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Author Topic: Mastercoin suggestion: Contracts for Difference  (Read 5428 times)
ripper234
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Ron Gross


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November 13, 2013, 08:22:19 AM
 #21

wouldnt such a proposition require more a larger amount of mastercoin to stabilize your position than said position is worth?

The size of assets the Mastercoin economy can support is of course tied to the value of MSC.
If MSC drops then the contract would be liquidated.
Nobody would be "cheated", they would just get a shorter term contract than what they would have hoped for.

Even if mastercoins were worth 1 trillion dollars (I see your smile Ron), people would not tie up wealth in order to secure wealth, If speculators choose to use this instrument than fine, I am sure its a nice feature, but I do not see how it makes economic sense to use such a proposition in order to reduce volatility in MSC. If you want to reduce volatility in another currency just hold it, and if you want to reduce volatility in a derived currency we already have the escrow proposition?

I'll ping Peter Surda again, maybe he explain my thoughts better (or prove me wrong).

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November 13, 2013, 08:25:45 AM
 #22

I want to add a $500 bounty for someone qualified in Economics to research and document this properly.

Added a ticket, verifying the amount with the board.

https://trello.com/c/EAWWSd1n/40-economic-research-why-does-msc-have-value

Quote
How much would be a suitable bounty for this feature? $500?

We need someone with a solid economics background (Peter Surda caliber) to research and explain why MSC has value.

A good feature to investigate is the CFD feature. CFDs and backed currencies "need" MSC to have value, and thus I believe their adoption will _cause_ MSC to have value.

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November 14, 2013, 04:03:44 PM
 #23

I think that back when we discussed longcoins and shortcoins ideas it turned out that it is possible to not need a data feed.

Basically at any moment when either party saw a price somewhere that made them prefer that price, they could escape the longcoin/shortcoin position to cash in wherever it was that they thought would for them be a better deal.

It thus needed no oracles aka data feeds, since it is no one else's business but your own why it is that you exercised, or even whether you were in fact going to actually be able to get the better deal that had lured you into exercising


You absolutely do need a price feed, centralized or decentralized somehow (eg. proof of stake voting), in order to do any of this. The problem is that the network has no way of "knowing" about the real world; there is no term in cryptographic functions to represent physical US dollars. Thus, we have the following problem. Suppose that you had some kind of instrument that reflected the price of USD without relying on any kind of price feed. Now, suppose that due to a market fluctuation the price of this instrument drops to 0.99 USD. Presumably, people would buy up this instrument seeing it as undervalued, and thus raise the price back up to 1 USD - that's the self-fulfilling prophecy for which the designers hope. However, the problem with self-fulfilling prophecies is that they go both ways. What if the price of this instrument drops to 0.96 USD, and some investors get a different idea: that the price drop is a sign that the link between the instrument and the USD is broken, and it will only drop further? Then, they sell, and the price of the instrument might drop to 0.93 USD, then 0.9 USD, then more and more people will realize this fact, and the price of the instrument will drop further. Unlike Bitcoin, however, it will likely never recover. Bitcoin can restabilize at a lower price target, and many times did. The USD instrument cannot stabilize at anything but 1 USD, so if it's not at 1 USD it goes to zero.

So these "magic"-based price targeting mechanisms will undoubtedly be stable for a while, but the first black swan event will wipe half of them out in an instant. This is why you need external, hard data on prices.

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LIBOR-style manipulation

If people think this is a concern I could write a spec for proof of stake voting on price feeds to require larger collusions to significantly manipulate prices.

Quote
Also I do not believe what is described in the OP meets the formal definition of a CFD - at least not the one used in the finance industry.   I only interned at an ibank and decided it wasn't for me so I am certainly no expert.

How is it not a CFD? It seems to follow the examples here pretty closely. In any case, it may be different in some technicality, but precise definitions aren't important; what is important is what it lets you easily have an arbitrary position in a market with an arbitrary margin if you can find a counterparty.

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BTW you could even have meta features based on it: I could basically entrust a certain amount of mastercoins to "any CFD that meets certain criterias". This way, even if the duration of the contract runs out, and my counterparty can withdraw their funds ... my CFD will automatically pop up to find the next counterparty, and I won't have to manually find another one.

This is interesting; we could definitely do it.

Argumentum ad lunam: the fallacy that because Bitcoin's price is rising really fast the currency must be a speculative bubble and/or Ponzi scheme.
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November 14, 2013, 04:14:56 PM
 #24

You absolutely do need a price feed, centralized or decentralized somehow (eg. proof of stake voting), in order to do any of this.

If people think this is a concern I could write a spec for proof of stake voting on price feeds to require larger collusions to significantly manipulate prices.


Agree about the above. Vitalik, you might want to look at this thread from September. You seem to be thinking a long similar lines.

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

I discuss a proof-of-stake based price feed that is extremely resistant to gaming/collusion.
The goal in this case is cryptoUSD rather than contracts for difference.

I use floating interest rates (possibly negative) to make sure a) there is always demand for cryptoUSD holdings AND b) there is a limitation on cryptoUSD issuance so the system can't get overleveraged. Essentially the value of cryptoUSD issued is approximately a fixed single digit  percentage of the backing coins market cap. Rather than using escrows, the entire outstanding coin stock is used as backing. This is much more stable.

Been to busy to work on it for the last couple months, but I'm still hoping to get back to it with a more comprehensible exposition and some refinements. 


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November 14, 2013, 04:17:50 PM
 #25

To develop some basic literacy on exchange rate issues and managed currencies, I suggest that everyone in the thread go through this series of web lectures on "Foreign Exchange Markets and the Balance of Payments." When he says Euro, you say MastercoinEuro and when he says swiss franc, you should say mastercoin.

http://www.youtube.com/playlist?list=PL9178E8F59734DA26

I know it sounds pedantic to recommend this, but seriously you 100% need to know this stuff.

Also, just because you have understand things from an investing point of view doesn't mean you understand it completely. Here, we are really thinking about things from the point of view of government (designing an algorithmic policy that stabilizes the currency).

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November 14, 2013, 04:19:15 PM
 #26

To develop some basic literacy on exchange rate issues and managed currencies, I suggest that everyone go through this series of web lectures on "Foreign Exchange Markets and the Balance of Payments." When he says Euro, you say MastercoinEuro and when he says swiss franc, you should say mastercoin.

http://www.youtube.com/playlist?list=PL9178E8F59734DA26

I know it sounds a little pedantic to recommend this, but seriously you 100% need to know this stuff.

I, for one, appreciate it Smiley Ever learning

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ripper234
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November 15, 2013, 09:06:40 AM
 #27

I would love to do it, thanks for the recommendation.
Don't see myself manufacturing the time to do this in the near future however.

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December 12, 2013, 04:58:56 PM
 #28

Following an interesting discussion last night, I flushed out some of our joint thoughts about this into a wiki article about CFDs. Everyone, please feel free to contribute and correct any foolish assumptions or mistakes I made there Smiley

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January 17, 2014, 09:56:05 PM
 #29

Eli5 or you lost me completely
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Ron Gross


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January 20, 2014, 11:46:53 AM
 #30

ELI5:

You an me enter into a contract.
We both deposit 100 MSC.
Let's say 1 MSC = 15 USD.

The contract states that either of us can liquidate the contract at any time (other liquidation conditions are also available, this is just an example).
When liquidation happens, I get $1500 worth of MSC, and you get the rest.

Example 1:
1 MSC is worth 10 USD when liquidation occurs.
I get 150 MSC.
You get 50 MSC.

Example 2:
1 MSC is worth 30 USD when liquidation occus.
I get 75 MSC.
You get 125 MSC.

Example 3:
1 MSC is worth 150 USD
I get 10 MSC
You get 190 MSC

Example 4:
The price of MSC gets to 8 USD. The contract is automatically liquidated by the protocol, to ensure it has enough funds.

I get 187.5 MSC
You get 12.5 MSC

Example 5:
The price of MSC quickly drops to 7 USD without a prior price point at 8 USD.

I get 200 MSC = 1400 USD (100 USD less than I should)
You get 0.

The contract can include margins to protect against this - you can set it to auto-liquidate at 9-10 USD or require a larger security from the other party.

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