Bitcoin Volatility: Problem Solved?

By Aug 29, 2014 6:27 AM EDT

NEW YORK (InsideBitcoins) — One of the main criticisms thrown at bitcoin on a regular basis is that it’s too volatile to be used as money. When the price has the potential to skyrocket or crash 20% in a matter of hours, not many people will want to use it for their day-to-day purchases. While there are a countless number of obvious advantages to using Bitcoin as a payment system, the prospect of using bitcoins as money is an idea that not many people are comfortable with right now.

BitShares is the development team behind the idea of DACs (distributed autonomous companies), and the first project to be built on their platform is an attempt to achieve the holy grail of cryptocurrency.

With BitSharesX, users may be able to trade cryptocurrencies pegged to the value of dollars, gold, stocks, or any other real world asset. Unlike other projects built around similar ideas, these new “bitassets” do not require any counterparty risk.

How does it work?

BitSharesX is a rather complex topic, but what makes it possible to issue various bitassets — such as BitUSD and BitGLD — are “contracts for differences.” For any bitasset to come into existence, it first needs to be shorted by someone who owns BTSX (the cryptocurrency for the BitSharesX platform).

Using BitUSD as an example, the idea is that the market for short and long positions on BitUSD will always stay around the real value of the U.S. dollar. The reason that the price should stay near its real world counterpart is that everyone in the system benefits from predicting that this market will act as intended.

For example, the speculators on the BitSharesX distributed exchange have an incentive to bid up the price of BitUSD when it is below the real value of the U.S. dollar because, in order to make a profit, they want to take action before anyone else. Basically, the only logical price to be determined by the market for a bitasset on BitSharesX is the price of that asset in the real world.

The experimental phase

Plenty of criticism has been thrown at the basic idea of BitSharesX because it is a completely new idea in money and finance. Some may even say it is a crazy idea, but there are others who believe the idea is so crazy that it just might work.

The platform currently in place is not dissimilar to Bitcoin in 2009. No one really knows whether or not it can work because the first bitassets were only created a few days ago. This is the kind of system where people will need time to figure out whether or not a bitasset could actually hold its value over the long term.

Even Dan Larimer, one of the creators of the BitShares concept, agrees that this is an experiment. When you throw in the fact that BitSharesX uses a completely new blockchain technology, known as delegated proof-of-stake, it’s definitely going to take some time before the general public will put any kind of trust, money, or faith into the system.

Written by Kyle Torpey
You can follow @kyletorpey on Twitter.

  • Freya

    I wonder how useful this is for the everyday consumer. I think for many people, watching markets and bidding is out of the question. For most people they would be more comfortable using something like Locks to tie a Bitcoin wallet balance to USD without going anywhere near and exchange.

  • robrigo

    Thanks for your reply; it is important to recognize multiple differing perspectives exist.

    I personally don’t subscribe to his views (Full disclosure, I am a BTSX / PTS holder) partially because I don’t believe he has done his due diligence in researching the latest developments in the platform, understanding how it works, and presenting that information in an unbiased manner. Also, I think he could have a vested interest in BitSharesX not succeeding. I say this because he is one of the founders of a DAO company that plans to use Ethereum and could very well be competing in this space: http://www.linkedin.com/company/eris-industries?trk=ppro_cprof (see: specialization in finance).

    One case in point: He fails to mention the mechanism by which “unilateral intervention” in pausing the market was achieved. This is a very important point: the dev team will not be able to arbitrarily pause the market on a whim when liquidity / proper depth is achieved by market forces; rather, there is a minimum bid / ask depth required for a particular BitAsset market to trade (currently 5,000,000 BTSX I
    believe). They have been putting up silly bid / asks (re: bids / asks
    nobody will meet) to reach this market depth and kick start trading. At
    any time, any user with enough BTSX could put up the required depth in trades and start the market again against the “wishes” of the dev team. By this mechanism, the dev team have been able to “pause” the market when exploits or bugs are found so that the proper hot-fix releases can be made and the integrity of the system isn’t harmed by exploits. But it is important to note that anyone with enough stake could restart the “paused” system if they so cared to do so!

    This is an experiment and it is important to recognize that bleeding edge technology will never be perfect in beta!

  • Guest

    Thanks for your reply; it is important to recognize multiple differing perspectives exist.

    I personally don’t subscribe to his views (Full disclosure, I am a BTSX / PTS holder) partially because I don’t believe he has done his due diligence in researching the latest developments in the platform, understanding how it works, and presenting that information in an unbiased manner. Also, I think he could have a vested interest in BitSharesX not succeeding. I say this because he is one of the founders of a DAO company that plans to use Ethereum and could very well be competing in
    this space:
    http://www.linkedin.com/company/eris-industries?trk=ppro_cprof (see: specialization in finance).

    One case in point: He fails to mention the mechanism by which “unilateral intervention” in pausing the market was achieved. This is a very important point: the dev team will not be able to arbitrarily pause the market on a whim when liquidity / proper depth is achieved by market forces; rather, there is a minimum bid / ask depth required for a particular BitAsset market to trade (currently 5,000,000 BTSX I believe). They have been putting up silly bid / asks (re: bids / asks nobody will meet) to reach this market depth and kick start trading. At any time, any user with enough BTSX could put up the required depth in trades and start the market again against the “wishes” of the dev team. By this mechanism, the dev team have been able to “pause” the market when exploits or bugs are found so that the proper hot-fix releases can be made and the integrity of the system isn’t harmed by exploits. But it is important to note that anyone with enough stake could restart the “paused” system if they so cared to do so!

    This is an experiment and it is important to recognize that bleeding edge technology will never be perfect in beta!

    tl;dr: Preston Byrne is spreading FUD, in my opinion.

  • meteor

    Seems there is a more serious issue. Here is a series of blog posts explaining the problem with BTSX; listed in reverse chronological order:

    http://prestonbyrne.com/category/bitmarmot/

  • ciaranmurray
  • robrigo

    Here is a recent post from Dan summarizing the market peg experiment and why the team concludes it was successful:

    https://bitsharestalk.org/index.php?topic=8358.0

    Price feeds are necessary as “training wheels” that will have little effect when the BitAsset markets’ become liquid.

    Quote from Dan / bytemaster on price feeds:

    “Prices feeds are considered undesirable because they are always “delayed” and potentially subject to manipulation. They represent a kind of price fixing that generally hurts markets and prevents them from adapting to rapidly changing conditions. With the way BitShares X uses price feeds however, most of these pitfalls are completely avoided. The price feed is used for exactly two purposes: limit when new shorts can execute and limit when margin calls can happen. The feed provides no restrictions whatsoever on how BitUSD vs BTSX can trade which means that BitUSD vs BTSX is a fully free market that is able to respond instantly and honestly to all market conditions. Once the market grows large enough the volume of straight BitUSD to BTSX trades will be able to provide enough liquidity that restrictions on the shorts will have little impact on the price discovery.

    When it comes to margin calls, it is still subject to market fluctuations within 10% of the price feed and thus at best the price feed can delay a margin call slightly in extreme volatility. Under normal market conditions where the volatility is less than -10% of the price feed we can safely claim that margin calls are also market-based and not artificial.

    At the end of the day the price feed prevents BitUSD from ever being shorted to 0 and prevents market manipulators from seizing collateral. It will have very little influence once the market matures and thus market participants are mostly trusting the market rather than the feed producers.

    There is only one “edge-case” risk that needs to be noted: if 51% of the feed producing delegates collude to publish a very high price feed *AND* they have sufficient BTSX they could end up shorting more BitUSD than the market can currently support. The result will be BitUSD temporarily trading below a dollar. The other risk is for delegates to collude and publish a lower feed and then using significant capital to buy up the order book and trigger fake margin calls. Both of these “attacks” require large amounts of capital and a large amount of collusion. They would hurt BTSX value and thus these delegates would likely be voted out very quickly and accurate price feeds restored. In both cases the attacker would likely lose more money than they could make, especially if they attempted to short BitUSD while attacking the network. Such an attacker would end up margin called when the network corrects.

    Conclusion: the market pegs are working and will get better!”

  • robrigo

    Hello,

    I assume you are asking about voting for delegates? Every transaction that is sent re-submits a participant’s voting “slate”. So to change your delegate votes, you can simply make a transaction to yourself after you have made the desired changes to your Delegate votes in the BitSharesX client. The weight of your vote depends on your stake, or how much BTSX you hold.

    As for holding shareholder configurations… I think I understand your question; there is a BitSharesX client that has wallet, market, and block explorer features built in. You can download it at http://bitshares-x.info. If you were asking something else please specify.

  • Caracrist

    Who controls the voting process, and what holds and verifies configurations of shareholder?

  • http://twitter.com/kyletorpey Kyle Torpey

    There are definitely other solutions out there/already in the works, but they usually have problems related to counterparty risk or higher costs. The CFD experiment is going to be tried out by Ethereum as well. Vitalik has some posts about his views on the topic over at the Ethereum blog.

  • meteor

    In the thread you linked that acknowledges it is an experiment, Winslow Strong of ETH-Zurich points out that a self-referencing prediction market (no price feeds) could have (should have?) been tried on a centralized exchange at some point in the past. A blockchain is not necessary to implement this concept. This would have been a huge improvement over existing futures markets that have termination dates and deliverables. Absent such an example, I am skeptical.

    The yet unreleased NuBits projects claims to have a mechanism to remove Bitcoin price volatility.

  • http://twitter.com/kyletorpey Kyle Torpey

    Thanks for sharing. I’ve seen Dan from BitShares talk about external price feeds as a last resort. It would be interesting to see if price feeds from 101 delegates would be decentralized enough for BitShares users. It could be problematic if many of those delegates are getting their price information from the same source.

  • meteor

    V. Buterin has also commented on the proposed price peg:

    https://bitcointalk.org/index.php?topic=324830.msg3581512#msg3581512