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Creation of equivalent of fiat money in the crypto world singapore
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Author Topic: Creation of equivalent of fiat money in the crypto world  (Read 7236 times)

bob_ggg

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Re: Creation of equivalent of fiat money in the crypto world
« Reply #20 on: April 23, 2014, 01:32:50 pm »

A put option is an expensive way to obtain this result. In this way, you are keeping the benefits of an upside move of the BTC while being protected against its drop. IMO, all contracts should have the possibility to be paid in BCT, as this is the only currency providing enough liquidity.

A cheaper option would be based on the following ingredients:
  • futures (with different expiration times?). These futures would be activated immediately after the issuance of the coins.
  • careful management of the settling value of the contract (e.g. the value of the underlying BCT/EUR pair should account for the liquidity of the market)
  • management of the collateral of the two parties (the Crypto side is easy as we assume that issuer provides full back up of the currency, the other side of the contract is more difficult (e.g. how do you pay if the underlying currency goes against your position?))
  • definition of the action in case the collateral is not enough due to a sudden drop of the underlying currency
  • automatic payment of a fee to the issuer to reward him on a predetermined basis with a reduction in value of the coins or by an explicit payment required to the coin owner; the two choices have different implications: the first one creates a mechanism called demurrage which reduces in time the value of the coin whose value is different according to the time when they were issued; the second mechanism requires the coin owner to pay on a predefined basis a fee.
These are just the basic ingredients that would allow you to create such a "currency".  If we agree that these steps are OK and we not missing some obvious info, I propose that we examine in full detail each one of these steps.
BTW, if you have this mechanism in place, you can obviously have coins representing anything of value that is currently traded.
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bob_ggg

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Re: Creation of equivalent of fiat money in the crypto world
« Reply #21 on: April 24, 2014, 08:49:26 am »

James, here is the structure of a contract that would fit the purpose.
For simplicity sake, I use the concept of Contract for difference (CFD) as defined for instance here http://en.wikipedia.org/wiki/Contract_for_difference

The contract could be formalized in this way:

CFD (amount, oracle, long/short, expiration, margin_start, margin_minimum)

The meaning of the parameters is the following:
  • amount is the number of units that the seller want to trade
  • oracle    is the data source that provides the information about the price of the asset that is traded 
  • long/short defines if the contract issuer opens a long or short position
  • expiration sets the date when the contract expires; if zero, no expiration is set and the parties can resolve the contract at any time by paying the due difference
  • margin_start is the amount of units of value that will be locked until contract expiration
  • margin_minimum is the minimum amount of units of value required to keep the contract in place; if passed, then the defaulting party undergoes a liquidation of its position and the proceeds are transferred to the other party according to the value published by the oracle
This is the way I would use to cover some of the actions required to create a fiat currency within the crypto domain.
  • Alice wants to transform 10 BCT in Euro, without selling them; she understands that the contract that will be proposed to her will be in the same currency she already has (e.g. BCT) and that when she decides to get back her money this money will be again in BTC. However, the exchange rate vs. Euro, her local currency is now stable;
  • the issuer, bob_ggg, receives the 10 BTC and immediately issues the tokes to Alice and creates a contract for difference based on the value of the asset pair as published by coindesk.com
  • the contract issued is as follows: CFD (10 (e.g. the number of units of value), http://www.coindesk.com/price/ (the address of the oracle; a better choice is to have the value of the unit written in the block chain) , short (here the issuer of the contract says that it wants to create a short position in BCT), 0 (no expiration is specified), 0.3 ( the margin required to the parties to start the contract), 0.1 (the minimum margin required to keep the contract in place; liquidation of the loosing position would be activated by transferring the assets of the loosing position to the winning party)
An essential assumption is that the assets involved in the contract are in some way locked. If this were not possible, I do not know how to handle the counterparty risk without a third, trusted party.
Is this doable? Is it doable without introducing the complexity of smart contracts?
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jl777

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Re: Creation of equivalent of fiat money in the crypto world
« Reply #22 on: April 24, 2014, 10:08:46 am »

James, here is the structure of a contract that would fit the purpose.
For simplicity sake, I use the concept of Contract for difference (CFD) as defined for instance here http://en.wikipedia.org/wiki/Contract_for_difference

The contract could be formalized in this way:

CFD (amount, oracle, long/short, expiration, margin_start, margin_minimum)

The meaning of the parameters is the following:
  • amount is the number of units that the seller want to trade
  • oracle    is the data source that provides the information about the price of the asset that is traded 
  • long/short defines if the contract issuer opens a long or short position
  • expiration sets the date when the contract expires; if zero, no expiration is set and the parties can resolve the contract at any time by paying the due difference
  • margin_start is the amount of units of value that will be locked until contract expiration
  • margin_minimum is the minimum amount of units of value required to keep the contract in place; if passed, then the defaulting party undergoes a liquidation of its position and the proceeds are transferred to the other party according to the value published by the oracle
This is the way I would use to cover some of the actions required to create a fiat currency within the crypto domain.
  • Alice wants to transform 10 BCT in Euro, without selling them; she understands that the contract that will be proposed to her will be in the same currency she already has (e.g. BCT) and that when she decides to get back her money this money will be again in BTC. However, the exchange rate vs. Euro, her local currency is now stable;
  • the issuer, bob_ggg, receives the 10 BTC and immediately issues the tokes to Alice and creates a contract for difference based on the value of the asset pair as published by coindesk.com
  • the contract issued is as follows: CFD (10 (e.g. the number of units of value), http://www.coindesk.com/price/ (the address of the oracle; a better choice is to have the value of the unit written in the block chain) , short (here the issuer of the contract says that it wants to create a short position in BCT), 0 (no expiration is specified), 0.3 ( the margin required to the parties to start the contract), 0.1 (the minimum margin required to keep the contract in place; liquidation of the loosing position would be activated by transferring the assets of the loosing position to the winning party)
An essential assumption is that the assets involved in the contract are in some way locked. If this were not possible, I do not know how to handle the counterparty risk without a third, trusted party.
Is this doable? Is it doable without introducing the complexity of smart contracts?
The building blocks I have (or will have soon) are:
NXTsubatomic: crypto <-> crypto trustless exchange
NXTatomic: any NXT tx <-> any other NXT tx
NXT <-> BTC atomic exchange is something I am very close to solving

Peer verified data can create a trusted dataset into the blockchain, I already have some early prototypes for this, but currently it is cost prohibitive at 1NXT per AM. I would like to publish new data every minute.

Enforcing the contract is where I see the difficulty. I can lockup any crypto asset for specific periods of time, but if the final distribution is based on the dataset in the blockchain, then unless the dataset itself somehow directly controlled the disbursement of funds, the party that is losing money can just bail out and avoid the loss.

I have an idea. It will only work for short term instruments and there wont be a 100% guarantee of completion,but both parties will be able to monitor each other in realtime and so as soon as one of them defaults, the other can terminate the deal. The loss of reputation might be enough to prevent most defaults. It will be implemented via software running 24/7, so loss of internet becomes an issue.

Thank you for your post,the more details I have, the better chance of a creative solution.

James
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bob_ggg

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Re: Creation of equivalent of fiat money in the crypto world
« Reply #23 on: April 24, 2014, 10:47:23 am »

  • A first simplification would be to remove the oracle from the loop. This means that the oracle is uploaded upon request of the parties and that the transaction sleeps unless activated by the interested party. When activated, the transaction is executed. In this way, the cost of transaction would be much lower.
  • Is it possible to create a token in the Nxt system that is backed by BTC locked by a multisig in the BTC blockchain?
  • concerning the locking of the assets, I think that contracts should be self-executing and no party should be allowed to back out. I need to spend some time to propose a first protocol so that you can check how far it is from reality.
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