*old* BitShare Economic Theory 10 BTC bounty to prove me wrong... paid.

[mmeijeri]

OK, let's try it another way, maybe that will help clear up the confusion.

Do we agree you could create a crypto-USD that acts much like Ripple IOUs if we had a central party (it could still be a commercial venture, it doesn't have to be a central bank) issuing crypto-USD and redeeming it at face value (minus some small fee). To the degree the central party was considered credit-worthy and reliable, the crypto-USD would then indeed track the real USD.

The disadvantage of this is that you are now reliant on a central party and it is this you want to remedy?

Can you explain the nature and details of the differences between your proposal and what I just described?

[1713889126]

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[mmeijeri]

How much crypto-USD and other crypto-fiat could the system support relative to the market cap of the underlying cybercurrency? I'm assuming always strictly less. What would happen if we approached that limit? What would happen if the value of the underlying currency dropped to nearly zero, say because it was supplanted by a different cybercurrency without a proof-of-burn transition path?

[bytemaster]

I have been thinking about the benefits of pre-mining to help get this thing going.

It seems like there is a paradox where no one will invest in this as long as they believe SOMEONE ELSE will and so they can sit back and get no benefit.  My goal is to get this out there ASAP so we need to change the market dynamics to help make that happen.

I clearly don't want to pre-mine like Ripple.  

I suspect there is some balance here, so the best approach I can think of to making sure that pre-mining is fair and just is to set a price to sell pre-mined shares.   Therefore, I propose the following:

1) Anyone who sends Bitcoins to the following address:  18dzTA5JDLrP5bu6spDSqK9wGDLS4sM5bU  will be allowed to redeem 10000x as many bitshares from the genisis block of the new chain.  Thus the IPO is priced at about $0.01 per bitshare.  The gensis block will contain a transaction with outputs that are redeemable with the same private keys.

2) By contributing funds to that address you will recognize that they may be used to fund this project as I see fit to make it a reality.  

3) I will pay all contributors who write code, documentation, create promotional / educational videos from this fund, with the caveat that I may request they 're-invest' some or all of their pay by sending the money back to the fund.  

4) As a result of this structure EVERYONE gets paid for their time at current market rates and that time is reflected in your initial stake in the bitshare economy.   Whether you contribute time or money, it will all be valued at market rates.  

5) I believe this gives us an ability to set a price for bitshares *today* based upon how many actually get issued.  The market forces will be such that bitshares will be issued in quantity until the expected market-value on launch equals .0001 bitcoin.

6) 'pre-mining' is fair with this system because all pre-mined shares are tied to real proof-of-work represented by the bitcoins contributed.

7) I will create an alternate address for people who want to contribute to the bounty to prove the idea will not work.

Please do not send money to this address until I post a follow up post that CONFIRMS this plan.  I will create a more detailed contract and then SIGN it with that bitcoin address.  

What does everyone think?

[bytemaster]

OK, let's try it another way, maybe that will help clear up the confusion.

Do we agree you could create a crypto-USD that acts much like Ripple IOUs if we had a central party (it could still be a commercial venture, it doesn't have to be a central bank) issuing crypto-USD and redeeming it at face value (minus some small fee). To the degree the central party was considered credit-worthy and reliable, the crypto-USD would then indeed track the real USD.

The disadvantage of this is that you are now reliant on a central party and it is this you want to remedy?

Can you explain the nature and details of the differences between your proposal and what I just described?

Good questions and I think I have good answers:

1) Yes I agree that crypto-USD could be thought of like an IOU from a 'central' bank. 

The DIFFERENCE between crypto-USD and a crypto-USD-IOU is the following:

1) There is no limit to how much crypto-USD-IOU a central bank could issue... you have to trust them not to practice fractional reserves.

2) There is only one party that can actually redeem those crypto-USD-IOUs and if that party were to disappear then all crypto-USD-IOUs would be worthless.

3) The crypto-USD-IOU derives its value from a promise to pay, promises can be broken.

4) The crypto-USD-IOU could not pay interest without the practice of fractional reserves (*or*  having a fixed loan period where they are not redeemable on demand, but only after some date... in which case not all crypto-USD-IOUs would be fungible as they would all carry different effective interest rates based upon their maturity date).

5) A crypto-USD is not an IOU USD.   Instead it can be thought of as a bitcoin-bond with a fixed interest rate.  Therefore, its value comes not from a promise to pay, but from the value of a bitcoin bond.   The interest rate paid on the bitcoin bond is established as the average exchange rate at which all outstanding crypto-USDs have been lent into existence.   Thus crypto-USD can be thought of as a bitcoin bond at rate X while crypto-EUR would be at rate Y and crypto-GOLD would be at rate Z.   The net-present-value of these bitcoin bonds would track USD, EUR, and GOLD based upon supply or demand of people wanting to borrow GOLD from the network (withdraw it) and people wanting to deposit gold into the network.   These people will only deposit GOLD or withdraw GOLD in exchange for a bond of comparable value and thus the willingness of people to deposit/withdraw gold will effectively set the bitbond interest rate defined by crypto-GOLD.






 
 

[mmeijeri]

I clearly don't want to pre-mine like Ripple.  

I suspect there is some balance here, so the best approach I can think of to making sure that pre-mining is fair and just is to set a price to sell pre-mined shares.

I see no fairness issue either way, as long as you are open about it. It's more an issue of whether the value proposition you are making to both early adopters and the general public is sufficiently attractive to win them over. Fairness doesn't enter into it.

Personally, I would try to avoid a split from Bitcoin, and of course I still need to be persuaded the whole thing would work. Additionally, I don't think you could manage to compete against a fork that didn't split from Bitcoin.

[Rampion]

I have been thinking about the benefits of pre-mining to help get this thing going.

It seems like there is a paradox where no one will invest in this as long as they believe SOMEONE ELSE will and so they can sit back and get no benefit.  My goal is to get this out there ASAP so we need to change the market dynamics to help make that happen.

I clearly don't want to pre-mine like Ripple.  

I suspect there is some balance here, so the best approach I can think of to making sure that pre-mining is fair and just is to set a price to sell pre-mined shares.   Therefore, I propose the following:

1) Anyone who sends Bitcoins to the following address:  18dzTA5JDLrP5bu6spDSqK9wGDLS4sM5bU  will be allowed to redeem 10000x as many bitshares from the genisis block of the new chain.  Thus the IPO is priced at about $0.01 per bitshare.  The gensis block will contain a transaction with outputs that are redeemable with the same private keys.

2) By contributing funds to that address you will recognize that they may be used to fund this project as I see fit to make it a reality.  

3) I will pay all contributors who write code, documentation, create promotional / educational videos from this fund, with the caveat that I may request they 're-invest' some or all of their pay by sending the money back to the fund.  

4) As a result of this structure EVERYONE gets paid for their time at current market rates and that time is reflected in your initial stake in the bitshare economy.   Whether you contribute time or money, it will all be valued at market rates.  

5) I believe this gives us an ability to set a price for bitshares *today* based upon how many actually get issued.  The market forces will be such that bitshares will be issued in quantity until the expected market-value on launch equals .0001 bitcoin.

6) 'pre-mining' is fair with this system because all pre-mined shares are tied to real proof-of-work represented by the bitcoins contributed.

7) I will create an alternate address for people who want to contribute to the bounty to prove the idea will not work.

Please do not send money to this address until I post a follow up post that CONFIRMS this plan.  I will create a more detailed contract and then SIGN it with that bitcoin address.  

What does everyone think?

Just my 0.02: if you are preming I will not support your crypto, which seems interesting (but i have to admit I'm not getting many points).

I do not think premining is "immoral"  or something like that, it's just that premining invalidates the "decentralized" concept from the very beginning.

[btcmind]

As explained in the other thread there can not be crypto-USD. Imagine I say I have 10$ in my virtual account (i.e. electronic cash). How do I prove that in the system? There is no way, so what I do is a have central clearing authority, the central bank. Every transaction then goes through this central point, essentially to verify this fact. In this sense proving that account A is worth 10$ is the same as verifying transactions from A to B . The whole point of Bitcoin is get around this fact. I thought that was obvious, but I'm surprised to find out it is not. However the problem is that a Bitcoin network has nodes which interact with fiat money. Which makes these outside facing nodes a target. This part isn't solved yet, but has little to do with blockchains. I highly doubt it can be solved. Which means the main network BTC can be shutdown by governments, because without e-processing from bank to BTC the use is very limited. And then there are legal issues to solve. Anyway...

[bytemaster]

As explained in the other thread there can not be crypto-USD. Imagine I say I have 10$ in my virtual account (i.e. electronic cash). How do I prove that in the system? There is no way, so what I do is a have central clearing authority, the central bank. Every transaction then goes through this central point, essentially to verify this fact. In this sense proving that account A is worth 10$ is the same as verifying transactions from A to B . The whole point of Bitcoin is get around this fact. I thought that was obvious, but I'm surprised to find out it is not. However the problem is that a Bitcoin network has nodes which interact with fiat money. Which makes these outside facing nodes a target. This part isn't solved yet, but has little to do with blockchains. I highly doubt it can be solved. Which means the main network BTC can be shutdown by governments, because without e-processing from bank to BTC the use is very limited. And then there are legal issues to solve. Anyway...

Let me try to use yet another analogy to help clarify things.

Suppose you have 1 dollar in hand and you go to someone and ask for 20 nickels.   If they have 20 nickels they are generally willing to trade despite the fact that a paper dollar and 20 nickels are two different things with different market values.  Base metal in nickel is worth more than face value.   Nickels are heavy and hard to carry around, but paper is easy to move around.  Nickels go through the wash better than paper.   Despite these differences people are generally willing to trade at face value *unless* they both need the properties of one or the other.  I might charge you $1.10 in nickels for $1.00 just because I really don't want to mess with the bulk, but for an extra 10% it is worth my while.

The dollar/nickel trade does not involve any IOU between the two parties.  Both parties traded something of about equal value despite both being labeled and denominated in USD.

What Bitshares allows us to create is a new asset class that can be traded without an IOU at near parity.  This asset class is a Bitshare BOND that pays interest in Bitshares.   If you trust in Bitcoin then imagine a Bitcoin bond that pays interest enforced by the blockchain so there is still no counter-party risk.    You can then concluded that depending upon the interest being paid on that bitshare bond it will have a different net-present-value.   

So you want to deposit USD in to the system and have it maintain parity without any counterparty risk.  Someone else wants to withdraw value from the system in the form of USD.    (neither party wants to convert out of USD denominated assets).   For this exchange to occur assets of near equal value must trade hands.   Fortunately, the bitshare network facilitates that by allowing the creation of bitshare bonds at ANY interest rate and therefore ANY nominal value.    So, you give someone USD and they give you a BitShare bond with Equal net-present-value.

The process of creating / destroying bonds of USD denomination is such that the interest rate will adjust to keep parity with the original value.

Because people can BARTER value for equal value like converting nickels to paper dollars there is no need to interact with banks (once things get big enough).  There is no need for a vault or to trust anyone.

[mmeijeri]

The process of creating / destroying bonds of USD denomination is such that the interest rate will adjust to keep parity with the original value.

Can you elaborate on how the bonds are destroyed? I tried to asked this before, but I think you understood it as asking how to sell off the bonds, which is not the same thing. In other words how is the stock of outstanding collateral reduced?

[bytemaster]

The process of creating / destroying bonds of USD denomination is such that the interest rate will adjust to keep parity with the original value.

Can you elaborate on how the bonds are destroyed? I tried to asked this before, but I think you understood it as asking how to sell off the bonds, which is not the same thing. In other words how is the stock of outstanding collateral reduced?

When you 'go short crypto-USD' they are tied to a SPECIFIC number of crypto-USD that you are issuing.  You will endup with an output in your wallet with a negative crypto-USD balance that is linked to the bitshares backing it at a particular exchange rate.   To destroy bonds you can create a transaction that 'spends' that negative balance to an output denominated in bitshares (at the encoded exchange rate) provided the same transaction includes an input with a positive crytpo-USD balance.    Thus the individual who creates crytpo-USD can destroy it by reversing the process they used to create it.

 

[bytemaster]

How does everyone come to an agreement about what a particular sub-currency is supposed to track?

The same way that the market comes to an agreement about what to use as money, or any other convention that is not demanded by government.   If there are multiple competing sub-currencies all claiming to track gold, then the market will trend toward whichever one gains the strongest reputation for actually following gold.  Any variants would end up having to do currency exchanges to convert between two different sub-currencies both claiming to be 1 oz of gold and those inefficiencies would cause everyone to join the majority consensus.   Once one currency gained large enough volume on the exchange and a majority of the 'market share' then it would become the defacto-standard.  Any market participant that had an opinion that differed from the ‘consensus’ would make losses by mis-pricing the asset.  Thus no one would be able to redefine what a particular sub-currency means without changing the group consensus of all traders.

How did language develop?  Who decided what words would 'track' what ideas?  The answer is that anyone who doesn't learn and adapt to the consensus would be unable to communicate.  This is a very natural process and does not require any central authority to define standards.

[greBit]

I hope im not the only one who is very intrigued but a little lost on this proposal!

...

• Users may issue new sub-currencies by ‘shorting the sub currency’ and backing the short position with dividend payments from a defined number of their Shares.
• Owners of sub-currencies will receive the dividends from the all Shares used to create them proportional to their balances.
• Short positions can only be redeemed by the issuer.

Any chance you could write an example explaining how crypto-USD is created? i.e. what operations would be involved, what would happen on the blockchain etc

Concretely, how would I 'short the sub-currency and back it with dividend payments from my bitshares'?

• The native currency will be called a share and is mined into existence on the same schedule as Bitcoin.
• Shares will pay dividends from half of the mining fees and rewards

Say I have 100 BitShares, and I receive dividends - in what currency am I receiving them?[/list]

[cunicula]

Where I live a mango costs 1 USD. Say I create a crypto-mango. I also create a crypto-USD. These require identical backing when I create them. Will their value diverge in the future? If so, why?

As I see it, CryptoUSD will not necessarily follow the price of USD. You can only hope that they will. Am I wrong?

Market participants need to align the price of CryptoUSD with the price of USD. What are the incentives to do this?

BTW: I am a big fan of dividend payments as a mechanism for supporting something like this. See here for example,

https://bitcointalk.org/index.php?topic=197799.msg2280672#msg2280672
https://bitcointalk.org/index.php?topic=169204.msg2143460#msg2143460

[nomailing]

I think you misunderstand the nature of motive 2.  Someone who wants to convert crypto-USD to USD is doing so because they *FEAR* that crypto-USD will fall in value.  Therefore, they become SELLERS of crypto-USD which pushes the price of crypto-USD down.

But your assumtion that they *FEAR* that crypto-USD will fall in value is based on the assumption that they assume that the price will reach parity in the future. You haven't proven that this is the case.

For example you could do the same reasoning for BTC by just renaming it to crypto-USD. Just by naming it USD you could argue that people want to sell it for paper-USD if the price is 101$. But nobody can guaranty that the price will be on parity. In reality the price could diverge to some arbitrary number (like with the BTC-USD exchange rate). So I still think that you use circular reasoning... But probably I just miss some important point... Would be nice if you could point me to the correct reasoning if I made an error. thanks a lot..

@bytemaster you still haven't replied to my answer above. So I assume we are still on a different level. Maybe I still miss some important point, or you are still reliying on circular reasoning?!
I will try to clarify what I mean, so that we can maybe come to the same conclusions...

You say:

Also, if the price of crypto-USD is above face value then that effectively means they can make a profit by selling 100 crypto-USD for 101 paper-USD assuming they bought 100-crypto USD for $99 paper-USD the last time their was an imbalance of withdrawals and deposits.

But your assumption that "they can make a profit by selling 100 crypto-USD for 101 paper-USD" is solely based on the assumption that the exchange rate between crypto-USD and fiat-USD actually IS on average 1:1. So it is a circular argument.

So, I just want to point out here, that what you say in the white paper, is not a proof that the price will be parity (on average), because in your reasoning you use the assumption that the price is on parity on average. Do you see the point, and could you agree to this?

If that is the case, then maybe we could come to the following conclusion, which is what I understand from your reasoning: the exchange-rate between fiat-USD and crypto-USD will be 1 on average IF enough people think that the exchange-rate between fiat-USD and crypto-USD will be 1 on average. So although this IS circular reasoning, the idea might still work?! But it is no proof that it will work.

[cunicula]

If that is the case, then maybe we could come to the following conclusion, which is what I understand from your reasoning: the exchange-rate between fiat-USD and crypto-USD will be 1 on average IF enough people think that the exchange-rate between fiat-USD and crypto-USD will be 1 on average. So although this IS circular reasoning, the idea might still work?! But it is no proof that it will work.

+1; what I was trying to say with the mango example is that even if the exchange rate were 1:1 now, there is no reason to believe it will remain 1:1. Thus, we really need even more extreme circular reasoning:

the exchange-rate between fiat-USD and crypto-USD will be 1 on average IF enough people think that the exchange-rate between fiat-USD and crypto-USD will be 1 on average at all points in the future

[bytemaster]

Say I have 100 BitShares, and I receive dividends - in what currency am I receiving them?[/list]

All dividends are paid in shares; however, shares can be 'sold' for the sub-currency on the exchange.

(On a technical/implementation side of this)
Because 'dividends' are awarded each time a block is created, they cannot be redeemed for 120 blocks, just like newly mined shares.    You redeem them by spending the output, which will then calculate the proper dividend amount based on the coin-age and the summary statistics of all blocks since that coin was received at a particular output.

[bytemaster]

Where I live a mango costs 1 USD. Say I create a crypto-mango. I also create a crypto-USD. These require identical backing when I create them. Will their value diverge in the future? If so, why?

As I see it, CryptoUSD will not necessarily follow the price of USD. You can only hope that they will. Am I wrong?

Market participants need to align the price of CryptoUSD with the price of USD. What are the incentives to do this?

BTW: I am a big fan of dividend payments as a mechanism for supporting something like this. See here for example,

https://bitcointalk.org/index.php?topic=197799.msg2280672#msg2280672
https://bitcointalk.org/index.php?topic=169204.msg2143460#msg2143460

First of all, I do not blame anyone for having a hard time resolving the apparent circular logic.  This is as tough to explain as it would be to explain how the first spoken languages developed.   In some sense though, bitcoin is a perfect example of 'circular logic' creating value.  On day one of bitcoin there was no 'value' except what some people arbitrarily decided to exchange a pizza for.   That first exchange was truly arbitrary.  Later people made other trades based upon that arbitrary first exchange.  Over time people began to gain some confidence that others would trade them.  Eventually bitcoin will reach a stable price just like USD (probably more-so).   Why will it do this, circular reasoning:  someone exchanged it yesterday, so someone will do it tomorrow, it has value because it has value.    It has value because of consensus.

The first crypto-Mango would be less arbitrary than the first bitcoin-pizza trade (assuming bitshares have established some value like bitcoin has).   The crypto-Mango would start out at parity with mango's or no one would trade a real mango for a crypto-mango.  The second crypto-Mango would only be created because there was someone else who wanted to deposit a mango and someone else who wanted to withdraw a mango.  This deposit/withdraw would only occur *if* the crypto-Mango was worth a real-mango.  Thus the second crypto-Mango would have to be created at the new exchange rate which would adjust the interest paid on all crypto-Mangos.  It would also affect the short-position of the issuer of the first crypto-Mango causing them to either make or lose money.

The third crypto-Mango is yet again issued based on the desire for a deposit, and once again the depositor will only accept a crypto-Mango if its value is close to parity with a real mango. 

The fourth depositor wants to make a deposit, and the current crypto-Mango price is already near parity so he can simply trade his mango with one of the first 3 depositors who already have crypto-Mango. 

Later someone wants to withdraw a crypto-Mango into a Mango.  They need to attract a depositor.  Those who are 'short' are potential buyers because if they can buy the crypto-Mango back they can either cut-their losses or make a slight profit by redeeming it slightly below face-value.  All shorts would be competing to earn that profit which is why the 'profit' will be minimized and approach the transaction fee.   If there was only 1 short, they could demand 50C on the $ to redeem, but there are 1000's of shorts and who ever offers the lowest price 'redemption' gets to make the profit.

So early adopters of the crypto-Mango would take some risks back-stopped by the underlying value of a bitshare.  These early adopters would establish a consensus that would cause the market for crypto-Mango's to grow.  As the market grows then it establishes a history.  Once it has a history people can trust it.

[bytemaster]

You say:

Also, if the price of crypto-USD is above face value then that effectively means they can make a profit by selling 100 crypto-USD for 101 paper-USD assuming they bought 100-crypto USD for $99 paper-USD the last time their was an imbalance of withdrawals and deposits.

But your assumption that "they can make a profit by selling 100 crypto-USD for 101 paper-USD" is solely based on the assumption that the exchange rate between crypto-USD and fiat-USD actually IS on average 1:1. So it is a circular argument.
[/quote]

First of all there is a self-reinforcing market dynamic at work here.  I will focus on the underlying dynamic first that is not 'circular'.

There are 2 exchange rates we must consider in all of this.

1) crypto-USD to paper-USD
2) crypto-USD to Bitshare

The short seller is the one who makes a profit by redeeming slightly below face value.  There are many such short sellers and thus they all compete to redeem as close to face value as is profitable.  Why is it profitable, because their value is held in bitshares and they would be able to free 10 bitshares for the "price" of 9 bitshares.   Assume the price of a mango on the market is 10 bitshares, assume someone has is short a crypto-Mango and has it backed by 10 bitshares.   Then they could make money by producing a mango (bought at the local store with USD) provided someone gave them 1 crypto-Mango + 1 bitshare.   

[bytemaster]

The short seller is the one who makes a profit by redeeming slightly below face value.  There are many such short sellers and thus they all compete to redeem as close to face value as is profitable.  Why is it profitable, because their value is held in bitshares and they would be able to free 10 bitshares for the "price" of 9 bitshares.   Assume the price of a mango on the market is 10 bitshares, assume someone has is short a crypto-Mango and has it backed by 10 bitshares.   Then they could make money by producing a mango (bought at the local store with USD) provided someone gave them 1 crypto-Mango + 1 bitshare.  

Let me clarify, they could also 'make money' by producing 1 mango in exchange for 1 crytpo-Mango an 1 paper-USD or 1 crypto-Mango and ANYTHING else.  Perhaps they produce a mango with a bite taken out of it in exchange for a full crypto-Mango.   Mango's are neither 'fungible' nor 'divisible' so the example is a bit contrived, but you get the idea.

[cunicula]

There are no fundamentals relating the price of cryptoUSD (denominated in shares) to the price of actual USD (denominated in shares).

Say you take x shares and turn them into a cryptoUSD. Now you have a cryptoUSD backed by the discounted present value of txn fee revenue from x shares.

Say you take x shares and hold them. Now you have x shares backed by the discounted present value of txn fee revenue from x shares.

Ignoring liquidity issues, the value of the cryptoUSD could remain constant when denominated in shares. The USD value of a cryptoUSD could go up and down, just like the USD value of a share will go up and down.

You're going to tell me that the cryptoUSD will certainly go up and down in share-denominated price, etc., etc. Why? Suppose no expects it too. Will it still go up and down in price? Isn't complete stability an equilibrium (albeit a useless one)? If so, isn't the entire set of outcomes determined by arbitrary expectations of market participants?

To achieve something functional, you need to
 
a) create an incentive scheme for asset issuers (e.g. reward issuers that create frequently transferred assets) and/or
b) peg your derivatives to something with a physical interpretation (e.g. PoW difficulty).

I suggest you save your money for a well thought out project.