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RE: Scaling, Decentralization, Security of Distributed Ledgers

in #cryptocurrency2 years ago (edited)

@‍monsterer2 (formerly @‍monsterer) from bitcointalk.org sent me a message claiming that BitMex’s XBTUSD contract is a counter example to the claims and explanation in my blog as to why every peg is eventually doomed to market risk factors.

I’m sorry but that’s no counter example. It’s a centralized service that runs a feed and manages the margin deposits of longs and shorts. The market can move discontinuously faster than the system can liquidate the margins and thus the peg breaks. There’s not infinite margin deposited. In my blog I discussed StableCoins’ point that with sufficient reserves against market fluctuation (i.e. the margin deposits), a peg can have a longer lifespan. But there’s always long-tail distribution events that will be outside the normal reserve requirement assumptions.

Also there’s risks of failure and corruption due to it being centralized. And if decentralized then more arbitrage opportunities will be opened as market risk modes that can break the peg.

The generative essence stated in my blog on the instability of pegs is correct.


After writing the above, I read another comment from him:

This pegging system works like interest rates. There are no liquidity walls involved.

When the price is below the peg, longs pay shorts an interest rate, visa versa when the price is above the peg. Long/short positions are naturally encouraged to change their stance in favour of the peg, thus playing the role of inter-exchange arbitrage in the absence of that possibility.

The interest rate is proportional to the disparity of the current price from the desired price.

This introduces differential equations into the model (slow moving, higher inertial mass of interest rate payments with fast moving mass of the exchange rate), which can cause in some situations for long/shorts to do opposite of what the model expects them to do when volatility is very high because of tailing inertial oscillation in such a mathematical model.

And the participants still need to supply margin to cover the costs of what they must pay when their position is going against them.

There’s no mathematical way to remove market risk entirely from a peg. Such a deterministic system would have no uncertainty.