BitUSD

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Accordingly steemian Fabian Schuh (@xeroc), 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.[1]

In an article comparing different pegging cryptocurrencies published in June 6th, 2017, Crypto Insider blog author Martin Higgins wrote that the high volatility of exchange value is one barrier to the mass adoption of cryptocurrencies.[2] The founder of the world's first Bitcoin-only hedge fund, Anatoly Knyazev, wrote an article saying: Cryptocurrencies are volatile. A layman - or an average redditor commenting on cryptocurrencies - would say “My Bitcoins have mooned! I don’t see a problem.” But in economic theory, upwards revaluation is just as bad as devaluation since it hurts debtors and makes day-to-day practical implementations impossible. World domination requires stablecoins.Cite error: Closing </ref> missing for <ref> tag

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

Fabian Schuh (@xeroc) remind us that 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, Fabian continued, 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. [1]

Price manipulation risk

In Bitshares.org website, the "Price-Stable Cryptocurrencies" chapter alert that there is always concern of price manipulation. Someone with a large amount of money on both sides of a trade can use their funds to manipulate the markets and thus the price feed. If the amount of money they lose manipulating the markets is less than the amount of money they can gain by manipulating the price feed, then it will be profitable to manipulate the market at the expense of either the BitUSD longs or the shorts. A low-collateralized short that sees a large force-settlement order requested can attempt to manipulate the markets and thus the feed against the BitUSD holder.

The risk of price manipulation is priced into the premium on BitUSD charged by the shorts, and thus should already be priced into the market. If price manipulation became a serious problem that caused very high premiums, then it could be addressed by the price feed producers, who can adopt a moving average over wider time windows to increase the difficulty of short-term manipulation. A variety of algorithms could be used to estimate a “fair price” that keeps BitUSD valued at least $1.00.

In practice, a feed producer can observe the BitUSD-to-USD market as an indicator on which way to adjust the feed. Generally speaking, the strategy that the feed producers adopt for controlling the feed should be public knowledge, because the shorts will ultimately rely on it. For the feed producers to change strategies in unpredictable ways could cause losses to both longs and shorts.[3]


References

  1. ↑ 1.0 1.1 What makes the bitUSD better than nuBits Written by Fabian Schuh (@xeroc) on Steemit in 6/9/2016
  2. ↑ Pegged Cryptocurrencies and Credibility Written by Martin Higgins in Crypto Insider blog in 6/6/2017
  3. ↑ Price-Stable Cryptocurrencies Bitshares.org, retrieved in 12/9/2017

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