How do BitAssets like bitUSD work? HD

Get your Bitshares wallet here: http://linksfrom.us/cryptobits

View the next video in the BitShares 101 series:
https://youtu.be/Jbqyandddy4?list=PLjgfpSQFJTLpKmTGCG8FjvDFbfst6F-x5

Now it’s time to talk about the products that BitShares offers. A cryptocurrency just like Bitcoin, but with the stability of an underlying asset like the US Dollar. A BitAsset like that is called bitUSD.

So let’s start by taking a look at the underlying derivative. A bitUSD is created when two parties enter into a contract.

Bob says “I am an investor in BitShares”. “I have bought and own shares in BitShares”. “However, I think it is such a great investment I would like to buy more BitShares”. “Can anyone lend me $1 so that I can buy $1 worth of BitShares”? “So that you are protected (Bob says), I will put that $1 worth of BitShares on the blockchain in escrow and I will put 2 additional Dollars worth of my own BitShares into that escrow so YOUR LOAN IS SECURITIZED BY 300% CAPITAL”. “For the privilege of borrowing your money, I will pay you an interest rate on your $1 until I pay it back. Will anyone enter into this contract with me”?

Sally hears this. Sally is not much of a risk taker. She does not care much for speculating on the future value of BitShares. She just wants to keep her savings nice and safe, and hopefully get a nice little interest rate return on her money. Sally wants the peace of mind that she can get her $1 back at anytime. She recognizes that BitShares is a new concept and is liable to have a large fluctuations in price and is concerned about the safety of her money. Sally is comforted by the fact that the blockchain is holding 300% security for her loan. That means the price of BitShares can fall by 66% and her money is protected. Upon reading the fine print, she learns that the blockchain will check regularly what the price of BitShares is compared to the US Dollar (aka a “feed”) and make sure that Bob has enough security. That means that BitShares would have to fall by 66% in value in minutes or maybe hours in order for her to potentially lose money. She recognizes in Bitcoin’s entire history it has never been that volatile so as to lose more than 66% of its value in minutes or hours and she knows Bitcoin was really volatile back in its early days. Sally decides the reward of the interest rate is worth the potential risk. She enters into a contract with Bob. Sally puts $1 worth of BitShares on the blockchain for Bob. Bob adds his $2 worth of BitShares on the blockchain to protect Sally, and a bitUSD (a derivative asset) is born.

Prior to BitShares, it was not possible to have a cryptocurrency with stable value.

Just like in the traditional market for gold derivatives real gold is not necessary. So too, US Dollars are not needed to secure these US Dollar promises. As long as the value is there in some form and is offered as security, the market functions.

Most major Forex exchanges you could try to currency pair with only 1% security. BitShares chooses to demand 300% security to engage in contracts. That means that the $100 worth of value that Sally lent Bob to buy BitShares is combined with the $200 worth of BitShares that Bob already has. This $300 worth of collateral is held on the blockchain to securitize the 100 bitUSD. The BitShares remains there until Bob repays his loans plus interest and retires the bitUSD that he and Sally created.

At what point does Bob experience a margin call? If the $300 worth of BitShares falls below $200 in value, the blockchain will automatically use Bob’s security to go out and buy $100 in bitUSD from a Sally to close out this Bob. Not necessarily the same Sally though. Of course for a price, there will always be a Sally.

How does the blockchain know the price? If the blockchain needs to initiate a margin call, it must know the price of one BitShare compared to one US Dollar. How does it know this? This is another of the technological leaps that BitShares has pioneered. See DPOS on Wikipedia for full details.

BitShares is a powerful marketplace that matches buyers and sellers of financial contracts in the world’s first fully decentralized way. This technology is just months old and already it has the promise of allowing a derivatives market that is significantly more secure and orders of magnitude less expensive the ones we currently have on Wall Street. Five+ derivative products are already actively trading on the BitShares platform. They are bitUSD, bitCNY, bitEUR, bitGOLD and bitBTC. Traders can, and are trading in and out of these derivative products on a daily basis.

Note: The above transcript has been truncated due to Youtube limitations.

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See you in the next video… 🙂

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How do BitAssets like bitUSD work? HD

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Kane Dane