BSIP 42: dynamically adjust price feed
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[38](bsip-0038.md) | Add target collateral ratio option to short positions | Abit More | Protocol | Installed
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[39](bsip-0039.md) | Automatically approve proposals by the proposer | Fabian Schuh | Protocol | Draft
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[40](bsip-0040.md) | Custom active permission | Stefan Schießl | Protocol | Draft
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[40](bsip-0042.md) | Adjust price feed to influence trading price of SmartCoins | Abit More | Protocol | Draft
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bsip-0042.md
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bsip-0042.md
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BSIP: 0042
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Title: Adjust price feed to influence trading price of SmartCoins
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Author: Abit More <https://github.com/abitmore>
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Status: Draft
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Type: Protocol
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Created: 2018-08-22
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Discussion: https://bitsharestalk.org/index.php?topic=26948.0
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Worker: TBD
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# Abstract
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We here propose to dynamically adjust price feed in order to influence trading
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price of smart coins to achieve tighter peg.
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# Motivation
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To get mass adoption, it's better that the SmartCoins can peg to targets more
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tightly. E.G. bitUSD pegs more tightly to Fiat USD.
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# Rationale
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When BTS is in a downtrend, the SmartCoins are always being traded at a
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premium; when BTS is in a uptrend, the SmartCoins tend to be traded with a
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discount. Here is a chart showing historical trading price of bitUSD:
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https://coinmarketcap.com/currencies/bitusd/
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Typically a premium is around 10%, and a discount is around 5%. Although some
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people think the numbers are not very large, other people think they're too
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large. In this BSIP we aim to reduce the numbers.
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Trading price of a SmartCoin is influenced by
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* underlying value guaranteed by collateral;
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* demand vs supply.
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## Downtrend and premium
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When BTS is in a downtrend, before a black swan event, supplies of SmartCoins
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are squeezed, while the underlying value is still guaranteed if price feeds are
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around real trading price, thus trading price of the SmartCoins will be pushed
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up.
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If we slightly adjust the price feed, thus slightly loose the guarantee on the
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underlying value, hopefully we can push the trading price of SmartCoins towards
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par. Since adjusting price feed affects supply as well, ideally we don't need to
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adjust much to achieve the goal.
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Other options include decreasing MCR to stimulate supply, or decreasing MSSR to
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suppress demand.
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### Negative feedback
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Actually we don't know what's the best offset to be applied to the inputs, but
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we can adopt a negative feedback approach. When adjusting the inputs, keep an
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eye on the result (trading price of SmartCoins). If the adjustment is in the
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correct direction, the price should move towards par. If the price moved too
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little, we adjust more; if the price moved too much, we adjust less. Finally
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this will lead to a stable result.
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### Risks
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All the adjustments (price feed, or MCR, or MSSR) in a downtrend actually looses
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requirement of collateral ratio, so it seems it will increase the possibility
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of black swan events. This is actually the most contraversial part of this BSIP.
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The counter argument is about liquidity. As we can see, even without the
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adjustments, black swan events have occurred on bitHKD, bitSGD and some other
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SmartCoins due to poor liquidity. In contrast, bitCNY, bitUSD and etc have
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survived due to good liquidity. With the adjustments, hopefully we'll have
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better adoption, which means better liquidity in the markets, so possibility
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of black swan events would likely decrease.
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### Guarantee of value
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Adjusting price feeds impacts force settlements. Specifically, a user will
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likely get less by force settling when the price feed is adjusted. This lead
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to an argument says it breaks guarantee of SmartCoins' value.
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The counter argument is also liquidity. With good liquidity, users should buy
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from market rather than force settling. It's up to UI to guide users for better
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experience. If a user has a large volume to trade, she has to be patient,
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since even go the force settlement approach she will likely encounter the
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volume limitation as well.
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### Margin call price
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Actual price (in FIAT) when buying into a margin call would be unchanged,
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because the adjustment will shift trading price of SmartCoins but not BTS.
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It's expected that margin calls will be less though.
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### User experience changes
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Currently, GUI shows median price feed on the market page. By looking at the
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price,
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people know what price BTS is trading around. Then people can check lastest
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trading price of BTS / SmartCoin pairs, to know how much premium or discount
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that the SmartCoins are trading at.
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After applied the adjustments on price feeds, the median price feed showing
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on market page of GUI will no longer mean trading price of BTS, instead, it
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will mean a somewhat "guiding price" for SmartCoin production. People may get
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confused especially in the beginning of applying the adjustments.
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On the other hand, after applied the adjustments, hopefully SmartCoins will
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be traded on par, so latest trading price of BTS / SmartCoin pairs will
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indicate trading price of BTS.
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It's up to the GUI development team to optimize the GUI for better user
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experience.
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## Uptrend and discount
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When BTS is in a uptrend, usually SmartCoins are oversupplied which results in
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devaluation. Ideally, to reduce supply, the best approach is to increase MCR.
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However, at this moment, there is a bug in BitShare-Core so we can't adjust MCR
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freely (more info is here:
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https://github.com/bitshares/bitshares-core/issues/1270). Before the bug is
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fixed, we can adjust price feed instead, similar to downtrend, with negative
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feedbacks, but in opposite direction.
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Note: when adjusting price feed in a uptrend, we should set a fair force
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settlement offset at same time, see [BSIP 16](bsip-0016.md) for more info.
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# Specification
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When witness publishing a price feed, after got price of BTS from exchanges
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(assuming it's `P`), check trading price of the publishing SmartCoin,
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adjust `P` with an algorithm.
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The algorithm should implement negative feedback,
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that said, it should track historical adjustments and historical differences
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on trading prices of SmartCoins, and make new adjustments accordingly.
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We don't force all witnesses to use same algorithm, instead, witnesses are
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encouraged to implement different algorithms for same goal.
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# Discussion
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[To be added]
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# Summary for Shareholders
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[To be added]
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# Copyright
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This document is placed in the public domain.
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