[Announce] Project Quixote - BitShares, BitNames and 'BitMessage'

[cunicula]

1) You cannot perform mathematical operations on prices except comparison.  Addition, subtraction, multiplication, division are not valid operations on prices.
2) A price represents a single exchange ratio, a single data point.  Its meaning is limited to the two people involved in the exchange and cannot speak for the global value.  It cannot be aggregated, averaged, or used for anything other than curiosity.
3) As a result of a market exchange, value may neither be created nor destroyed, only reallocated.
4) No one should get something for nothing or nothing for something.
5) There is no 'unit' of value.
6) BitShares have a non-0 value.
7) the only valid price is between the highest bid and lowest ask because this means the whole market agrees, not just one person.
If there is an opportunity to profit, someone will find it.
9) All trades must be voluntary, ie: the two sides of the trade must agree.
      * note * margin calls the 'bank' has authority to sell the collateral but not force someone to buy it.

I was more thinking along the lines of fixing a certain point in time and considering all possible "moves" a single participant could make in the market.  The assumptions could be something like this:

1) Bitshares have some "external" price (or marginal price if you prefer) at which everyone can buy/sell Bitshares for (real) USD.  At least for low volumes and if we for simplicity neglect the exchange spread such a price is given.  As I understand it, this is the basis on which everything is built.  (Bitshares as cryptocurrency.)

2) This price changes over time, but the future prices are unknown (a stochastic process).  Not sure yet if we have to assume something about the probabilities for going up/down or how those are perceived.  Probably the intrinsic "margin calls" put some kind of bound on the maximum steepness of the price, at least in one direction.  But I haven't yet thought about that.

3) It is known to every participant how just holding either Bitshares or BitUSD will pay out dividends over time, at least if we assume that the total amount of BitUSD does not change (because we consider short time intervals for instance).

4) There is a current market rate for Bitshares to BitUSD, similarly to 1.

5) The moves a participant can make are to buy/sell Bitshares on the market (see 1) for USD, buy/sell them for BitUSD (see 4) or create/destroy BitUSD with Bitshares collateral.  I have to admit that I have to check the current whitepaper for how/when exactly this is possible and at what rate, because this changed over time in the proposal and I didn't check the current version.

This is of course not really formalised yet - but do you think those assumptions seem reasonable?  Did I misinterpret something in the proposal or miss something?  I know this is very simplified and doesn't take a real market into account yet (because of 1 and 4), but maybe this already does for a starter.  Then the next question would be to consider the possible cases (BS/BitUSD is greater/smaller than BS/USD for instance), how the possible "moves" in 5 pay out for a single participant over a small time interval (thus how a rational participant would react) and what the influence of this move is on the rates - the question is then whether or not this always tends to equalise exchange rates, and if this can be argumented in general.

Disclaimer: As said I'm a mathematician and interested in economics, but my actual field of research is not related to economics or game theory.  I also only have some basic training in economics (you guessed it, mostly Keynesian models for macroeconomics as well as some very simplified microeconomic models).

You (domob) definitely have the right approach. It won't get very far however because equilibria in monetary systems are never unique. The market equilibrium depends on the beliefs of market participants, which can change arbitrarily. (i.e. unique beliefs are not pinned down by math. their is an infinite set of possible beliefs which map into an infinite set of equilibria). The key questions are "how/why do market participants coordinate on the selection of one particular equilibrium" and "what causes this coordination to break down"

The selection of equilibria depends on the beliefs of market participants because pure monetary instruments have no intrinsic uses besides the store and transfer of value.

If I believe that other market participants think that a BitUSD is worth 0.00 USD, then I will not buy a BitUSD unless it is free and I will sell a BitUSD for any positive price.
If I believe that other market participants think that a BitUSD is worth 1 BTC, then I will purchase it for any price less than 1 BTC and I will sell a BitUSD for any price > 1 BTC.
If I believe that other market participants think that a BitUSD is worth 1 USD,  then I will purchase it for any price less than 1 USD and I will sell a BitUSD for any price > 1 USD.

You can see these belief-driven movements in price in the BTC market. Wild price fluctuations occur despite no obvious changes in fundamentals.

For state currency, beliefs depend on expectations of state behavior. Looking at state currencies is illustrative. Let's look at the Brunei dollar as an example. The Brunei dollar is pegged 1 to 1 to the Singapore Dollar (SGD). (see the linked graph)
https://www.google.com.sg/search?q=hkd+i+nusd&oq=hkd+i+nusd&aqs=chrome..69i57j0l3.5033j0&sourceid=chrome&ie=UTF-8#fp=a70c8018b0426e41&q=1+brunei+dollar+in+sgd&safe=off
This doesn't mean that the Brunei gov't has 1 SGD or USD equivalent in reserves for every Brunei dollar issued. They hold far less than this (maybe 15 billion SGD in monetary issue, and 5 billion in reserves). If market participants suddenly shifted their beliefs to 1 Brunei Dollar = 0.00 SGD, then the Brunei gov't would be forced to devalue their currency. This type of simultaneous belief shift is extremely unlikely, but it is a nash equiliribium outcome. If the reserves dropped to say 1 billion, then market participants nerves would begin to rattle. Some speculator (e.g. George Soros has famously done this vs. Bank of England, HK, etc.) could see profit in precipitating a change in beliefs, by placing huge leveraged shorts on the Brunei dollar. To save themselves, market participants would go to the central bank and trade in their Brunei Dollars for SGD, causing the bank to run out of foreign currency reserves and thus force a devaluation. This is called a self-fulfilling prophecy. If Soros didn't come in and make the speculative bet, the Brunei Dollar could just as easily have gone on trucking at parity with the SGD.  

Maintaining a fixed price for a monetary instrument depends on the issuer's willingness to step in to buy it at that price. BitUSD confuses things because there are multiple issuers of fungible BitUSD. This creates some problems for value stability. To see this, suppose that 90% of bitshares are owned by one guy. He may then issue BitUSD backing them with bitshares. This one guy has quite strong incentives to maintain the price of BitUSD at parity by intervening in the market. If the whole BitUSD thing falls apart, then bitshares will become worthless. If not, then he can charge txn fees and essentially run a paypal like business.

Now suppose that their are 1000 people who each own 0.1% of bitshares. We now have a free rider problem. Again, these people would prefer for BitUSD to maintain parity, but providing finance to stabilize the currency against market fluctuations is costly/riskly. If someone else does it, then you enjoy all the benefits but face not of the cost/risk. So why do it yourself? Consequently, equilibria in this set-up are likely to be highly unstable. An eventual shift to a devaluation equilibrium is the likely outcome. The price would most likely approach zero. (i.e. expect bitUSD to initially be stable if ownership is extremely concentrated, but collapse if ownership becomes diffuse (i.e. if the bitShares becomes truly decentralized rather than a paypal style operation).

The takeaway message is that someone needs to have a strong profit-driven incentive to intervene in markets for the system to work (in the sense that paypalUSD works even though they are debt issued by paypal not debt issued by the US gov't). I actually think it is possible to decentralize these incentives and build a successful system to do this. However, I am extremely sceptical of the bitshares project. I haven't seen any serious consideration whatsoever to the incentives of market participants.

Consider some unanswered questions:

Why do people issue bitUSD?
How is this profitable?
Who has a strong incentive to spend money ensuring that the 1 bitUSD = 1 USD equilibirum is maintained? It is not adequate to say that it will be maintained because people expect it to be maintained and a deviation is an arbitrage opportunity. You could just as easily say that about the 1 bitUSD = 1 Euro equilibrium or the 1 bitUSD = 0.00 USD equilibrium, etc. Someone or some group has to be willing to sacrifice money to demonstrate a commitment to the good equilibrium. Who will this be? (surely not minority owners)

The bitshares paper presents us with a bunch of 'axioms' as a substitute for economic analysis. There is no one trained (or even vaguely familiar with) in mathematics-based economics on their staff. In fact they disavow constructs such as game theory as invalid by some anti-math axiom.

How could this really work:

I think the most productive way of addressing bitshares' objectives is by viewing the operations as a decentralized paypal. Sort of like a paypal credit union run for the benefit of its users. You need to have a mechanism where a large group of minority owners collaborates to make decisions normally delegated to a CEO. The mechanism needs to be incentive compatible and individually rational. Individually rational means that investments in bitshares offer a fair-risk adjusted return on average. Incentive compatible means that users have some pecuniary reward for contributing to the currency's stability. Stability can never be guaranteed. Paypal can (hopefully will) go bankrupt too. However, the probability of this happening depends heavily on how well paypal is managed. For a decentralized system, the probability will depend on how well the program coordinating decentralized management is designed. Individuals should be rewarded with money for successfully managing the exchange rate. To me, the design of a program to govern this (in economics language such a program is called "a mechanism") is a very exciting idea.

I'm not going to go into the details of how I would do this here. It is not my thread and the alt-coin development community is not ready to go there yet.  You (Dobom) seem equipped with some appropriate analytic tools. I (quite honestly) wish I could say the same for the BitShares team. I thank Bitshares for having a laudable and visionary goal though. Failures will lay the stage for future successful efforts. At this point, however, the ideas are so new that hardly anyone can evaluate the feasibility of different implementations. Projects like bitshares will help draw more eyes to the issue. Hopefully, both people with relevant economic expertise (that is in mathematics-based economics at the PhD level) and developers will take an interest. Without input from both groups, we will never see a successful outcome. [hint to investors: hire an economics professor from a leading university as a consultant. There is a huge quality gradient and you really need a good economist to guarantee quality input. They will charge a lot, but it shouldn't require much of their time just to evaluate the project's feasibility. A theorist specializing in mechanism design or better yet the design of financial markets is probably the best choice. The finance people will be super expensive though.]
 
Disclaimer: I'm an economics professor. Monetary economics and mechanism design (the relevant branch of game theory) are not my primary fields of research, but I have graduate training in both areas.

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[td services]

Just to be clear:  Only the BitShares ID and BitShares Mail system will be released in beta at C3.   Rushing a crypto-currency to market without ample testing and review is something we want to avoid.   That said, a large part of the BitShares blockchain has already been defined including the transaction types.   I have even generated and validated 5 blocks to prove the basic behavior as a crypto-currency with dividends.  You can view my debug block-explorer output: http://the-iland.net/static/chain.html for an example of how the numbers work.    Anyway, just showing you that we have a plan and will be systematically rolling it out as time permits.

Do you have a planned date when mining will start? I thought it also was this fall, maybe I misread something.

Also, will the mining code be available to test mining prior to the actual start?

Finally, how do the current investors plan on earning a return on their investment in Bitshares?

[AnonyMint]

It won't get very far however because equilibria in monetary systems are never unique. The market equilibrium depends on the beliefs of market participants, which can change arbitrarily. (i.e. unique beliefs are not pinned down by math. their is an infinite set of possible beliefs which map into an infinite set of equilibria). The key questions are "how/why do market participants coordinate on the selection of one particular equilibrium" and "what causes this coordination to break down"

The selection of equilibria depends on the beliefs of market participants because pure monetary instruments have no intrinsic uses besides the store and transfer of value.

You've essentially wrote the same as what I wrote in my prior post quoted as follows, yet you attribute the other guy instead of me. Oh well.

The value of the BitAsset will be driven by the desire for each party to maximize their return w.r.t. to their preference. Opportunity cost preference can span time, diversity, liquidity, security, anonymity, etc, etc, etc, etc.. Yes a stochastic distribution of unknowable preference strategies.

Since we can't categorize every preference scenario

This type of simultaneous belief shift is extremely unlikely, but it is a nash equiliribium outcome...

Maintaining a fixed price for a monetary instrument depends on the issuer's willingness to step in to buy it at that price. BitUSD confuses things because there are multiple issuers of fungible BitUSD. This creates some problems for value stability. To see this, suppose that 90% of bitshares are owned by one guy. He may then issue BitUSD backing them with bitshares. This one guy has quite strong incentives to maintain the price of BitUSD at parity by intervening in the market. If the whole BitUSD thing falls apart, then bitshares will become worthless. If not, then he can charge txn fees and essentially run a paypal like business.

Now suppose that their are 1000 people who each own 0.1% of bitshares. We now have a free rider problem. Again, these people would prefer for BitUSD to maintain parity, but providing finance to stabilize the currency against market fluctuations is costly/riskly. If someone else does it, then you enjoy all the benefits but face not of the cost/risk. So why do it yourself? Consequently, equilibria in this set-up are likely to be highly unstable. An eventual shift to a devaluation equilibrium is the likely outcome.

Now re-consider my solution to solve the above drift away from equilibrium, quoted as follows.

Since we can't categorize every preference scenario, my idea is to paradigm-shift to a different semantic level to remove the unknowable. I assume that if the preferences degrees-of-freedom are symmetric for both long and shorts (which in current BitAsset proposal they are not), then can assume there is no other variable to drive the valuation other than the perceived (expectation) of the value. In that case, the only expectation is the designated asset.

This is why I proposed symmetric, day trading BitAssets for tracking designated assets.

Since everyone closes their positions daily, then the expectation and drift away from the designated asset price can not occur.

The tracking ETFs already showed us how to do accomplish asset tracking using the futures markets (there is no 90% backstop as you require!).

We don't need to reinvent what was already invented and tested.

[nomailing]

@bytemaster and charleshoskinson

Did you consider to somehow link your Identification system with OpenPGP keys?
If it is possible to cross-sign the Bitshare-Id and the OpenPGP-Key you could make use of the already existing Web-Of-Trust.
This would make the system more interoperable with existing cryptogrphic identities.
Wouldn't it be nice if you already know the OpenPGP-key of a friend for email encryption and if you can easily switch to send messages via the Bitshare system?
And vice-versa, if you know the Bitshare-Id/Name of a friend, you could also easily send him an encrypted email, because you can lookup his email address and OpenPGP-key in the Bitshare account.

[charleshoskinson]

You (Dobom) seem equipped with some appropriate analytic tools. I (quite honestly) wish I could say the same for the BitShares team.

I find it a bit hasty professor that you've decide to make such a judgment without ever meeting us in person or having a direct conversation with us about our plans and team. We are very well funded and have a long term roadmap. I think you have discounted that we established our company in early July and have only just begun this journey. Perhaps in the future, you'll revisit your opinion of us.

[bytemaster]

@bytemaster and charleshoskinson

Did you consider to somehow link your Identification system with OpenPGP keys?
If it is possible to cross-sign the Bitshare-Id and the OpenPGP-Key you could make use of the already existing Web-Of-Trust.
This would make the system more interoperable with existing cryptogrphic identities.
Wouldn't it be nice if you already know the OpenPGP-key of a friend for email encryption and if you can easily switch to send messages via the Bitshare system?
And vice-versa, if you know the Bitshare-Id/Name of a friend, you could also easily send him an encrypted email, because you can lookup his email address and OpenPGP-key in the Bitshare account.

PGP keys are too big and lack support for deterministic wallets.

[bytemaster]

It seems very clear to me that economic debates are entertaining, but ultimately will require experimentation.    Obviously all new innovations enter a market of skeptics and often appear to contradict conventional thinking.    So rather than debating the theory, lets plan the experiment.   Bitcoin was an experiment that has left many "economics professors" at a loss and has defied their predictions.   Throwing in those credentials at the end as a "disclaimer" is really just the fallacy of "appeal to authority" and should be entirely left out of such a conversation.  Such an appeal causes readers to avoid critical thinking and instead be lazy and 'trust' an authority.   

So when we launch the test network one side will be filled with professors who doubt, the other with believers and the market will show us what actually happens given the set of rules proposed by BitShares.

Until we have proved via experimentation that BitUSD will behave as I expect it to, it is merely a conjecture.   

Once the code is complete it would be trivial to launch a version without dividends and see how it competes.

In the end the market will discover what works and what doesn't.  In the mean time, lets focus on trading strategies given the proposed set of rules.  Explain how you would value BitUSD relative to BitShares, when you would 'short' and when you would go long.   

For the sake of getting the experiment out the door and settling all debate, I am going to restrict my involvement in this thread to a minimum.    If you have ideas on how to run an experiment please post.

[nomailing]

@bytemaster and charleshoskinson

Did you consider to somehow link your Identification system with OpenPGP keys?
If it is possible to cross-sign the Bitshare-Id and the OpenPGP-Key you could make use of the already existing Web-Of-Trust.
This would make the system more interoperable with existing cryptogrphic identities.
Wouldn't it be nice if you already know the OpenPGP-key of a friend for email encryption and if you can easily switch to send messages via the Bitshare system?
And vice-versa, if you know the Bitshare-Id/Name of a friend, you could also easily send him an encrypted email, because you can lookup his email address and OpenPGP-key in the Bitshare account.

PGP keys are too big and lack support for deterministic wallets.

Well, I am not saying you should use these keys as your Id-System, but rather to be able to link these identities. So they don't have to be deterministic wallets.
And also the OpenPGP key fingerprint is just 20 bytes. Wouldn't it make sense to be able to include these 20 bytes in the BitNames public account ledger?
Then you can use any public key servers to find the email addresses and send encrypted emails using the existing infrastructure and vice-versa.
Similarly, in openPGP you could use cross-certification to prove that the BitName-Id belongs to you. Therefore, anyone who knows your OpenPGP signature could directly send money to you.

[Ola]

I read the white paper and its states some ambitious goals, would be looking forward to beta, when is that anyways? But you will also need way more developers to get this beast of an idea rolling.

[cunicula]

You (Dobom) seem equipped with some appropriate analytic tools. I (quite honestly) wish I could say the same for the BitShares team.

I find it a bit hasty professor that you've decide to make such a judgment without ever meeting us in person or having a direct conversation with us about our plans and team. We are very well funded and have a long term roadmap. I think you have discounted that we established our company in early July and have only just begun this journey. Perhaps in the future, you'll revisit your opinion of us.

Sure, I am well known for excessively harsh criticism. Things could easily change. I just don't think this will happen unless you bring in outside expertise from mainstram economics (not Austrian). Just think of it as a strong recommendation.

[charleshoskinson]

Sure, I am well known for excessively harsh criticism. Things could easily change. I just don't think this will happen unless you bring in outside expertise from mainstram economics (not Austrian). Just think of it as a strong recommendation.

We've already been pursuing partnerships with several academic entities including Virginia Tech. My primary concern at this stage is to resolve all the legal, financial and personnel issues associated with starting a corporation that does international business.

That said, it's very important to understand four core concepts about our business model:

We are developing three products that are both modular and produce emergent properties

Combining identity, communication and money into a single piece of software that is accessible to developers is really the most unique feature of our ecosystem. Once we have finished building the foundation, then you guys get to build (and sell) whatever software you can dream useful in this trinity.

The economics and design of BitShares is still in an experimental phase 

We have a lot of tough design work alongside a great degree of mathematical rigor and model building to do over the coming months capstoned by data collected from the test network. The core takeaway is that we have the resources to try different ideas to see what works and what doesn't.

No one has ever built a true decentralized P2P exchange, but there are a lot of ideas and they are in the open domain 

As our software is open sourced and free alongside many competing ideas, we only need one exchange to succeed for the original goal of Invictus to be a successful company- even if this idea is a competing exchange. The key concept here is to understand that I am referring to a decentralized exchange as defined in our whitepaper as an ideal free market financial system.

We feel that our design roadmap will get BitShares there and provides the maximum benefit to everyone in the ecosystem not just a few.

Good Technology is a mix of inspiration, iteration and collaboration

I find it odd to read statements from one of the core devs discounting the innovations of altcoins. Bitcoin does not enjoy a technology monopoly just a network effect monopoly. Building a completely new coin specifically for our exchange gives us the freedom to implement some of the most creative and innovative ideas that have been proposed over the past 4 years.

I totally reject that only a handful of privileged few should be entrusted with the keys to progress. Over the coming months, we'll be systematically working our way into every corner of the cryptocurrency world looking for that perfect blend for BitShares architecture. One of our biggest advantages is that we have software developers capable of building nearly anything once they understand the fundamentals.

It really is the most fun I've ever had and I hope I can share it with many of you over the coming months. 

[charleshoskinson]

Well, I am not saying you should use these keys as your Id-System, but rather to be able to link these identities. So they don't have to be deterministic wallets.
And also the OpenPGP key fingerprint is just 20 bytes. Wouldn't it make sense to be able to include these 20 bytes in the BitNames public account ledger?
Then you can use any public key servers to find the email addresses and send encrypted emails using the existing infrastructure and vice-versa.
Similarly, in openPGP you could use cross-certification to prove that the BitName-Id belongs to you. Therefore, anyone who knows your OpenPGP signature could directly send money to you.

We've had a lot of discussions about an email bridge that would connect normal email addresses to our ecosystem similar to some of the ideas Zimmerman had with silent circle. The challenge with any scheme where you are trying to combine a system you don't control with one that you do is that security cannot be guaranteed. In fact, without homomorphic encryption, all email bridges would be susceptible to man in the middle attacks from maleficent or coerced operators.

I can promise you we definitely are going to explore OpenID and OpenPGP a great deal as we are building this system and have a great advantage to be collaborating with the W3C in this respect via the Web Payments Group. We'll probably have a much clearer idea towards the November timeframe of what we can do at launch in February.     

I read the white paper and its states some ambitious goals, would be looking forward to beta, when is that anyways? But you will also need way more developers to get this beast of an idea rolling.

We should have a beta for BitCom and some form of BitID ready by C3 or somewhere in that timeframe (so October). In terms of BitShares, we are going to launch a test net in November and be good scientists. Our tentative goal is to launch BitShares for the general community in February.

[domob]

You (domob) definitely have the right approach. ... There is no one trained (or even vaguely familiar with) in mathematics-based economics on their staff. In fact they disavow constructs such as game theory as invalid by some anti-math axiom.

While this sounds very flattering to me, I have to admit that I also don't think this is fair judgement.  I don't know about their staff, but you also don't really know about myself.  I don't think I really have the expertise in economics / design of "mechanisms" you mention to be better situated in designing a project like that.  I'm just used to mathematical thinking and would like a bit more rigour in the description in order to understand and "believe in" the ideas behind BitAssets.

And I'm also aware that of course it all depends on how "BitUSD" is perceived by the market participants - after all, it doesn't matter whether or not it is called "BitUSD" or "BitBananas" or whatever.  (But to be fair, bytemaster already mentioned this some time ago and is seemingly well aware of that fact.  His argument was that, since people want/need a P2P exchange, it is to everyone's advantage to agree upon BitUSD tracking USD and thus this will happen.  (Please correct me if I'm misrepresenting you, that is how I remember it.)  Not sure about this, but I'm not the person to judge whether or not such thinking is ok.)

However even if we leave this point away for now, I just did a very simplistic calculation I want to present here:  Assume that 1 Bitshare (BS) is worth ps USD (as mentioned above it doesn't matter whether we use USD here or any other unit of "value" someone interested in investing is holding) and that 1 BitUSD (BU) is worth pu USD at the moment.  We have Ms BS in total and Mu BU created (how that works is not important for me now).  C BS are held of the Ms in collateral for the Mu BU.  D is the total amount of dividends paid for all BS in some time interval.

This means that 1 BS pays D/Ms dividends in this interval, and 1 BU pays D/Ms C/Mu, also in BS.  If I'm now an investor holding x USD and looking for a return, I can consider the two choices to invest in BS or in BU:

1) Investing in BS: I can buy x/ps BS, which pay x/ps D/Ms BS dividends.  My return in USD is thus this times ps, which is x D/Ms per time interval.

2) Investing in BU: I can buy x/pu BU, which pay x/pu D/Ms C/Mu BS dividends.  My return in USD is thus x ps/pu D/Ms C/Mu per time interval.

Comparing both, it is clear that the crucial question for me is whether the expression ps/pu C/Mu, which is the "difference" between both possible returns, is larger than 1 (in which case I should invest in BU) or smaller than 1 (in which case I should buy BS).  If it is the former and I buy BU accordingly, this decreases the price ratio ps/pu and makes the expression smaller.  If it is the latter and I buy BS, it increases the expression.  Thus at least from this very simplistic analysis, it follows that this system should converge to an "asymptotically stable equilibrium" where

pu / ps = C / Mu.

This makes sense because it means that the relative price of BU in BS should equal the quotient of the total amount of collateral in BS backing the all BUs to their monetary base.  However, I wonder how this result fits to the premise that collateral must be 1.5 times the amount of BU created ... wouldn't that imply that no-one ever has an incentive to create BU because he/she always gets less dividends back?  The only reason for why I could want to issue BU is that I imagine that the market price of BU relative to BS will rise, so that I can make money not from dividends (which I miss out on) but rather speculation.

Let's consider this.  Assume that C/Mu = 1.5 pr, where pr is some mean average relative price at the times when BU were issued against BS collateral.  If now others join the game, they will follow the same decision process as above, and if no fresh BU are issued and only BS or BU bought on the market, this will lead again to the equilibrium of

pu / ps = C / Mu = 1.5 pr.

Thus it is indeed expected that the price of BU in BS rises to 1.5 times the price at which BU were issued.  Because this means that the price rises which each issuance of BU, it should be fair to assume that pr as average price over all past BU issuances is less than the price at which I was able to issue BU if this is the current market rate (not sure about how this is done in the current BitAssets proposal though).  Thus the anticipated price rise is less than what I need to get even with the dividends, so it makes no sense for me to issue BU except if I speculate on others also doing this after me ... which feels like a Ponzi scheme.

As stated I have no training in economics, so please forgive me if my interpretation is wrong.  But it seems to me as if it would not matter at all whether I invest in BU or BS (assuming the market reached equilibrium already), and that issuing BU is a loss for me if not others also do it after me.  This is the dynamics by itself without considering that people might "want" BU to track USD (pu = 1), but it seems like an odd system to me (particularly because of the 1.5 factor in the collateral requirement).  Please also note that the forum is not very well suited to typing formula (although they are quite simple), so if it helps in reading I could also typeset this calculation again in LaTeX.  And finally, please excuse if I made any typos in the formulas or similar ... I just wanted to contribute my quick calculation but haven't done thorough review.

[AnonyMint]

Edit: This assertion about BitAssets will go to 0 is incorrect. Please see discussion near the end of this page.

cunicula is correct, BitAssets will go to 0.

It is very easy to explain. Both the short and the long have an incentive to ask and bid (respectively) a lower price. Both seller and buyer want a lower price (at the moment they transact). Period.

Short wants to sell for a lower price, so he is protected on the downside. Long wants to buy for a lower price, so he can gain more on the upside.

In a normal futures market, there is always threat of delivery of the real asset, thus the short's liability is the value of the real asset and the short has an incentive to sell (ask) for a premium on the external price of the real asset.

In BitAssets, there is no such backstop, thus both short and long of the trade profit more the lower the price they sell and pay for respectively. This is the Tragedy of the Commons (cunicula's free rider).

I am sure everyone will realize now, BitAssets are dead. Forget it. I tried to think of way to make them work, and cunicula is 100% correct. The only way to make them work is if there is a backer willing to defend the external price and who is paid some fees for doing this.

I arrived at the (quite obvious) epipheny in a roundabout manner, as I was thinking about how my proposal for shorter duration forced expiration would work as I had a few spare moments laying in bed as I awoke. Lately I have been very busy when at the computer, coding the Xtext parser for my new Scala-inspired language Copute (which compiles to Scala). I managed to trip on the HUGE EGO of the super capable lead developer of Xtext (his own fault!), so I must be back to my very high-level of programming that I used to do. I must reiterate what Eric S. Raymond (creator of the term open source and the famous Cathedral and Bazaar essay which catapulted the open source revolution) wrote about Ego is for little people, "if I am not regularly pissing people off, I must be doing something wrong". This is simply because most people have their ego dialed higher than their logic.

Some misinterpret my ENTP/ENFP personality as ego, whereas it is usually just the E in Extroverted. I love communication (except when I am coding, then I have an INTP personality switch, which is why I hate to stop to interact, e.g. file bug report, when I am coding because it pulls me out of my INTP into ENTP then ENFP modes).

It seems very clear to me that economic debates are entertaining, but ultimately will require experimentation.

bytemaster, I hope you come off your high-chair about economics. You don't know economics. I don't say this with any personal vendetta or animosity. It is just that you block your own learning, when you try to resolve economics to some subset of fixed axioms.

Axiom of Leadership: Being an effective opensource leader means never, never assert on the group what you can not prove beyond any reasonable doubt. In closedsource you can take proprietary risks. Separate your closedsource activity from the opensource, if you want support of others who as smart or smarter than you.

Bitcoin was an experiment that has left many "economics professors" at a loss and has defied their predictions.

Unlike BitAssets, Bitcoin doesn't need a backstop, because it is tracking the value of itself, thus there is no situation where short (seller) and long (buyer) both want a lower price.

Once the code is complete it would be trivial to launch a version without dividends and see how it competes.

I hope you are implementing my suggestion to write modular code. Scala would have been a much better choice for that vector of need.

One of our biggest advantages is that we have software developers capable of building nearly anything once they understand the fundamentals.

<joke>But you don't have me and Scala.</joke>  

[td services]

You (Dobom) seem equipped with some appropriate analytic tools. I (quite honestly) wish I could say the same for the BitShares team.

I find it a bit hasty professor that you've decide to make such a judgment without ever meeting us in person or having a direct conversation with us about our plans and team. We are very well funded and have a long term roadmap. I think you have discounted that we established our company in early July and have only just begun this journey. Perhaps in the future, you'll revisit your opinion of us.

Sure, I am well known for excessively harsh criticism. Things could easily change. I just don't think this will happen unless you bring in outside expertise from mainstram economics (not Austrian). Just think of it as a strong recommendation.

The 'mainstream economics' I've seen is just some combination of Keynesian and Monetarist drivel. Since money supply is backed by government debt, they are really just two sides of the same silver plated copper coin. Intelligent life is hard to find in academic economic departments, and the results of their handiwork is plain for all to see in the current global economic crises, with no end in sight. History has shown repeatedly where things are headed, though this time it will be on a global scale. Please don't contaminate a promising project like Bitshares with mainstream economic theory and its history of failure.

I have heard, though, that there are actually Austrian economists at UC San Jose, and Santa Clara University also has some good professors in the field. Harvard is the bottom of the swamp, mouthpieces for the elites.

[AnonyMint]

The 'mainstream economics' I've seen is just some combination of Keynesian and Monetarist drivel. Since money supply is backed by government debt

Oh my, you go off on the same mistakes and single-minded delusion as bytemaster and goldbugs with their "tinfoil hats". Read Armstrong more carefully and thoroughly.

First of all, you don't understand what Keynesian economics really is, because vested interests have distorted his theories for their own use. Here are some quotes from a blog and the comments that you should study. Make sure you read the comments from me that are bolded, as I don't agree with Keynes.

http://blog.mpettis.com/2013/08/the-urbanization-fallacy

But what if you are Keynesian? Didn’t Keynes say that simply creating work would make an economy richer, even if that work consisted of digging holes and filling them up again? Isn’t it better to build an apartment building than to dig a hole and fill it up again?

No, and Keynes never said that. Keynesian pump priming only works if there is high unemployment caused by the self-reinforcing tendency of lost jobs leading to lower demand leading to more lost jobs as factories fire workers. Spending in itself does not create wealth, and Keynes never said that it would. Spending can create a process that under some conditions can cause the economy to grow faster and under other conditions simply creates an unnecessary expense.

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-750

In fact no, because the point is simply to reverse what is essentially a positive feedback loop. Rising unemployment causes declining demand which causes rising unemployment. By hiring the workers that are fired, you break the loop. This is really the Keynesian point. He never said that government spending was always good, even when non-productive.

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-752

He never argued that free markets are bad. He argued that they are the best system ever devised for generating wealth but that, among other things, they are prone to disorderly behavior and brutal adjustments from time to time, and that these can have such a heavy social cost that the market system can itself can be rejected. Remember that he was writing at a time when communists and fascists were mounting a serous attack on what seemed like an enfeebled capitalism.

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-574

Keynes has been misunderstood as politicians around the world have routinely abused the argument for “Keynesian spending” to justify poor government policies sometimes very blatantly.

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-581 (my comment)

I have not read Keynes, but I think his theories were twisted by those who wanted to misapply them for their own vested interests.

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-637

Here’s a great article by Keynes on his views of inflation and governments resorting to money printing to finance a funding gap. Quite simply, he wasn’t too fond of it. Keynes hated deflation, but he also hated inflation and he certainly wasn’t this big government guy that the “Keynesians” always paint him out to be. He felt that government budgets should be balanced most of the time, he didn’t like freely floating exchange rates(he wanted fixed, but adjustable pegs), and he felt that taxation should never be above 25% of the total economy.

http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-615

Keynes was a believer in free markets. However, he also believed that government should and could play a role in moderating boom and bust cycles. I think some of Mr. Pettis’ prescriptions for the U.S, Europe and China could be described as Keynesian in nature.

In my mind, simple Keynesian philosophy would be to repair (or build in countries lacking infrastructure) necessary roads and bridges at the onset of recession. Conversely (and this is just as important) when the economy is heating up, slow down the amount of government spending on road and bridge projects, Simple isn’t it? However if look at the nature of governments and politics it isn’t so easy in practice. Many governments can’t seem to pull away the fiscal stimulus when the economy starts to heat up. Running deficits year after year was never what Keynes prescribed.

Rest of the comments below are from me.

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-621

Indeed government can never be the solution, thus seatrus’s idea that the government could subsidize just the right things and pick the winners in the future economy, is fantasy.

We programmers have a saying “talk is cheap, show me the code”

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-516

Keynesian pump priming only works if there is high unemployment…

I have to question the assertion.

FDR devaluing the dollar in 1934 (and confiscating gold to get ‘er done) was necessary to write-down the illusory capital (e.g. lenders debts were devalued since borrowers can pay back in cheaper money) from the roaring 20s and set the USA back to a more competitive position, which enabled the USA to bottom. Japan is in the process of doing this now and thus should bottom 2016.

Backstopping people so that 33 – 50% of the population doesn’t starve, become sickly, stop educating their children, etc.. is more productive than letting the economy spiral into an abyss. But taking it too far to protect 100% of the people from 100% of outcomes is unproductive.

WW2 pretty much destroyed the productive capacity of the rest of the world and left the USA with the best infrastructure remaining (sans Pearl Harbor).

In theory the free market would work best, except that a large society (much inertia in top-down) doesn’t respond as a free market even if given the opportunity. We have to live with what works. But preventing fine-grained annealing of the private sector while responding with appropriate Keynesian spending, which is what is developing now in most of the world developed and developing. For example, I read yesterday India has banned gold imports and made it illegal to transact on gold without a license.

Want to know why the G5 is going to make a war now, read the following comment.

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-559

However, I don’t see Japan(4% unemployment) or even the US today as extremely depressed.

Agreed that is why I wrote upthread that Michael’s Keynesian stimulus only applies to the minimum social welfare, not to giving people 100% of everything. Stimulus is much more productive too when it is difference between wasting away in squalor picking your nose all day or maintaining primary+secondary school education (post-secondary education is more dubious since the benefits only surely apply in the STEM fields). Agreed in the USA, the boomers refuse to lower than standard-of-living in order to write-down the capital stock. Ditto what happened to Japan over past 23 years. Japan had the benefit of an trade surplus. The USA has a trade deficit. My understanding is that Japan was forced to Abeconomics when they moved into trade deficit this year. The USA has the benefit of being the reserve currency with the strongest military. So the western boomers (and their guaranteed Medicare $5 trillion per year accrual-based budget deficit, etc) will not go down without a fight– the USA Laffer-limit-be-damned, taxman cometh with an M14.

http://blog.mpettis.com/2013/08/the-urbanization-fallacy/#comment-760

Agreed in the USA, the boomers refuse to lower than standard-of-living in order to write-down the capital stock. Ditto what happened to Japan over past 23 years. Japan had the benefit of an trade surplus. The USA has a trade deficit. My understanding is that Japan was forced to Abeconomics when they moved into trade deficit this year. The USA has the benefit of being the reserve currency with the strongest military. So the western boomers (and their guaranteed Medicare $5 trillion per year accrual-based budget deficit, etc) will not go down without a fight– the USA Laffer-limit-be-damned, taxman cometh with an M14.

Could that be why the G5 appears (to me and others) to be hellbent on inventing a false-flag to start a war in Syria?

The G5 has no other option to maintain control as it spirals the global sovereign debt toilet bowl.

[td services]

Right - Keynes advocated trying to level out the boom-bust cycle with government spending financed by government debt to stimulate the economy by reducing unemployment. Herbert Hoover tried and failed with this at the beginning of the Depression with a slew of public works projects(think Hoover Dam). People think FDR started this with WPA and New Deal, but it actually started much sooner under Hoover, ending with a mass panic and bank run.

My understanding is even Armstrong points out that attempts to counter business cycles with manipulation of the economy is futile and just exacerbates the problem. The panics prior to the Great Depression were much less severe and only lasted a few years when allowed to resolve on their own.

[AnonyMint]

The context of the discussion was I explained that Keynes(ism) never proposed to run deficits year-after-year, yet the failure of Keynesism is he assumed government was rational and self-limiting.

Agreed, but don't conflate and then assume it is because of a gold standard that the 1800s were more prosperous. They were because the USA was a frontier and the government was less than 10-20% of the GDP (now is it roughly 60 - 80% if include cost of complying with regulation and local govts, especially when the $5 trillion per year unfunded liability deficit is considered).

And don't conflate and say that inflation is bad. It is centralized inflation that is bad, because it helps to build the government. Decentralized inflation is absolutely necessary, M2 and nominal GDP grew by 5% per annum since 1790 in the USA. Without inflation, you can't grow the economy. The USA never had ONLY gold and silver as money, there were always fractional receipts from private banks. It was the decentralized nature (private banks making fractional receipts for gold) of the debasement that made the USA great during the 1800s. The downfall was that the receipts were fractional reserves. This allowed JP Morgan to bail out the Treasury and bankers took over the government by 1913. The decentralized digital currencies solve this problem, but Bitcoin has a flaw in that debasement stops (very bad).

Please read the math:

https://bitcointalk.org/index.php?topic=160612.msg2895021#msg2895021

And more discussion on that (follow the sub-links too):

https://bitcointalk.org/index.php?topic=160612.msg2930843#msg2930843

[td services]

Per Adam Smith's Real Bills Doctrine, there wasn't really inflation during the 1800s. The private bank notes were backed by gold and bills of exchange held by the issuing banks. The bills were 90 day notes representing goods in production. The amount of bills in circulation reflected the level of economic activity. Thus, money supply could expand and contract to match the level of economic activity. The British Empire also thrived and expanded under this system.

[AnonyMint]

I debated Antal Fekete about this in private email a few years ago.

If there weren't fractional reserves, then why were there massive bank runs and panics, that led to JP Morgan bailing out the system in the late 1800s?

I forget all my logic about Real Bills, but I don't think they stopped fractional reserves at the private banks. I think Real Bills is all smoke and mirrors. The M2 still increased by 5% per annum. I supplied the link to the data in prior post.

P.S. There is very high quality of discussion in this thread. Participants are very astute thus far.