The BitShares Blockchain has a lot of great features among them price stable digital assets. Today I want to talk about how do we kick off one of our most powerful and innovative features, the market pegged assets (MPA)?
You can see an MPA as a “smart contract” that gives you a new MPA token in exchange for locking up BTS as collateral. This new token is tracking the value of a fiat currency like USD, Euro or other financial assets. You may know the concept already from Steem backed Dollars, or BitEUR, BitUSD etc.
In this story, we use the BitUSD MPA as an example. 1 BitUSD is 1:1 closely pegged to 1 Fiat USD. Yet until today, these MPA did not take off yet and global supply is still low. In this short memo, I want to write down some of my thoughts and questions about:
- How to create demands for MPA
- How to create a profitable gateway service on BitShares MPA?
- What are the Profit streams for business?
- Outlook - Could we built BitShares into a sustainable banking platform?
- Conclusion
Term overview
- Gateway = a company where you can buy and sell MPA for Fiat, aka Kraken
- MPA = market pegged assets
- user = end consumer, the average joe
- issuer = the person or company that creates a new MPA
- bridge = a company where you can buy MPA for Bitcoin, aka Shapeshift
- price feed = current price of the MPA according to the price feeds of all BitShares witnesses. The feed price can be different than the latest market price on the exchange.
- collateral = to issue an MPA, one need to add BTS as collateral / security on the BitShares blockchain
- settlement / settle = an MPA like BitUSD can be sold to the price feed price within 24h. This will “dissolve” the BitUSD and you will get BTS in value of 99% of the MPA. Practically you are selling the BitUSD on the market for the price feed, and somebody else can buy it for 99% of the real value, those make a profit.
1. How to create demands for MPA?
Built products that people value. Built an ecosystem that people find useful. The primary goal should be to build an ecosystem around MPA, that people value. Once they have the right tools, an incentive to stay or an inherent added value of using the MPA, then users are willing to put money on the counter and buy into MPA.
Benefits MPA:
- 100% private money, free from central banks
- Bail-in secure
- Tradable worldwide, because represent real value
- Divisible, micropayments
- 3 seconds global transfer of MPA
- No bank account fees
- Anonymity
- Price stable to underlying asset
- Free trade with any other asset
- MPA can represent any financial asset in the world
- No negative interest
- Price stability through “smart contract” enforced by Blockchain
- Grant users total control over their own funds
- Easy to use
- MPA can be transformed into any asset
- Are the future of money
Disadvantage:
- MPA Ecosystem is still under construction
- Entry and Exit fees (Deposit / Withdraw)
- Acceptance in brick and mortar business of MPA
- Capital could escape into another MPA
- MPA could fall due to Black Swan
Do you have more pro/con arguments? Add them in the comments below.
Q. The Black Swan. What if everybody wants to sell their MPA at the same time?
There always will be someone who sees value in BTS and the platform. If there is no trust in the platform, then the MPA are worthless. That means, if the user does not receive any service for his MPA, then the MPA are worthless. Same for Fiat currencies like Euro or Dollar.
Think About Bitcoin. Can Bitcoin go below 1 USD again? Why? When? What needs to happen that Bitcoin losses its value?
Q: If all BitUSD (MPA) wants to settle at the same time, then all MPA are sold for BTS at the price feed. Where does all the BTS come from to buy?
This two option will go into effect in the case that a Fiat currency like Euro collapses. All BitEUR holders want to sell their BitEUR because it is losing in value. What would be the best way how to settle a whole market? User sells their BitEUR to the issuer for a new MPA, so that the issuers can pay back their debt, release the collateral and issue a new MPA that users want e.g. BitUSD etc. In this way, an issuer can easily supply the market with new MPA, and earn money. Nobody is stuck with issuing an MPA, as long as the issuer has a way how to get back the MPA he gave away.
- From the Issuer, who needs to buy MPA from the market to pay back his debts and get his collateral back.
- Or issuer, takes back all the old MPA, pays back his debts and takes the released collateral to create new MPA that are in demand right now. In this way, he could resell the new MPA for a profit and close down the old market. (Euro collapse)
2. How to create a profitable gateway service on BitShares MPA?
In a Nutshell
Gateway is setting up a reserve account that issues MPA,
Set up a market maker bot who trades MPA with a spread of 1-2%,
And a marketing team that is marketing the MPA.
Q. How can I finance the BTS collateral for issuing MPA?
- Bank loan
- VC / Angel investors
- Customer funds (debit card services, market maker funds, etc.)
- Own funds
- Crowdfunding (profit sharing of gateway services)
Q. The challenges for issuers - How to ensure that I get my MPA back?
If I am the issuer I can
a) set up a system that the MPA come back to me (gateway or bridge services)
b) Buy the MPA for the feed price back at the DEX
To either
a) sell the MPA again, or
b) to reduce my debts and free my collateral.
When I have the opportunity to buy for the feed price, then I can resell the MPA for feed price +x% fee.
Q. What If an issuer cannot get the MPA back?
Then the gateways need to buy the MPA from the market, or the gateway will lose their collateral in BTS because they provide enough MPA to cover their debts. Of course, a gateway always has the option to buy MPA from a different gateway for any other currency.
Q. What If My Gateways A gets an MPA issued by the Gateway B?
Since all MPA are the same, Gateway owner A can settle the MPA from Gateway B at any time for 100% of the feed price, and
- Sell the BTS that the gateway got from the settlement
- Add the BTS to the collateral
- Create new MPA with the BTS the gateway got from the settlement
- Take the MPA and trade them against another MPA the gateway needs
If the issuer is a bridge then:
- Trade MPA for BTC
- Trade BTC for MPA
A bridge needs to take care that users want to trade MPA and BTC (both ways) because then I will get my MPA back.
A bridge that fails to create a two-way money flow, so only has a BTC inbound flow, needs to take the BTC and buy BTS. With the BTS the bridge than can buy the required MPA for the settlement price. The MPA will be sold by those who
a) a different gateway that needs to settle the MPA for BTS
b) market maker trading.
In this way, the bridge can close his open positions and pay back it debts to the blockchain.
If I am an exchange, I have the same business model like a bridge. Additionally, I can resell the MPA to new customers for fiat.
Q. Why is an MPA in this constellation revolutionary?
Because the MPA allows me to exchange real value in form of BTS. Every Gateway around the world can accept MPA, trade it against other assets or settle it for BTS and use the BTS to create new MPA that are in demand. That also means that MPA can solve the remittance problem. Gateways in developing countries that have no real use for BitEUR, can settle the MPA and create BitBRL or similar and sell it locally. No fiat money needs to be sent via the traditional way when a gateway is using MPA, the MPA have value in itself like Bitcoin, but with all the benefits of the MPA!
3. What are the Profit streams for business?
- Trade of BTS and MPA (market making)
- Value increase in BTS
- Loan business
- Digital vault
- Investment banking
- Private banking
- Privacy features
- Escrow services
- Customer Services
- Big Data Analytics
- Providing Fiat Gateway Services to Startups / Companies
4. Outlook - Could we built a sustainable banking platform based on BitShares?
Here is the challenge. What if I have 5 million euro? A thought experiment.
Based on the idea that I can earn money with creating MPA the moment I can create a demand for MPA. Let us think about the case what if I invest 5 million euro in BTS and start selling MPA with a markup of +2%. Additionally, I will earn money with providing market making on the exchange. Since I am a running a serious business, I need to take care of my collateral and cannot enter any risky deals. It could be a new area of sustainable Banking Services.
So in the scenario that I manage deposits in the value of 5 million Euro, then I need enough securities. An issuer could borrow capital for 2% and sell MPA for 3% markup on the market, leaves 1% for business operations. Scaling up this idea, that means that my debtors are investing in BTS, and trust the institution to generate a profit with the BTS reserves. That is possible with an experienced team.
Combined with a good business plan, I could build up a profitable business and raise money for financing the plan. Over the time, the business could turn profitable and pay back the initial financing loan. Then the BTS can act as a real collateral in terms of a crisis. +100% collateralized MPA in a bank environment.
How could we build a something like a bank….
Credit business:
Users can borrow MPA from a bank, and the creditor needs to pay back the MPA to the Bank.
Challenge, the bank cannot pull back the MPA from the user account, in case he does not pay his interest.
Solution: Risk profiling, collateral of car, house, wages etc. , legal steps to get money back.
Digital Vault:
Users could use MPA to store “cash” on the blockchain. The money could be moved around easily between several accounts. The best thing of a digital vault in MPA is that the user does not pay any negative interest rates.
Investment Banking
Once funds are stored in MPA, the user can easily start investing in different digital assets like other MPA, ICO tokens, or market maker funds etc. The investment opportunities are endless on the BitShares Platform and gateway services can provide easy to use interfaces, analytic tools, own trade bots and more to just name a few profit centers.
Challenges: Gateway needs to be regulated for providing these features.
Private Banking
Gateways can provide extra private banking services for their clients. Including investments into Fiat MPA, Crypto MPA, ETF MPA, precious metal MPA. Other features could be advanced privacy services, global money transfer services, heritage services etc.
Challenges: Create enough demand for financial market MPA´s. Once there is demand, the creation part can be easily managed.
Q. How can you manage speculation business e.g. leverage trading?
Traders are always interested in leveraged trading and price speculation. How can they exist in a blockchain world?
Option:
- Trades provide market making
- Trades provide or take loans
- Trades add liquidity to the platform
The gateway could provide easy to use market maker bots, market maker funds, trading tools etc. to attract traders on the platform.
Q. How could sustainable banking change our financial system?
A security reserve banking would in contrast to fractional reserve banking guarantee enough funds to pay all investors back at any time. Today's fractional reserve banking speculates on the assumption that only a fraction of the debtors wants to withdraw their funds from the banking system. (because they need to pay their bills outside the city, outside the range of cash payment). If the capital does not leave the traditional financial system, all parties are saved. However, in times of crisis wealth management allocates capital outside of currencies and decreases the liquidity in the financial system. This is life threatening for any financial system, hence everybody tries to keep you inside their system. Aka War on Cash. Don't go anywhere, keep the money in the system.
So where is the problem? Credit business
With an MPA bank, I cannot just create new money without adding securities. Traditional banks just create new money, they don't have to give it back to a debtor. In MPA I would need to add BTS collateral. If I don't have BTS I need to a) borrow it b) buy it.
It seems like fractional reserve banking is not a major problem because business needs to stay in the game to play their games and cannot withdraw funds. So the major problem is speculation and massive leverage that cannot be paid back. The problem is also bad credit score ranking and unpaid loans, resulting in huge losses for the business. The compliance cost for fighting fraud are exceeding the profits streams of banks, hence banks are going bankrupt.
A few final thoughts:
Q. What if all capital flows into BitShares, what will happen to something like the Euro? If BTS holder gets trillions Euro, what can they buy with it?
- Today´s BTS holder who sell their BTS for Euro, need to invest in hard assets like real estate asap.
- Euro is worthless and gets destroyed
- ...
You are trading two assets where both assets have their benefits and value. If one of them can not provide any value, or be used as a measurement, then it's worthless.
Q. Which monetary policies could be applied on a blockchain like BitShares?
That is an open discussion.
a) Helicopter money
b) quantitative easing
c) interest rate
d) ...
Q. How to create value with your digital currency?
Open to discussion
Q. Is a digital currency a nation or a global community?
Open to discussion
Q. How would a full reserve Banking System look like?
Open to discussion
Conclusion
The solution for Market Pegged Assets (MPA) like BitUSD are on the one side in the marketing of MPA. On the other side, you need an issuer who has a well thought out business model to make money with issuing and trading MPA.
The big question of 3 or 5x collateral is in my opinion not that relevant right now because a gateway always has to manage the “debt ratio” in BTS. If you factor in the financing cost to lock away liquidity as collateral, once can earn enough money to be profitable. If you can create enough value around the MPA, you can run a revolutionary full 100% collateralized sustainable bank.
Potential next steps
- Create a Business Plan for a Gateway
- Create a Marketing Plan for MPA
- Find Financing
- Buy BTS and issue MPA
- Sell MPA for a profit
- Add a market making bot for additional profit
- Continue Marketing around MPA and add value to the platform
- Once you created enough value around MPA, the chance that everybody wants to sell their MPA is decreasing
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