What are the incentives for creating HERO token (5% apr) vs bitUSD token (0% apr) on Bitshares?

in bitshares •  10 months ago

Someone asked this title question in chat so I wanted to share the incentive structure as I understand it.

Note: Creating mechanic is completely separate from buying. Not promotion. Numbers only.

TLDR: For traders who want higher possible gains from leverage due to market price above real price from expectation of profit


Bitshares 2014, Steem 2016, and EOS 2017 are graphene blockchains by Dan Larimer (and others). Bitshares has a built in decentralized exchange (DEX) and custom tokens discussed here. This is not about the new ethereum token that chose the same name.

Who would want to buy either one?

bitUSD token is pegged to 1 USD and bought by those who need decentralized price-stable currency (much like SBD).

HERO token is built to accumulate in value at 5% APR and bought by those who need decentralized price-stable currency with reduced risk from inflation and works as long term investment through compound interest.

Both are backed by collateral (in form of BTS) and exact value can be taken out at any time by hitting "settle" button. Additionally, both can be sold back on markets with price supported by the above mechanism.

Note: 5% APR is significantly higher than purchasing power drop rate of USD this decade at 2%/year average. 5% APR is calculated relative to USD in 1913.

What are incentives for creating both?

The incentives to create them are completely different from those of buyers and done in different manner.

Typically, creating these smartcoins is done by those who suspect BTS will go up more than value of smartcoins.

Simplest approach is margin trading, or that creating them might allow getting significant additional profit (1x-2x of regular) from BTS price increases.

Additionally, you could create smartcoins by borrowing them and spend anywhere (e.g. buy food in real world) by locking BTS instead of selling it. If BTS goes up in relative value, they can unlock it by selling less BTS than before. This latter scenario offers little difference between the two, so margin trading will be the focus.

Of course, neither plan is guaranteed to work.

(Continuation) Why might people think that BTS might go up in value?

Reasoning could be right or wrong as hard to know the future. Here are common ones:

Increase in demand or decrease in supply would put upward pressure on prices.

Supply is limited because BTS has no inflation (3.6b total). Other effects can come from more users (e.g. 1,2) or investors, lost private keys, value being locked up in bitAssets or DAO treasury, and so on. BTS chain usage has increased as well to set world record of over 1 million transactions per day.

Crypto prices tend to go up A LOT more in value relative to USD due to scarce deflationary nature of crypto. For example, BTS is up 1576% last 356 days at time of writing, with peak increase of over 10000%.

Compared to that scale, (0% APR) bitUSD or (5% APR) HERO values are relatively unchanging. This is why there is a lot of incentives to create price stable bit assets on BTS in general. 5% APR was likely picked significantly smaller than crypto value increases but larger than drop in USD purchasing power.

How margin trading and asset creation works

Process for creating both is identical, so I'll use bitUSD for example:

BTS collateral by default for bitUSD. That means anyone who is "bullish" or thinks BTS will "go up" in relation to bitUSD has incentives to long extra BTS by borrowing bitUSD, i.e. margin long.

BTS:bitUSD margin long is done by buying BTS, borrowing bitUSD, and buying more BTS with that.
Borrowing bitUSD step works by locking up BTS as collateral in the blockchain smart contract which then creates new bitUSD.
Details on margin longs possible (e.g. 1-2x effective leverage with varying risk) I summarized here.

Finally: why might someone choose to create specifically HERO token over bitUSD?

Higher possible profit.

HERO provides stability, inflation resistance, investment. bitUSD also offers stability and maybe network effect but no inflation resistance and lower investment potential. Liquidity can vary.

Since borrowing price is independent of demand on DEX, both tokens relatively same.

Buy price can't be lower than feed for long because of ability to buy and settle value.

The fiat market value of HERO on DEX is likely to be higher than the feed price b/c of demand from expectation of profit.
We have observed this with BTWTY, the first decentralized cryptocurrency index fund also on Bitshares - when profit is expected long term, people are willing to pay more.

HERO, can be argued, is better defined asset designed to be steadily profitable so lower in risk and more passive than various cryptocurrencies. The HERO investor or buyer would be more isolated from motives and mechanics of traders who create it.

The higher market price than feed price means you can buy more BTS by borrowing and selling HERO than by borrowing and selling bitUSD. The additional BTS a borrower gets might mean additional returns from BTS position. The HERO debt is likely independent of BTS increase and still only driven by price feed and demand. (This effect only works of course if BTS value grows faster than 5%/yr and position survives.)

Example of just buying BTS and selling i.e. "spot"

Scenario: BTS new price 10x of previous

What we did: bought BTS and sold it after increase

Result: +900% price increase lead to 10x net-worth of previous

Example of using bitUSD

Scenario: same as above

What we did: 1.5x leverage: buy BTS, lock it & borrow bitUSD, sell bitUSD to get more BTS

Result: +900% price increase lead to 1+(9)(1.5)= 14.5x net-worth of previous

Example of using HERO

Scenario: same as above + lets assume HERO market price 12% higher than feed constantly.

What we did: same steps as for 1.5x leverage: buy BTS, lock it and borrow HERO, sell HERO to get more BTS

Result: +900% price increase price lead to 15.04x net-worth of previous


HERO market price 12% higher than feed price means you can buy 12% more BTS with your HERO loan creation. You can't profit 12% immediately because to unlock BTS you have to buy back HERO at same rate. But the effect on returns are magnified.

Usually leverage = position/collateral = (locked BTS + new BTS)/(locked BTS) and (new BTS) ~= (HERO debt) in value initially

But here with same (locked BTS):(HERO debt) ratio (based on desired risk sensitivity) the "new BTS" we can buy is higher by 12%

That means additional 0.5x leverage we get from borrowing becomes 0.5*1.12 = 0.56 so effective 1.56x total leverage

So +900% price increase lead to 1+(9)(1 + 0.5 * 1.12) = 15.04x net-worth

General equation is
(total_multiplier) = 1 + (price_multiplier - 1)(effective_leverage)
effective_leverage = 1 + (leverage - 1)*(market_to_feed_price_ratio)
and for a simplest margin (1-step)
leverage = (1+y)/y
where y = (collateral/initial_debt) ratio (y source).

Of course, if BTS price goes down buying back HERO would also cost 12% more BTS on top of price drop % so double edged sword like all leverage. Some various market/feed ratios looked at here.

That's all. I was curious about this for myself.


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Bottom line: the Hero will be easier to sell and the 2.5% will mean nothing in the long run as BTS does it's 10x, 100x, 1000x thing.