BitSharesX: Extraordinary claims require extraordinary evidence

[NOTE: be sure to read the comments below this blogpost, where the conversation continues.]

Seems legit

Seems legit

Twitter is somewhat on the quiet side, considering BitSharesX is the next big thing. What I have seen, I view with skepticism:

Because the best way to keep a secret is to broadcast it in the clear on Twitter while also promoting a Thunderclap:

Sarcasm aside, this is actually a somewhat serious post.

#BitMarmot gets serious

#BitMarmot gets serious. Eating flowers will have to wait

1) On my motivations

By way of reply to a thread on BitSharesTalk.org on my previous post, I should say a word about my motivations. Although I do work on a DAO project and am acquainted (and indeed friendly) with the people at Ethereum, I hold no Ether and indeed have no stake in any “2.0” public ledger, whether token or equity. Furthermore, there is zero likelihood that my involvement in any project, now or in the future, will ever wind up competing with BitSharesX.

I don’t like or approve of token pre-sales and I never will.

My motivations are actually fairly boring. I have a blog of limited readership consisting of friends, business contacts, professional colleagues, and the occasional principled malcontent on which I write about cryptocurrency. In these writings, which are addressed mainly to them, I try to call things as I see them. I look at BitSharesX and I see a group of talented and idealistic individuals who, in possession of a new and revolutionary technology, believe that they can deploy it in such a way as to change the face of the banking system and of business itself.

As part of that process, I see this team making very optimistic claims relating to their platform’s performance to thousands of members of the cryptocurrency community. And I think virtually all of these representations are incorrect. It’s nothing personal. It’s just that

What counts is not what sounds plausible, not what we’d like to believe, not what one or two witnesses claim, but only what is supported by hard evidence, rigorously and skeptically examined. Extraordinary claims require extraordinary evidence. 

-Carl Sagan

2) The extraordinary claims

To rehash, the BitSharesX platform purports that it can safely carry out the following functions:

  • High Yield Savings
  • Save in Gold, Silver, Gas, Anything 
  • Instant Transfers
  • Better than a Swiss Bank [noting again that yes, they actually say this]
  • Never Frozen
  • Free Market Decentralization!

such that 

BitShares X will resolve the problems arising from fractional reserve banking, naked shorting, and high-frequency trading manipulation.

According to BitShares, the price of the peg for these assets in the event of BTSX volatility will be maintained by collateralisation in BTSX, failing which the platform employs

…a very simple fall back option:

1) The delegates publish a price feed
2) All trades must be within X% of the price feed

3) Prove it

My article sought to make one point, and one point only. As correctly identified by forum member Yellowecho:

I’m referring to the scenario mentioned by the author.  He’s basically trying to make the case that bitAssets won’t hold market peg if BTSX has huge volatility to the downside because they’ll be ‘unbacked’ by real world USD… or to put it another way, the value of all outstanding bitAssets will largely exceed the value of all BTSX during a black swan so it will implode on itself.

Scenario: If BTSX has a market cap of $100M and there are $50M worth of bitAssets issued and a black swan happens .. if the market cap of BTSX falls to $1M then those with bitAssets are screwed because their bitAssets would be greatly undercollateralized so if they wanted to cash out in USD they’d do so at huge loss.

That’s about the size of it. 

In the case of a substantial fall in value of BTSX, BitAssets will be under-collateralised and will start trading under par as they (being BTSX derivatives, and not actual assets) will not entitle the holder of the in-the-money side of the trade to obtain sufficient USD on settlement to actually recover the expected dollar equivalent of what they are entitled to under the contract. The collateral pool will, at some point, run out of firepower. Price-fixing through unilateral delegate intervention will result in market failure as mispriced trades will be unable to find a counterparty. Nobody is going to spend $1.00 to buy BitUSD which they will only be able to dispose of for, e.g., $0.25.

Irrespective of supply-side intervention through the “DAC” (printing new BTSX/BitAssets or removing them from circulation), if the market abandons the platform in a “black swan” event (which to date virtually every single cryptocurrency in existence, including arguably Bitcoin, has experienced) depositors, investors, and BitAsset holders alike would, in my view, incur substantial losses. These losses would arise not only from the collapse in the value of the BitAssets themselves as described above but also from the fall in value of the BTSX collateral which is locked up in these transactions, as against a reference unit of value with an independent existence outside of the BTSX ecosystem (USD/Bitcoin/whatever).

No asset rises in price forever, including BTSX. To think otherwise is folly. The relevance of the issue is that BitSharesX does not benefit from protections available to users of deposit-taking banks or other financial institutions, such as guaranteed deposits or claims in insolvency. If BTSX collapses, unless the laws of economics have somehow been suspended, depositor value may evaporate without any recourse being available. 

In the interests of fair play, I don’t think it’s unreasonable that the market – including current holders of BTSX – should ask BTSX’s promoters to:

  • demonstrate irrefutably why a falling BTSX price as described above will not result in losses as described above; or
  • accept that this point is correct.

4) BitSharesX’s response so far

Restating my position in brief, I will be happy to retract my earlier assertions if BitSharesX can prove that their claims are true and that investors and BitAsset depositors will not suffer losses under one (in my view inevitable, given sufficient time) scenario: a rapid fall in the price of BTSX of 50% or more

BitShares X has singularly failed to address that point. What we saw instead was quite a bit of ad hominem (this is the Internet, after all):

I thought the article was quite entertaining… it has been a while since I read such a scathing review that said more about the author than about BTS.  

It was like someone trying to argue that Bitcoin is “impossible” simply because there is nothing behind it.    To understand BitShares and BitAssets all you need to know are some very fundamental facts:

1) A digital asset has a non-0 value.   (Proven by 300+ alts with non-0 values)
2) A collateralized loan is a safe loan if the collateral is relatively liquid and stable
3) Prediction Markets Work.

The straw man arguments and inaccuracies reveal that he doesn’t have enough information to make a rational evaluation of the system and thus even if there were something wrong you cannot trust him to know what it was.

Be civil, BitSharesX; play the ball, not the man.

There is other commentary which fails to address the main point and improperly references the Nash Equilibrium; I do not therefore propose to repeat it all here. I trust the restatement of my position as described in section 3 above provides the necessary clarification.

5) Edit, 25 August 2014 – Postscript.

Daniel Larimer and I engaged in a short correspondence on this blogpost and my previous one (see comments below for these quotations in their full context). Daniel argues:

All banks make claims that are far less sound that BTSX makes. Namely, they claim you can withdraw your deposit on demand. They borrow short term and lend long term. They create USD on illiquid, non-fungible, collateral (housing, cars, etc) that can be just as volatile as any crypto-currency and is subject to fire, flood, weather, and owner abuse. The mechanics of BitUSD creation are far more sound than any fractional reserve bank creating USD with similar accounting principles…

I agree that all “marketing” tends to oversimplify and unfortunately I cannot control all members of the community nor BTSX websites. For the sake of a fair discussion on the merits of BTSX I suggest you separate out the claims of “random people” from the actual technology. We should talk about what it can and cannot do in an objective manner. The BTSX website is not under my control, but I have suggested to them that they need to have the fine print in more prominent places.

Law-abiding people in developed countries are at the mercy of law-breaking government officials, IRS, and identity thieves. Contracts are expensive to enforce, MF Global saw segregated accounts standing last in line in bankruptcy. Mt. Gox depositors were robbed by the Federal Government as were depositors at other otherwise trustworthy institutions that the government has shut down. The purpose of BTSX is to provide an alternative to the broken system that works without relying on contracts.

Obviously if we had rule of law and a true free market then 100% backed IOUs in the custody of a transparently audited company would be viable and superior. Unfortunately we don’t live in that world and thus must make compromises that have different risks.

To which I replied:

Daniel,

The oversimplification is not just coming from third parties… The banks’ claims are not at issue here; BitShares’ claims are.

You cite some of the worst examples of business mismanagement in history as your comparator, and blame the US government for investor losses under Mt. Gox in order to present BTSX as a “compromise” when so compared. There really is no comparison. For the average Joe, the likelihood of losing an FDIC-insured bank account balance is close to zero (which I note the BTSX website claims BTSX is superior to, at least if we assume that by “Swiss bank” the website means a bank of more substantial repute than a local farmers’ cooperative in rural Vermont).

I am cognisant that antigovernment and anti-corporate rhetoric plays to the gallery. However, this rhetoric is not in my opinion responsibly made, exaggerating the risk of relying on regulated, mainstream financial service providers while minimising or indeed ignoring completely the risks of BitSharesX to a group of people who are unable to understand the difference (though they might think they can).

The technology is interesting, but the structure is flawed: speaking objectively, BTSX/BitAssets cannot provably do what the marketing material claims it can do. I think you have an obligation, at the very least, to make this point abundantly clear to everyone who is about to throw money at it.

 To no avail. It would appear the die is cast:

I’ve said my piece and have no more to add to this discussion. I will leave you, dear reader, with one parting thought:

Skeptical scrutiny is the means, in both science and religion, by which deep thoughts can be winnowed from deep nonsense.

-Carl Sagan

6 comments

  1. This article is far more fair than his prior articles and focuses entirely one the “black swan failure mode”…. the dreaded 50% fall that happens so fast BitUSD ends up only partially backed by BTSX. An event similar to a bank run, hyper inflation, or bankruptcy of a traditional banking institution.

    The only issue is that Preston is arguing against the straw man that we claimed BitUSD will ALWAYS under ALL conditions be worth $1 with 0 risk. We do not claim this and have never claimed this when you read the details. Sure high-level marketing always has fine print with financial instruments. We have always maintained that BitUSD will vary in price around the value of the dollar and that in the event of a massive black swan BitUSD is worth at most 2x the BTSX you spent to buy it.

    All banks make claims that are far less sound that BTSX makes. Namely, they claim you can withdraw your deposit on demand. They borrow short term and lend long term. They create USD on illiquid, non-fungible, collateral (housing, cars, etc) that can be just as volatile as any crypto-currency and is subject to fire, flood, weather, and owner abuse. The mechanics of BitUSD creation are far more sound than any fractional reserve bank creating USD with similar accounting principles.

    So claiming that Mt. Gox USD is always worth a dollar is the same as claiming BitUSD is always worth a dollar. Sometimes GoxUSD is worth more than paper USD (if you want to buy in the next 48 hours)… sometimes it is worth less (you need paper USD in the next 48 hours). Thus GoxUSD vs Paper USD has similar price volatility to BitUSD / Paper USD. You don’t see anyone complaining about exchanges making the claim that your USD deposits are pegged to the dollar yet the RISK that you could get nothing for your Gox USD is always there.

    Quote
    The relevance of the issue is that BitSharesX does not benefit from protections available to users of deposit-taking banks or other financial institutions, such as guaranteed deposits or claims in insolvency.

    A DAC offers depositors the same thing regular banks do in the event of insolvency, their debt is converted to equity. As far as I can tell BTSX offers a far more efficient conversion to equity than any claims system. As long as BitUSD holders accept this risk then BitUSD can serve a valuable role.

    So the only questions that remain are:

    Is BitUSD pegged to the USD while volatility is within the design tolerance? Yes
    Is there value in having an instrument that is pegged within the design tolerance? Yes
    Is it possible to tweak the design parameters to reduce risk (ie: increase collateral?)… Yes
    Is it possible to back BitUSD with printing BTSX? Yes (to some extent)

    If the prior steps are true, then the system is very valuable even with its limits. You cannot eliminate risk, you can only change its nature, hedge, and insure. BTSX provides an innovative new tool to manage your risk. Users can trade risk of bank failure, government seizures, capital controls, lack of privacy, slow transactions and high fees for the risk of a black swan in BTSX valuation or their private keys being stolen. Every individual will evaluate these risks differently. The key is to know the risks when you act so you can choose to accept them or not.

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  2. Daniel,

    In my personal view, your measured and thoughtful reply is substantially at variance with both the representations made on BTSX’s website and those being made in public by the members of the BitSharesX community.

    Claiming that an assertion that BTSX holders believe “BitUSD will ALWAYS under ALL conditions be worth $1 with 0 risk” is a strawman argument, and that users will deposit assets with BitSharesX Bank with the express understanding that in doing so they “trade risk of bank failure, government seizures, capital controls, lack of privacy, slow transactions and high fees for the risk of a black swan in BTSX valuation” is, in my view, off base.

    Law-abiding people in developed countries benefit from not having their assets seized and also from substantial deposit guarantees. When they deal with “deposits” at functioning exchanges and regular banks, their deposit balance represents a contractual obligation on the depository institution to return those funds at par.

    Your reply is appreciated. I will leave it to the community to judge it on the merits.

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  3. I agree that all “marketing” tends to oversimplify and unfortunately I cannot control all members of the community nor BTSX websites. For the sake of a fair discussion on the merits of BTSX I suggest you separate out the claims of “random people” from the actual technology. We should talk about what it can and cannot do in an objective manner. The BTSX website is not under my control, but I have suggested to them that they need to have the fine print in more prominent places.

    Law-abiding people in developed countries are at the mercy of law-breaking government officials, IRS, and identity thieves. Contracts are expensive to enforce, MF Global saw segregated accounts standing last in line in bankruptcy. Mt. Gox depositors were robbed by the Federal Government as were depositors at other otherwise trustworthy institutions that the government has shut down. The purpose of BTSX is to provide an alternative to the broken system that works without relying on contracts.

    Obviously if we had rule of law and a true free market then 100% backed IOUs in the custody of a transparently audited company would be viable and superior. Unfortunately we don’t live in that world and thus must make compromises that have different risks.

    Like

    1. Daniel,

      The oversimplification is not just coming from third parties. As you put it on the BTSXtalk thread:

      “If there is not enough liquidity it is also possible for the network to ‘print’ BTSX necessary to make great deals relative to a trusted feed. IE: if BitUSD bids are over 10% above the feed, print BTSX to short BitUSD and if it is under the feed by 10%, cover the short. Simply knowing there is unlimited sell pressure at 10%+ and a large cover at -10% could also enhance the system. The benefit of this “system trading” is that the profits from shorting high and covering low go to the shareholders.
      “…I think the market peg will be so effective that those trading rules would never be hit in the first place.”

      That’s a far cry from what you’re saying here on this website: (1) BTSX is an innovative tool to manage your risk, (2) we don’t live in a perfect world, and (3) “All banks make claims that are far less sound that BTSX makes.”

      The banks’ claims are not at issue here; BitShares’ claims are.

      You cite some of the worst examples of business mismanagement in history as your comparator, and blame the US government for investor losses under Mt. Gox in order to present BTSX as a “compromise” when so compared. There really is no comparison. For the average Joe, the likelihood of losing an FDIC-insured bank account balance is close to zero (which I note the BTSX website claims BTSX is superior to, at least if we assume that by “Swiss bank” the website means a bank of more substantial repute than a local farmers’ cooperative in rural Vermont).

      I am cognisant that antigovernment and anti-corporate rhetoric plays to the gallery.

      However, this rhetoric is not in my opinion responsibly made, exaggerating the risk of relying on regulated, mainstream financial service providers while minimising or indeed ignoring completely the risks of BitSharesX to a group of people who are unable to understand the difference (though they might think they can).

      The technology is interesting, but the structure is flawed: speaking objectively, BTSX/BitAssets cannot provably do what the marketing material claims it can do. I think you have an obligation, at the very least, to make this point abundantly clear to everyone who is about to throw money at it.

      Like

  4. […] BitSharesX: Extraordinary claims require extraordinary evidence by Preston Byrne (see also the comments below the post) […]

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  5. […] This is entirely in line with my thinking in this morning’s post on BitSharesX. […]

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