Pirate v2.0: Unravelling the Bitshares Ponzi

[bytemaster]

friend , I don't even know what Cunicula's idea is...

https://bitcointalk.org/index.php?topic=297147.0

Bitcoin is far from flawless or solid in its self , trying to build a financial mechanism on top of it is,  i feel ....  "brave"  .

BitShares shares no common code with Bitcoin we are building our own blockchain, PoW and desktop client from the ground up

I don't see the "financialization" of a blockchain innovation, why not just issue a new Cryptocurrency   ?

BitShares will be its own cryptocurrency specifically designed for the kinds of trading we are advocating. Bitcoin does not have a method to support shorts and issuing options in a trustless way. We do and we have to design an entirely new currency to do it well.

Just super quick browsed over Cunicula's idea white paper - , you see my talent is one in seeing though to the source - i have no time here , but i will say that this idea will be at least as successful as yours. . . .

looks like he is issuing bonds for both USD and Bitcoin , (Hopdollars, and ah Hopbits)  Bonds always contain risk .

Again I will always ask where the risk is derived ?

When a bond is paid (upon 7 months?) where does the Interest come from , and work derived.  

I'm working on a different level of this system here , I know some people coming from a financial background will find these things attractive - that is a tiny minority , I fear you guys might have this all backwards , but that's just my opinion here...

we can only see in the future ?

Who pays the bond and can they run away?   Are these bearer bonds?  How to you ensure interest is paid?

[digitalindustry]

friend , I don't even know what Cunicula's idea is...

https://bitcointalk.org/index.php?topic=297147.0

Bitcoin is far from flawless or solid in its self , trying to build a financial mechanism on top of it is,  i feel ....  "brave"  .

BitShares shares no common code with Bitcoin we are building our own blockchain, PoW and desktop client from the ground up

I don't see the "financialization" of a blockchain innovation, why not just issue a new Cryptocurrency   ?

BitShares will be its own cryptocurrency specifically designed for the kinds of trading we are advocating. Bitcoin does not have a method to support shorts and issuing options in a trustless way. We do and we have to design an entirely new currency to do it well.

Just super quick browsed over Cunicula's idea white paper - , you see my talent is one in seeing though to the source - i have no time here , but i will say that this idea will be at least as successful as yours. . . .

looks like he is issuing bonds for both USD and Bitcoin , (Hopdollars, and ah Hopbits)  Bonds always contain risk .

Again I will always ask where the risk is derived ?

When a bond is paid (upon 7 months?) where does the Interest come from , and work derived.  

I'm working on a different level of this system here , I know some people coming from a financial background will find these things attractive - that is a tiny minority , I fear you guys might have this all backwards , but that's just my opinion here...

we can only see in the future ?

Who pays the bond and can they run away?   Are these bearer bonds?  How to you ensure interest is paid?

I'm very well versed with politics - but we are playing a political 0 game here , so yes indeed , I didn't look at the paper it ended on page 9  i haven't had time , but indeed enlighten me.

if there is a suggestion that these are not bonds issued , then what simply are they ?

in any other term they are a "promise to pay" otherwise there is no "leverage" in the system.

I understand the human incentive to  leverage , but I think we are heading in a different direction .

I believe you guys have missed the boat in a sense.

[digitalindustry]

In case you are missing the point here ....

this system i just looked at is "wrapped up" in a "useful human purpose"

and that I believe was suggested at , "to be used as a decentralized payment system"

unfortunately i will suggest that , in a digital system , (as opposed to say as i explained Commodities )

these "useful human purposes" can be overcome easily without "risk" and thus the equation again simplifies .

so you see what we are talking about is "Human work", , "useful purpose" and "risk"

Humans do like to take risk,  but usually when related to benefit, but as that equation equalizes  this aspect, the aspect that you people here are talking about will be in a sense "equaled out"

become zero. it won't be needed , there will be no useful human function for it .

but i could be wrong...

[Luckybit]

Again, you are not going to cloak your ponzi scheme in a (distributed asset corporation), blah blah blah.

You are going to the press and saying:

“If you own BitBTC you can earn dividends on your bitcoins,” said Larimer. “If you have a thousand bitcoins and you convert them to BitBTC, and then you hold it for six months, then you convert the BitBTC plus the dividends you received back to bitcoins, you’ll end up with more bitcoins than you started with.”

Sure you can create whatever type of intellectual property you want. Freedom of speech and all.

You cannot misrepresent what you are doing to naive investors in order to attract investment.

That is fraud.

Distributed / not distributed does not make a damn bit of difference.

Lets simplify this for you... I am Mt. Gox and am running a P2P exchange.  You deposit your BTC with me I pay you interest from the fees I charge facilitating the exchange.   You can withdraw more BTC in 6 months than you started with because the business earned a profit providing a service.

The only thing I have done is decentralize Mt. Gox and allocate the profits to the shareholders.

Isn't this exactly what MCXNow is doing with fee shares?

I don't see why both your ideas can't co-exist and compete in the market place without getting the SEC involved. That could be bad for the community. And what about Mastercoin?

[digitalindustry]

Knock yourselves out .

After some thought , I feel I have found the problem , the people designing these systems do not understand what a " Bond" actually is , its purpose and its intent .

That does not suprise me in the least , its been " taught out" or "educated out".

But how does the saying go ?  

" ignoring reality will not protect you from the results of reality "

Mostly  in this case , just wasted time .

[jedunnigan]

Again, you are not going to cloak your ponzi scheme in a (distributed asset corporation), blah blah blah.

You are going to the press and saying:

“If you own BitBTC you can earn dividends on your bitcoins,” said Larimer. “If you have a thousand bitcoins and you convert them to BitBTC, and then you hold it for six months, then you convert the BitBTC plus the dividends you received back to bitcoins, you’ll end up with more bitcoins than you started with.”

Sure you can create whatever type of intellectual property you want. Freedom of speech and all.

You cannot misrepresent what you are doing to naive investors in order to attract investment.

That is fraud.

Distributed / not distributed does not make a damn bit of difference.

Lets simplify this for you... I am Mt. Gox and am running a P2P exchange.  You deposit your BTC with me I pay you interest from the fees I charge facilitating the exchange.   You can withdraw more BTC in 6 months than you started with because the business earned a profit providing a service.

The only thing I have done is decentralize Mt. Gox and allocate the profits to the shareholders.

Isn't this exactly what MCXNow is doing with fee shares?

I don't see why both your ideas can't co-exist and compete in the market place without getting the SEC involved. That could be bad for the community. And what about Mastercoin?

Yep, the analogy breaks down if you take it too far though. mcxnow (which, btw, is probably a long con - run by a scammer) shares fee profits with holders of mcxFEE. BitAssets pay dividends in a similar manner, but mcxFEE doesn't have a predictions market or even a fraction of the features BitShares has.

Mastercoin is also in a different boat because it is leveraging the blockchain and is limited by the constraints of the Bitcoin network. This is not to say that Mastercoin basket currencies couldn't be supported in the BitShares network. Oddly, the method by which JR went about presenting and collecting funds for the project are right in line with some kind of scam; he either didn't care or just simply didn't know any better. Even OT/Praesto are different beasts altogether.

C's argument, to some extent has merit, however he(or she,idk) seems to abstract the problem in such a manner that it fatigues his capacity to judge without bias. The fact that he has conceded that some BitAssets are not a ponzi is evidence of that. Take for example this quote:

What I'm more concerned about is how I can own the whole world and my neighbour can own the whole world at the same time? This matter might cause some confusion. Do you have some theoretical physics story to go along with the prediction market? That might help to smooth things over.

Here is is making a valid point, but in the wrong context. Nowhere does BitShares imply (explicitly or otherwise) that it can break the laws of physics. Note what bytemaster says:

Party A decides to post that interesting bearing asset as collateral for a short position in BitBTC.
Party B decides to buy the long position in BitBTC with an equal amount of this interesting bearing asset.

A & B must agree on the exchange ratio.

There are now 2x the value of BTC held in the form of an interest bearing asset as collateral.  The interest from the collateral is paid to the holder of BitBTC.

If the market moves against A, the miner will cover giving B the opportunity to sell their BitBTC for BitShares at the new higher price and thus B ends up with more BitShares + Interest and the market value of these BitShares + Interest is greater than the BTC.   Assuming the prediction market dynamics work.There [is] 2x the value of BTC held in the form of an interest bearing asset as collateral.  The interest from the collateral is paid to the holder of BitBTC.

There is no more value there then there is in the real world. You must give to take. It's not a one way street. Think of it this way: just like you can't get Bitcoins for free, you can't acquire BitAssets for free either. If people choose not to participate in the predictions market then the system will not maintain its viability. Like I said earlier, there is risk that investors will think the system is flawed or not up to snuff; in this case your BitBTC goes to 0. Or perhaps the tech is flawed and it breaks. Again, 0. If people do invest, money is not created, it is redistributed following trade activity. That is all.

He also makes claims like this:

2) The investor is depositing x bitBTC worth of capital in your prediction market. Somehow this is generating returns, right? Normally you pay 100% of these returns to the investor, but now the investors is generously offering to give 95% of his returns to you, keeping only 5% for himself.

Ironically, many of the arguments c makes are reminiscent of the early-days of Bitcoin when people claimed it was a ponzi, creating value out of thin air. Those claims usually came from economists who didn't take the time to think through the proposition value of the system and the mechanics of how it works. Satoshi certainly could have premined Bitcoin, but then what? No one would use it. Likewise, if BitShares did not offer some return to participants why would anyone bother to use it. It's not about generosity, it's about practicality.

With quotes like this (and, as others have mentioned) I am beginning to think there are issues with semantics. A bitBTC is not in fact generating a return, the network is being fed money via fees generated from the prediction market, which are divided and distributed amongst participants in the network holding bitBTC. Why the word "somehow" needs to be used is beyond me.

He also likes the word interest, and with good reason (Daniel uses it, the coindesk article uses it, etc...):

The interest parity condition implies that bitBTC will steadily depreciate against BTC.

BitAssets do not provide interest in the traditional sense, so I think it is best the word is removed from the white paper. Perhaps finding a word that has better parity (yea, i used it) with the concept of being rewarded for participating in and supporting a network is needed ASAP. Someone said this I think.

The only thing I can see that would support a claim that this is a pump and dump is the short mining period, which c hasn't even mentioned yet. The whitepaper argues:

BitShares has chosen to adopt a 12 year period for issuing the available units instead of the 128 years built into Bitcoin because inflation is not necessary for the proper functioning of a currency and within 12 years competition for space in the blockchain (which is limited to meet the decentralization and scalability axioms) should drive transaction fees / volume to a level that keeps mining profitable and fees in line with the level of security demanded by the market.  The network also has other means of generating fees/incentives for miners including: inactivity taxes, margin calls, and ‘dividend dust’.  Bitcoin suffers from the pricing of mining rewards entirely out of proportion of with the needed / desired security.

If c could break down these motives then I would be more inclined to believe him. However, he won't be able to. When you compare BitShares to Bitcoin which has a >100 year mining, you begin to see why a short mining period is not indicative of a ponzi. The dividends replace the long mining period. In this sense BitShares has greater longevity and absolute scalability when compared to Bitcoin.

As of right now it *appears* that his claims are a peculiar mix of gaining a competitive edge and applying theories of economics to aspects of the system in a vacuum without having a complete picture of how the system works and why it will generate profit. Like he read the first few pages of the whitepaper then stopped; or perhaps his head was filled with too many thoughts to objectively critique the content. Or perhaps I am just too much of a 'tool' and am completely missing the point. Either way if things were kept civil in here it would make this discussion a whole lot easier. But wild behavior and personal attacks are usually indicative of someone trying to shift focus from the important points of the discussion - at least in my experience, the perpetual dicks on this forum are usually partially right but fail to see the big picture because they are blinded by emotional attachments.

c, before you reply take a deep breath it will do you a world of good brother. like i said earlier, I could be totally wrong about these guys and you could be right. But I'm still not convinced! Please prove me wrong

[jedunnigan]

In case you are missing the point here ....

this system i just looked at is "wrapped up" in a "useful human purpose"

and that I believe was suggested at , "to be used as a decentralized payment system"

unfortunately i will suggest that , in a digital system , (as opposed to say as i explained Commodities )

these "useful human purposes" can be overcome easily without "risk" and thus the equation again simplifies .

so you see what we are talking about is "Human work", , "useful purpose" and "risk"

Humans do like to take risk,  but usually when related to benefit, but as that equation equalizes  this aspect, the aspect that you people here are talking about will be in a sense "equaled out"

become zero. it won't be needed , there will be no useful human function for it .

but i could be wrong...

I am having trouble following you entirely. Are you implying that the the messaging and ID system should not be included? And how does this follow from your equation?

What do you think is the appropriate definition of a bond? And how does BitShares (if that is what you are talking about, I am not sure) violate that definition? And can the current implemetnation be changed to accommodate the "real" bond? The whole point of this open source thing is to collaborate and share ideas, not make absolute statements then walk away.

[bytemaster]

Actually carefully reading the white paper you will notice we never used the word 'interest' once and always refer to everything as dividends.    That said, there is no perfect analogy to these financial assets in the current market.   When you are talking to the common man they consider any return on their savings 'interest', when you think of equities you think dividends.    It is a 'variable interest' rate paid to the longs by the 'shorts' which must 'borrow' the asset from the network 'society' and the cost of borrowing from 'the network' in order to 'short' is the dividends paid on the collateral.   These are all just analogies so don't get to caught up on what it is called and instead just look at who is transferring value to whom and why.   

 We also place a heavy focus on eliminating any expectation for contractual obligation of any party to any other party and thus there are no 'bonds' in the traditional sense.  We ask no person to trust any other person to do anything.  There is no way for any person to 'default' because all rules are automated and execute predictably by the block chain entirely out of the control of any one individual.  If there is a way for someone to 'default' or violate a 'contract' then I would love to see it.

If you choose to speculate on the behavior of the chain, you might be able to make money.   It is an experiment with a solid foundation in economics being peer reviewed well known economists in reputable positions who are working to rewrite our white paper.  We are working with professionals from across the Bitcoin space and you will quickly learn that calling us a scam is tantamount to calling all of Bitcoin a scam.   

I encourage you to find a series of transactions / trading algorithm that would allow you to make a profit while systematically crashing the system rendering it insolvent.  It cannot be done because there are no contracts nor ability for anyone to default.   

Scams usually involve breach of trust.  Show me the trust that is being broken, and I am sure we can find ways of resolving it.

[jedunnigan]

Actually carefully reading the white paper you will notice we never used the word 'interest' once and always refer to everything as dividends.    That said, there is no perfect analogy to these financial assets in the current market.   When you are talking to the common man they consider any return on their savings 'interest', when you think of equities you think dividends.    It is a 'variable interest' rate paid to the longs by the 'shorts' which must 'borrow' the asset from the network 'society' and the cost of borrowing from 'the network' in order to 'short' is the dividends paid on the collateral.   These are all just analogies so don't get to caught up on what it is called and instead just look at who is transferring value to whom and why.   

Haha, you're right. The word gets  thrown around in here so much I think I implanted the memory.

If you choose to speculate on the behavior of the chain, you might be able to make money.   It is an experiment with a solid foundation in economics being peer reviewed well known economists in reputable positions who are working to rewrite our white paper.  We are working with professionals from across the Bitcoin space and you will quickly learn that calling us a scam is tantamount to calling all of Bitcoin a scam.

Great, that is much needed. You should consider having tiered white papers with varying levels of complexity. Right now all you have is the coindesk article for the less econ-inclined.

[bytemaster]

Actually carefully reading the white paper you will notice we never used the word 'interest' once and always refer to everything as dividends.    That said, there is no perfect analogy to these financial assets in the current market.   When you are talking to the common man they consider any return on their savings 'interest', when you think of equities you think dividends.    It is a 'variable interest' rate paid to the longs by the 'shorts' which must 'borrow' the asset from the network 'society' and the cost of borrowing from 'the network' in order to 'short' is the dividends paid on the collateral.   These are all just analogies so don't get to caught up on what it is called and instead just look at who is transferring value to whom and why.   

Haha, you're right. The word gets  thrown around in here so much I think I implanted the memory.

If you choose to speculate on the behavior of the chain, you might be able to make money.   It is an experiment with a solid foundation in economics being peer reviewed well known economists in reputable positions who are working to rewrite our white paper.  We are working with professionals from across the Bitcoin space and you will quickly learn that calling us a scam is tantamount to calling all of Bitcoin a scam.

Great, that is much needed. You should consider having tiered white papers with varying levels of complexity. Right now all you have is the coindesk article for the less econ-inclined.

A quick search of the white paper does reveal the word 'interest' can be found, but not in the definitions section and only in a few sections using analogies.   We recognize the need to define this better and will make it clear long before launch.

[digitalindustry]

Actually carefully reading the white paper you will notice we never used the word 'interest' once and always refer to everything as dividends.    That said, there is no perfect analogy to these financial assets in the current market.   When you are talking to the common man they consider any return on their savings 'interest', when you think of equities you think dividends.    It is a 'variable interest' rate paid to the longs by the 'shorts' which must 'borrow' the asset from the network 'society' and the cost of borrowing from 'the network' in order to 'short' is the dividends paid on the collateral.   These are all just analogies so don't get to caught up on what it is called and instead just look at who is transferring value to whom and why.   

With all due respect do you understand what a dividend is ?

I know that recent financial history has tainted the world but , come on , here is what I was talking about , without getting into it , your design is at best Transference Vehicle inside the Bitcoin equation, that's being very generous... now.

Equities  - (similar in manner to bonds) have a Dividend. so lets go though this :

Jon buys equity in "Knight Knives" (they sell knives) Jon knows the dividend , so the two aspects here are:

"Knight Knives" is producing a product and then a demand is receiving it , the part of the production goes back as a "dividend" - for the capital raised to add on the extra Knife factory that is now needed since so many Christians are getting their heads lopped off in Syria by Terrorists.

So,  Capital went to increase production (the new Knife factory warranted by the Terrorist extra demand) and a Dividend was paid back for expansion and work done.

you see the difference between a "vehicle" i.e the liquid and the "product" and the "work" and the "dividend".
 
So even in the world where 85 Billion "dollars" a month goes directly into equities and the Federal Reserve Czar rules with an Iron fist, we still can't quite call any "payment" derived from the design you propose a "dividend" .

You or someone else said that the interest was derived from the "fees" then you say above "It is a 'variable interest' rate paid to the longs by the 'shorts' which must 'borrow' the asset from the network 'society' and the cost of borrowing from 'the network' in order to 'short' is the dividends paid on the collateral. " these things just quoted are somewhat far apart no ?

We also place a heavy focus on eliminating any expectation for contractual obligation of any party to any other party and thus there are no 'bonds' in the traditional sense.  We ask no person to trust any other person to do anything.  There is no way for any person to 'default' because all rules are automated and execute predictably by the block chain entirely out of the control of any one individual.  If there is a way for someone to 'default' or violate a 'contract' then I would love to see it.

Of course there is not a contract - becasue there is really no counter-party (not in any relevant sense of that term) - a contract is always the basis of any honest agreement .

David Bowie issues "Bowie Bonds" - for capital for an up and coming Record.

The trust is in the "David Bowie" brand , and the bond is paid with the interest for the work of the album and live shows etc.

the contract is between the two counter-parties .

Sally borrows money from a "bank" - she signs a piece of paper and creates credit in the form of a loan - the Bank commits fraud and Sally's signature creates new money. , which then can be deposited and treated as "reserve" - there is still two counter-parties and still a work derivative (all be it one way)

the 0 game I was talking about is the fact that every thing you propose is occurring already , People can create an actual viable contract to Borrow Bitcoins, that's becasue you (Well as of this month) still hopefully live in a semi free society -

[QuantPlus]

Yep, the analogy breaks down if you take it too far though. mcxnow (which, btw, is probably a long con - run by a scammer) shares fee profits with holders of mcxFEE.

What on earth does mcxNOW have to do with this?

Scammers are more rational than academics because they function in the Real World.

If you have revenue of $50,000/year in an exploding niche...
And a Market Cap of $7,000,000 = very high Price to Revenue of roughly 135...
And only 5% of your Market Cap has been monetized...
What is your next move?

It's definitely not something that would hurt your business.

[jedunnigan]

Yep, the analogy breaks down if you take it too far though. mcxnow (which, btw, is probably a long con - run by a scammer) shares fee profits with holders of mcxFEE.

What on earth does mcxNOW have to do with this?

Scammers are more rational than academics because they function in the Real World.

If you have revenue of $50,000/year in an exploding niche...
And a Market Cap of $7,000,000 = very high Price to Revenue of roughly 135...
And only 5% of your Market Cap has been monetized...
What is your next move?

It's definitely not something that would hurt your business.

What? Someone asked, I just added my opinion of the motives of rs. Not sure what that post was all about.

[johnyj]

It's not a Ponzi, it is just an alt-coin promising superior return, and we know that all the alt-coins will introduce inflation...

[cunicula]

Let's go through another concrete example describing exactly what will happen to bitshares in the future. The example shows that 1) bitshares is a simple ponzi 2) bitshares is nothing at all like bitcoin

1) Suppose that bitshares experiences a bubble just like bitcoin's first bubble. At the peak of the bubble, the market cap of bitshars reaches 1 million in terms of bitcoins. (Recall that the market cap is just the bitcoin denominated price of a bitshare × the total quantity of bitshares in existence)
2) Suppose also that bitshares has issued 100,000 bitBTC at the peak of the bubble. At the peak of the bubble, this is fine. Bithshare's market cap is sufficient to back these 10 times over.
3) Recall that bitBTC cannot be involuntarily confiscated once they are issued. So if the price of bitshares drops the BTC denominated debt (100,000 bitBTC) do not just disappear. Instead bitshares just falls deeper in debt.
4) Suppose that bitshares market cap drops to 1/15  of its bubble peak (as in the 1st btc bubble). This leaves a bitshares market cap of 66 thousand BTC. But wait a minute, bitshares has 100, 000 units of bitBTC outstanding. Liabilities exceed assets. The system is bankrupt.

Let's ask some questions:

1) The bitshares creators tell us that a bitBTC will never fall below 1 BTC. Apperently some kind of price "floor" exists at this level. But ask yourself, would you pay face value for a bitBTC when the bithsares backing them trade for at most worth 0.66 BTC (and in all probability an order of magnitude less)
2) What about bithsares themselves? How much would you pay for a bitshare in this context? Bitshares are effectively equity. If the creditors holding bitBTC are to be repaid, bitshares will have to appreciate by 50% before the equity holders go into the black again. We do not normally see shares in bankrupt companies trading above 0 unless a gov't bailout is expected.
3) Assuming the gov't doesn't bailout bitshares, how is it that the market cap of bitshares could still be as high as 66 thousand BTC? What does this tell us? The value of a bitshare will keep dropping. Sending the system further and further underwater. It will not stop until it hits 0.

Who profits from the ponzi? Anyone who mined bitshares and got out before the bubble burst.

How is the scheme different from other bubbles; why call it a ponzi? The bubble is driven by purchasers of bitBTC from marks hoping for high returns and trusting in the creators' claims that a bitBTC is a completely safe investment. This makes the scheme not just a bubble, but a ponzi. It is no different from pirate ensuring his victims that he will never default, while luring them in with high returns.

What about the prediction market? A sideshow. The bitBTC come out of the prediction market as some kind of by product. The prediction market never needs to generate any value for the ponzi to work. All it has to do is spit out bitBTC to bait in naive, greedy people. If the prediction market does generate massive value, bitBTC still goes to 0. The prediction market is just irrelevant.

Why does the SEC need to get involved? 1) Because this is a predatory scheme designed to rob stupid people. 2) Because the scheme will inflict massive damage on cryptocurrency's reputation. Better to put a stop to it early, then wait for people to lose huge amounts in a cryptocurrency ponzi. Can you imagine how bad the press will be if the protocol itself runs the ponzi? The average Joe already believes cryptocurrency = ponzi. Proving him correct in one instance will not help matters.

[jedunnigan]

Let's go through another concrete example describing exactly what will happen to bitshares in the future. The example shows that 1) bitshares is a simple ponzi 2) bitshares is nothing at all like bitcoin

1) Suppose that bitshares experiences a bubble just like bitcoin's first bubble. At the peak of the bubble, the market cap of bitshars reaches 1 million in terms of bitcoins. (Recall that the market cap is just the bitcoin denominated price of a bitshare × the total quantity of bitshares in existence)
2) Suppose also that bitshares has issued 100,000 bitBTC at the peak of the bubble. At the peak of the bubble, this is fine. Bithshare's market cap is sufficient to back these 10 times over.
3) Recall that bitBTC cannot be involuntarily confiscated once they are issued. So if the price of bitshares drops the BTC denominated debt (100,000 bitBTC) do not just disappear. Instead bitshares just falls deeper in debt.
4) Suppose that bitshares market cap drops to 1/15  of its bubble peak (as in the 1st btc bubble). This leaves a bitshares market cap of 66 thousand BTC. But wait a minute, bitshares has 100, 000 units of bitBTC outstanding. Liabilities exceed assets. The system is bankrupt.

Let's ask some questions:

1) The bitshares creators tell us that a bitBTC will never fall below 1 BTC. Apperently some kind of price "floor" exists at this level. But ask yourself, would you pay face value for a bitBTC when the bithsares backing them trade for at most worth 0.66 BTC (and in all probability an order of magnitude less)
2) What about bithsares themselves? How much would you pay for a bitshare in this context? Bitshares are effectively equity. If the creditors holding bitBTC are to be repaid, bitshares will have to appreciate by 50% before the equity holders go into the black again. We do not normally see shares in bankrupt companies trading above 0 unless a gov't bailout is expected.
3) Assuming the gov't doesn't bailout bitshares, how is it that the market cap of bitshares could still be as high as 66 thousand BTC? What does this tell us? The value of a bitshare will keep dropping. Sending the system further and further underwater. It will not stop until it hits 0.

Thank you for the pleasant reply.

BitUSD is a BitShares-derived BitAsset that must be created against a valid bid and post collateral in BitShares equal to the value of bid.  If the bid is accepted, the collateral and purchase price are held by the network until the BitUSD is redeemed by repurchasing it.  The block chain will then redirect the dividends of the collateral to all BitUSD holders. BitUSD is entirely fungible and all dividends from all BitShares backing all BitUSD are pooled to determine the dividends (in BitShares) paid to the holders of BitUSD.   

The BitShares backing the BitUSD may be spent in two ways: 
by providing BitUSD as input to the transaction and redeeming it. 
by a miner who enforces a margin call when the value of the backing falls to less than 150% of the value of the BitUSD.   

Margin calls are enforced by the miners when they put together a block.  When a miner enforces a margin call, he uses the backing BitShares to repurchase the BitUSD and thereby redeeming it. After BitUSD is redeemed it no longer exists.  Any leftover collateral is sent to an address owned by the short position (not kept by the miner).

Am I on the right track here?

[cunicula]

Am I on the right track here?

No, of course not.

The miners can only enforce margin calls on bitBTC they own. They cannot enforce margin call's on other people's bitBTC. That would be confiscation. Reread the thread if you are unclear on this. BitBTC cannot be removed from your wallet and replaced with bitshares without your consent.

Therefore, unless 1) The savers sell off their bitBTC to miners and 2) The miners decide to enforce margin calls, the 100,000 bitBTC remain outstanding even if the currencies market cap is just a few pennies. Once this is happens there is no backing left to reclaim. All you have are bitBTC c/o your trust in God and the Bank of Zimbabwe.

The whole thing becomes dies permanently. The early miners of bitshares are laughing all the way to the bank (which is full of BTC and USD; late game only marks hold bitshares, bitBTC, or bit*).

[bytemaster]

Cunicula,
      I walked through your latest example of how BitBTC could in theory become under collateralized.   I want to address this because it was a solid use case that has not been addressed by any of our white papers directly. 

      1) It is theoretically possible for your scenario to occur, and in such a scenario everyone who was  Short BitBTC would be entirely wiped out and everyone who was long BitBTC would end up with twice as many BitShares as they started with (assuming they sold).   It is even possible for the result of this catastrophic loss of value in BitShares to result in BitBTC being on the books without any corresponding short positions backing it up.   Such an event would be terrible for those long BitShares, even worse for those Short BitBTC... but those who are impacted the least would be those who are Long BitBTC... they doubled their BitShare holdings.

      2) This market does not eliminate all risk, it merely transfers a large percentage of ordinary risk from the longs to the shorts.  It is impossible to eliminate all risk even with traditional financial markets.  For example, a US treasury is not a 'risk free' investment, the interest rate fluctuates, the dollar can be debased, and the government could default or be taken over.  You do not consider US treasuries to be a Ponzi or a scam despite the fact that they pay the returns with the investors own tax money or via inflation.   So, if even US treasuries are not 'risk free' then your argument against BitShares is a logical fallacy because you are holding them to an impossible standard and pointing to any risk at all as signs of a scam.

      3) The situation you present is very unlikely to occur for the following reasons:
          a) No savvy investor would short BitBTC against BitShares after a major run up in the market because they know BitShares behave like Bitcoin.  As a result, savvy investors would sell their BitShares and buy BitBTC so that they could make money when the price corrects.  This counter-market force would actually fend off Bitcoin style price volatility.  Because selling BitBTC is cheaper than shorting it, very few if any new BitBTC would be issued at the market peak and most trades would occur as trades in long positions.   
          b) If the BitShare price is heading to the moon, then most people would be swapping out of BitBTC and buying BitShares.  This will reduce the demand for the creation of new BitBTC.
     
       4) Assuming the event was only a case of extreme short-term volatility then anyone who held their BitBTC through the correction and allowed the market to clear would find that once again their BitBTC would recover near parity.   

       5) In the event that BitShares become worthless, clearly BitAssets are worthless and all parties accept this risk.

I would like to make one final statement regarding your claim about miners not having 'authority' to perform a margin call.   This would be like claiming that your stock broker doesn't have authority to perform a margin call.   When you entered into the short position, the network rules stated the terms under which a margin call could be executed and all miners must follow those rules or their block will not be confirmed by the network.  So, if you do not want to risk a margin call, don't enter a short position.   You can buy BitShares or your can Buy BitBTC... but you cannot short BitBTC.     Allowing someone to Short BitBTC and then calling foul when their margin is called would be like allowing someone to mortgage their house and then crying foul when the loan is called when the value of the house falls.   You are using borrowed money, you have no right to keep your short position without sufficient collateral.

Who profits from the ponzi? Anyone who mined bitshares and got out before the bubble burst.

Thank you for clarifying your position, your definition of a ponzi applies to every crypto-currency and every corporation that issues stock.    If this is what you think then there is no point in arguing.   

On the other hand it appears that 100% of your claims could be resolved provided we educate all parties to as many risks as we can think of and in this case you have been most helpful in identifying areas where our users must understand the risks.

In conclusion, BitShares allows users to mitigate to a large extent the vast majority of risks associated with crypto-currency price volatility.  However, every holder of BitX is only ever guaranteed to receive the collateral backing their position (2x as many BitShares) in the most extreme cases.   If you are willing to accept that risk, then you can buy BitBTC and earn dividends for taking that risk.   If you are not willing to accept that risk then keep your BTC and forfeit the opportunity cost of lost dividends.     Either way, you as the user of the system are responsible for assessing the risk/reward of using the system.

It is my belief that there is enough utility and corrective market forces to both justify the value of BitShares as non-0 and to prevent the most extreme market events from occurring.   It is also my belief that because BitShares are deflationary, income-producing assets they will on-average rise in value just like Bitcoin and therefore any extreme movements are only temporary in nature.   

So I am more than happy to put as much information in the hands of individuals to make educated investment decisions.

If anyone has any questions I am more than happy to address the concerns via Skype: macman2k. 

[cunicula]

     1) It is theoretically possible for your scenario to occur, and in such a scenario everyone who was  Short BitBTC would be entirely wiped out and everyone who was long BitBTC would end up with twice as many BitShares as they started with (assuming they sold).   It is even possible for the result of this catastrophic loss of value in BitShares to result in BitBTC being on the books without any corresponding short positions backing it up.   Such an event would be terrible for those long BitShares, even worse for those Short BitBTC... but those who are impacted the least would be those who are Long BitBTC... they doubled their BitShare holdings.

Let's put this in simple terms, so that everyone understands.

I purchase 1 BTC worth of bitBTC today. I plan to convert this back into BTC exactly one month from today.
As long as the next month's price of bitshares in terms of BTC is at least 50% of the current price, I will get my 1 BTC back.

However, if next month's price is less than 50% of the current price, I will not be able to recover my initial investment in full. (i.e. I will get back less than 1 BTC)

Correct? (please don't tell me that some magic speculator is going to come in and bail me out)

[digitalindustry]

     1) It is theoretically possible for your scenario to occur, and in such a scenario everyone who was  Short BitBTC would be entirely wiped out and everyone who was long BitBTC would end up with twice as many BitShares as they started with (assuming they sold).   It is even possible for the result of this catastrophic loss of value in BitShares to result in BitBTC being on the books without any corresponding short positions backing it up.   Such an event would be terrible for those long BitShares, even worse for those Short BitBTC... but those who are impacted the least would be those who are Long BitBTC... they doubled their BitShare holdings.

Let's put this in simple terms, so that everyone understands.

I purchase 1 BTC worth of bitBTC today. I plan to convert this back into BTC exactly one month from today.
As long as the next month's price of bitshares in terms of BTC is at least 50% of the current price, I will get my 1 BTC back.

However, if next month's price is less than 50% of the current price, I will not be able to recover my initial investment in full. (i.e. I will get back less than 1 BTC)

Correct? (please don't tell me that some magic speculator is going to come in and bail me out)

What about issuing a new coin to bail out underwater investors at that time ?

"QE-coin" - a truly faith based coin.