What makes the bitUSD better than nuBits

last year
70 in bitshares

The bitUSD is a premium asset that comes with a strong "peg" to the U.S. Dollar. The underlying mechanics ensure that it does not sell below $1 worth of BitShares equity.

What is a bitUSD?

The bitUSD is a market-pegged asset on the BitShares blockchain. It is often also referred to as a smartcoin, a bitasset, or just USD in the context of blockchain assets. It can be freely traded, or transferred on the BitShares blockchain and has a face value of 1 (one) U.S. Dollar.

What makes the bitUSD worth 1 (one) U.S. Dollar?

It is important to understand that the bitUSD is an asset that is not backed by real dollar in someone's bank account. The reasons for this is trust. We cannot trust anyone to hold and secure a physical asset so that people can redeem it eventually. History has repeatedly shown: It doesn't work!

Instead, the bitUSD is backed (e.g. secured) by the BitShares core token BTS. This means that behind any bitUSD, there are x amount of BTS that cannot be touched, traded or otherwise moved. These BTS are locked in a smart contract and serve as collateral.

More technically, that means that someone has put sufficient BTS into a contract for difference that only allows to access these BTS when the bitUSD are paid back. We call these short or call position and the bitUSD are debt that is borrowed from the network.

From whom do I borrow bitUSD?

Usually, these contracts are closed between two human parties. However, as we learned, we prefer to trust code instead of humans. So, who is the counterpart in and borrows us bitUSD?

Well, the counterpart for borrowing bitUSD is a smart contract that is implemented on the blockchain. It goes like this:

If you put enough BTS into my locker, I will give you bitUSD. You will only get your BTS back if you pay back the bitUSD (without interest!)

So, borrowing from the network is quite easy and only takes a few mouse clicks.

How much collateral do I need? Can I get 1 bitUSD for $1 worth of BTS?

As we have learned, the collateral is a safety measure and it needs to ensure that 1 bitUSD is worth $1 in BTS even if the $-price of BTS falls. And this is where things are getting interesting for traders.
The minimum required collateral for most bitAssets (including the bitUSD) is ~2x. This means that you need to put $200 worth of BTS into the contract to borrow just 100 bitUSD. How many BTS that actually are depends on the market price of the BTS. The blockchain knows this price from our oracles (i.e., witnesses).

This also means that every bitUSD is backed by at least $2 worth of BTS.

What will happen if BTS share price goes down (in $-terms)?

First of all, every borrower has it's own contract with its own collateral. If you maintain your collateral at >2x, you are on the safe side. However, if the $-value of your collateral becomes worth less then 1.9x of your debts, then the blockchain will execute a margin-call automatically (as part of the contract for difference-smart contract).

During a margin call, the collateral of your position (that is not sufficiently collateralized) is taken to buy back bitUSD on the internal markets. This happens at the price feed up to a certain price that is capped by the short-squeeze protection price (~10% above the price). This means that if you are margin called, all your collateral will be used to buy back the bitUSD you own but the smart contract will not pay more than ~10% above the fair price. Any BTS left from the margin call will of course be handed back to you.
(Note that the short-squeeze protection ratio (10%) is a parameter that can change upon committee approval.)

What will happen if the BTS share price goes up (in $-terms)?

Well, then you are lucky if you sold your bitUSD on the market earlier. Once the price climed, you can buy back bitUSD with less BTS than you received when you sold bitUSD. When you pay back your debt and close the call/short position, you will end up with more BTS than you started with.

What else ensures parity?

The above mechanics work quite well in liquid markets, however, any market has to be bootstrapped with no-liquidity and thus something else is needed to ensure parity (or at least redeemability at the peg) for larger volumes. In BitShares this is achieved by force settlements.

A settlement can be initiated by anyone that holds bitUSD (or any other bitasset). It is an order that takes 24h take execute and cannot be canceled. Once it is executed, it exchanges the full amount of bitUSD in BTS at the price feed. The collateral is taken from those traders that have the lowest collateral ratio and the bitUSD are used to reduce their debt.

In short, a settlement is nothing more than buying back collateral from someone else and paying his debt.
After the settlement, you will end up with $1 worth of BTS for every bitUSD you have settled.

How is this better than nuBits?

Well, bitUSD are actually backed by at least 2x the amount in BTS. And even if there was no buy walls for bitUSD, you could still "sell" your bitUSD for what they are worth by means of a settlement.

Furthermore, BitShares knows many more smartcoins besides bitUSD:

  • bitEUR
  • bitCNY
  • bitGOLD
  • bitSILVER
  • etc..

and all of these are created by means of contracts for difference.

Disclaimer

The author of this post is not an economist but understands the mechanics implemented in the bitAsset smart contracts well enough to give a brief introduction. By no means is anything mentioned here an investment advice. Furthermore, it is highly recommended to do your own due diligence before taking actions. The author refuses to take any responsibility
In no event shall the author be liable for any claim, damage or other liability, whether in an action of contract, tot or otherwise, arising from out of or in connection with this article.

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73
  ·  last year

NuBits is backed by NuShares with some critical differences from how BitUSD is backed by BitShares:

  1. BitUSD is only created by a super-bull willing to take the downside risk
  2. BitUSD can be force settled
  3. BitUSD does not depend upon trusted parties to run bots on exchanges
  4. Borrowers are Margin Called when collateral runs low which refreshes the collateral backing BitUSD as the price falls.

Currently there are $700,000 worth of NuBits backed by $1M worth of NuShares plus whatever BTC you trust the market makers to hold on your behalf. There is currently $100K worth of BitUSD backed by $9M worth of BitShares. This means that the ultimate source of value backing BitUSD is 60x greater than NuBits.

Comparison to Steem Dollars

The Steem Dollar works similar to BitUSD with a few important caveats:

  1. Steem Dollars are created by the blockchain to pay rewards, not by Super Bulls seeking leverage
  2. Steem Dollars are backed by the Steem Printing Press, this means no potential for black swans
  3. Steem Dollars maintain a 1:20 Debt to Equity ratio or better which means they are backed by 20x rather than 2x collateral ratio.
  4. There is a 1 week settlement window instead of 24 hours
  5. The settlement price is the 1 week moving median price rather than the instantaneous price feed.
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70
  ·  last year

There is currently $100K worth of BitUSD backed by $9M worth of BitShares. This means that the ultimate source of value backing BitUSD is 60x greater than NuBits.

$9M is the entire market cap of BitShares at the moment. Since not all BTS are tied into collateral for bitUSD, I doubt that the ratio is 60x, but it is surely more than 4x. Would be great to have a simply way to call this kind of data from the node.

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73
  ·  last year

Yes, but the value of the BTS in the collateral is derived from being part of a larger whole.

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70
  ·  last year

For me, collateral is locked and cannot be traded, transferred or moved. Thus "liquid" BTS are not backing anything.
However, I could understand if people thought of additional "inertia" coming from collateral for bitEUR, bitCNY, bitGOLD, because they reduce the supply of liquid BTS and thus result in reduced sell-pressure and this way support the "peg" during margin calls.

Whether the marketcap of BTS becomes bigger than the sum of the "market caps" of its bitassets needs to be proven first. Hopefully Metcalfe's law applies here as well :)

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49
  ·  last year

At very liquid market you dont't have to be BTS bull to short BTC - you're just playing the waves.

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58
  ·  last year
  1. Bitshares supports many pegged assets letting the shareholders decide which ones and to what extent they want to support. This gives free-market variety and is ideal for an exchange.
  2. The Steem Dollar is the only backed-asset on Steem. All Steem holders are in the position of backing the steem dollars.
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70
  ·  last year

Hi Dan, still trying to get my head around this, could you explain why points 4 and 5 are advantageous, please?

CG

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73
  ·  last year

They prevent short-term market manipulation from impacting the conversion price unless it can be maintained for over 3 and a half days.

Without this protection someone could request a conversion to STEEM, dump a bunch of STEEM on the market which will push the STEEM per USD ratio up. When the conversion executes they would get more STEEM and then price would recover.

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72
  ·  last year

posted on a branch .. ;/

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72
  ·  last year

.

66
  ·  last year

This article doesn't actually compare bitUSD to Nubits. In fact Nubits is only mentioned in two headers and none of its mechanics are described. Bait and switch?

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70
  ·  last year

Well, I didn't mean to compare it. I merely wanted to show that the underlying mechanics are superior and (maybe wrongly) assumed people reading this article know how nuBits works. Thanks for reminding me to better stay more neutral.

70
  ·  last year

Thanks for this post @xeroc, it has opened my understanding that bit more. Though I don't understand how it can be economically viable to give twice the collateral for a loan, even a zero interest loan.

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69
  ·  last year

Think of it like a home equity loan (HELOC). Let's say you have a $500k home and you take a $250k loan on it and you get cash. You can now spend, save or invest the cash. You don't have to pay interest to a bank either. That's how bitUSD/Smartcoins work.

Banks should require a lot more collateral to create new money, but they don't so there are greater systemic risks in the modern economy.

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70
  ·  last year

The collateral requirements are this high because the crypto currency BTS is highly volatile and we need to ensure the peg even if the price drops by more than 30%. I assume that once the internal markets become more liquid, the committee might be able to reduce the maintenance collateral ratio for some assets, but I don't see this happening in the near future.

72
  ·  last year

@xeroc - great post :) thanks, i have a few question if you don't mind.

Q. In the event of a margin call that cannot be fully 'covered/filled' below the 10% short squeeze protection; how is the remaining outstanding BitUSD covered?
Q. In the event of a force settlement (collateral is taken from those traders that have the lowest collateral ratio and the bitUSD are used to reduce their debt), am i right in thinking that their BitUSD balance / debt will decrease from this operation?

if anyone wants to see what Nubit looks like in a crisis check out (updated today - new chart at the bottom): https://steemit.com/bitshares/@steempower/warning-nubits--the-price-stable-currency-

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67
  ·  last year

I'll try to answer based on what I remember off the top of my head, but it has been a while since I've looked at this stuff in detail (so @xeroc, @dan, or anyone else please correct me if I am wrong).

In the event of a margin call that cannot be fully 'covered/filled' below the 10% short squeeze protection; how is the remaining outstanding BitUSD covered?

If I remember correctly, I believe the margin call acts as a limit order up to that 10% offset price. That means if it isn't fully filled at the time of margin call, it just sits there in the order books until it is filled. If a margin call order sits in the order books without being filled long enough as the collateral price changes, it is possible that the least collateralized short position can become undercollateralized. The moment this happens, it triggers a global settlement for all BitUSD holders at the highest price possible that the least collateralized short position can support. This means smartcoin holders are forced out of their long position into the underlying collateral (BTS in the case of the BitUSD asset) at a price a little less than the price feed. This event should in theory be extremely unlikely to happen (there would likely be enough liquidity in the order books within 10% of the current price to satisfy the margin calls instantaneously) that we call it a "black swan" event.

In the event of a force settlement (collateral is taken from those traders that have the lowest collateral ratio and the bitUSD are used to reduce their debt), am i right in thinking that their BitUSD balance / debt will decrease from this operation?

The conversion happens at the force settlement price, which is typically the same as the price feed (although it can be any percent offset away from it in the shorts favor, and in fact there is a somewhat controversial proposal happening right now to change that offset from 0% to 1% for the BitCNY smartcoin). So the amount of BitUSD being converted (which is ultimately destroyed) in a force settlement is the amount reduced from the debt of the short position with lowest collateral ratio, but then enough of the collateral asset is taken (BitUSD amount times the force settlement price) from that short position to give to the user who requested the force settlement. If the debt amount of the short position with the lowest collateral ratio is not enough to cover the BitUSD amount being converted, then that short position will be fully closed at the force settlement price (and the excess collateral will be given to short position owner) and then the blockchain will move on to the next short position (in order of increasing collateral ratio) to take care of the rest of the BitUSD amount yet to be converted.

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70
  ·  last year

Q. In the event of a margin call that cannot be fully 'covered/filled' below the 10% short squeeze protection; how is the remaining outstanding BitUSD covered?

As described by @arhag, the margin call will result in a order on the market with a 10% limit (again, 10% is currently defined per-asset as the short squeeze protection ratio, it could be something else eventually - In the beginning of BitShares 2, it even was 50%!)

Q. In the event of a force settlement (collateral is taken from those traders that have the lowest collateral ratio and the bitUSD are used to reduce their debt), am i right in thinking that their BitUSD balance / debt will decrease from this operation?

@arhag again describe it perfectly. I intentionally keep a single detail out of the description above to make it more simple to understand: The force settlement price may not be identical with the feed price per se. In fact, all bitassets (that are owned by the committee-account) do have a 0% offset from the fee price except bitCNY which was recently increased to 1% as an experiment. As @arhag pointed out, this was and still is a controversial discussion.

67
  ·  last year

How is this better than nuBits?

It doesn't look good for nubits!!!
1 NBT = $0.65