Hi all,
I thought I'd get the ball rolling on credit derivatives (because everybody loves credit derivatives, right?) by offering to sell 1000 bitcoins worth of 6-month CDSes with imsaguy's Open-Ended Investment Opportunity (
https://bitcointalk.org/index.php?topic=60117.0) as the underlying reference entity.
This offering will be structured as ten 100-coin contracts. Buyers will pay me monthly fees for the contracts, and if imsaguy defaults on his debt, I will pay the buyer the value of the contract. The contract will also cover the less extreme credit event of imsaguy being more than 48 hours late on any payments due to his investors, in which case it will pay less than the full 100-coin liability.
If a buyer misses the monthly CDS payment by 48 hours, I shall consider the contract terminated and will offer no default protection beyond that.
I have contacted nanotube, the founder of the IRC OTC channel and one of the most respected people in the bitcoin community, to act as a neutral arbiter for deciding whether a credit event has occurred.
This offering will be held as a Second Item Auction (sometimes called a Dutch Auction; see
http://en.wikipedia.org/wiki/Dutch_auction#A_second_item_auction), so anyone who wants these should just post how many contracts they're interested in and what percentage they're willing to pay as a fee. Bids should be phrased as a percentage, which represents what fraction of my liability you pay me in fees per month. I set a reserve of 1% (100 basis points, if you prefer finance lingo) on the contracts, so bids must be greater than or equal to 1%. To avoid too much clutter, let's do bids in increments of 10 basis points. As the wikipedia page explains, winning bids will pay whatever the
lowest eligible bid was. The bidding will run for a week after I post this. Sold contracts will provide coverage for 6 months from that day, with monthly payments on the same day of every month.
As far as my own creditworthiness, I have a good reputation on the WOT (
http://bitcoin-otc.com/viewratingdetail.php?nick=copumpkin), and am well respected on these forums. I've also signed a statement on this forum linking my WOT identity with this one:
https://bitcointalk.org/index.php?topic=66313.msg769294#msg769294. I have "lots" of coins (significantly more than I am accepting liability for in this CDS offering) and even in the unlikely even that those are somehow lost, I have other assets and a real job.
I will compile GPG-signed (with my WOT identity) contracts outlining all the terms so that buyers may use them as recourse against my reputation in the event of a dispute. To avoid creating perverse incentives for imsaguy, I cannot let him purchase CDSes against himself, and must require that bidders be reasonably well established either here or on the WOT.
So, if you want to hedge your investment with imsaguy (starting at just 10 btc a month for 1000 btc of protection!) or you just want to speculate on him defaulting on his investors, feel free to bid here. Or if you get nothing else out of all of this, you can see this as a monetary vote of confidence in imsaguy's creditworthiness
Free free to ask questions and I'll be happy to answer whatever I can. I'm also open to suggestions on adjusting the specifics of the contract. I can't say I have much experience actually dealing in CDSes, so some things might be a little funny.
Edit: I'll elaborate later on precisely what constitutes a default and what will happen if one happens, but I don't have time to write it out now.tl;dr: there is no tl;dr Read what I wrote above. This stuff isn't going to cost you much money (but could cost me a lot of it), but it isn't trivial, so make sure you understand how it works.
