time.
<knotwork> so as well as an expiry like maybe 30 days or whatever, also when you say to exercise it it does not actually execute until the next midnight
<knotwork> or dawn or whatever
<knotwork> so if you flinch at the first satoshi out of trhe money five seconds after making the deal, you may find when the full 24 hours of granularity of time is up that you flinched too soon
(Yes, "knotwork" on Freenode IRC is me.)
