Silk Road forums
Discussion => Silk Road discussion => Topic started by: Dread Pirate Roberts on July 09, 2011, 07:53 pm
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***Update***
It has been about a month and a half now since we introduced the hedged escrow feature, and I am happy to say it has worked really well! If you don't know what that is, check out the buyer's and seller's guides. There has been plenty of market volatility over this time and the system has balanced out irregardless of what the exchange rate has done, exactly as it should. We've been tracking all of the numbers, and have found that sellers will lose about 4% of their payment when using the escrow hedge. This is due to the bid/ask spread and slippage in the markets, especially at times when the bitcoin markets are thin. Basically, when the payment is hedged, the lowest available "ask" prices adding up to the price of the order are used. Then, when it is unhedged, the highest available "bid" prices adding up to the price of the order are used. So, if you are willing to forgo this 4% or so, or raise your prices by 4%, for the security and predictability of being protected from exchange rate fluctuations while your payments are in escrow, then I recommend you enable escrow hedging on your settings page :)
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Probably the longest standing and most important feature request to date is finally here. Sellers now have the option to hedge their escrow balances against fluctuations in the BTC/USD exchange rate. Our hope is that this will bring some much needed predictability and stability to the transaction process and allow sellers to price their items with confidence. Detailed explanations can be found in the buyer's and seller's guides.
Please note that this feature is experimental at the moment and we reserve the right to deactivate it without notice. Deactivating won't affect current hedged orders. It will only prevent future hedging.
cheers
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Can you explain how it is hedged?
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From the Sellers Guide:
"Escrow Hedging
DISCLAIMER: at this point, escrow hedging is experimental and we reserve the right to discontinue it without notice.
Unfortunately, the bitcoin exchange rate isn't as stable as we would all like it to be, and can fluctuate wildly in a matter of hours, let alone the days or weeks it takes for a package to arrive. Because of this, there is a real danger that the bitcoins being held in your escrow account will lose value by the time your customers finalize their orders. So, we've given you the option to hedge the future payments you are expecting from escrow such that the dollar value of the payment doesn't change as the bitcoin exchange rate changes.
For example, someone purchases one of your 10 btc listings. The dollar value of the order when purchased is $100. Now, a week later when the transaction is finalized, those 10 btc are no longer worth $100, they're worth $50! Because you hedged the escrow, you won't get paid 10 btc, you'll get 20 btc equaling the original value of $100. Of course, the opposite is also true. If bitcoins appreciate in value while your payment is in escrow, you'll get fewer bitcoins, but they will still equal the original dollar value.
The option to turn off or on escrow hedging can be found on your "settings" page. While it is on, the payments for any orders placed with you will be hedged. Payments for orders placed while it is off will not be hedged, but any hedged orders still not finalized will remain hedged.
On your account page, your escrow balances are split up between hedged and unhedged orders. All orders are unhedged until you confirm shipment, at which point, if you are set to hedge, the payment for the order will show up on the dollar side of your escrow balance. "
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From the Buyers Guide:
"Escrow hedge
Unfortunately, the bitcoin exchange rate isn't as stable as we would all like it to be, and can fluctuate wildly in a matter of hours, let alone the days or weeks it takes for a package to arrive. Because of this, there is a real danger that the bitcoins being held in your escrow account will lose value by the time your vendor gets paid or you are refunded. So, we've given the option to vendors to hedge the future payments they are expecting from escrow such that the dollar value of the payment doesn't change as the bitcoin exchange rate changes.
For example, a seller is hedging the escrow for a 10 btc order you place with them, and the dollar value of your order when you purchase it is $100. Now, let's say your order never arrives and your vendor agrees to a full refund, but those 10 btc are no longer worth $100, they're worth $50! Because your vendor hedged the escrow, you won't get a refund of 10 btc, you'll get 20 btc equaling the original value of $100. Of course, the opposite is also true. If bitcoins appreciate in value while your order is in escrow, your refund will be fewer bitcoins, but still equalling the original dollar value.
When checking out, you will see which orders will be hedged and which won't. After the order is placed, your escrow balance will reflect the dollar value of your hedged orders and the bitcoin value of your unhedged orders. All orders are unhedged until your vendor ships, at which point, payment for the hedged orders will be transferred from your bitcoin balance to your dollar balance. "
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Just keep that hedge fund/funds from getting frozen. ;D
Great feature! :::CHEERING:::
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There might be an obvious answer for this but, where do the extra Bitcoins come from?
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Awesome! Thanks SR!
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Holy moley wow!
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>There might be an obvious answer for this but, where do the extra Bitcoins come from?
Yes, exactly my question!
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Right? It's been like 4.5 hours and still no answer, it's bugging the hell out of me haha.
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>Right? It's been like 4.5 hours and still no answer, it's bugging the hell out of me haha.
LOL yes, it's bothering me because I can't figure it out.
Although, I thought of a related question. If a buyer cancels and he receives less BTC than the original order (due to price increase) where do those lost BTC go? I can only conclude that Silk Road maintains a separate pool of spare Bitcoins that act as a buffer.
It's possible there are enough canceled orders and market volatility such that the collection of these Bitcoins resulting from cancellations is sufficient to maintain enough balance to fulfill the hedge requirements.
Of course, if there is a large enough drop in the value of BTC, it would wipe out the reserve.
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@mrroboto I would guess it works by selling the bitcoins for USD and then buying them back.
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@mrroboto I would guess it works by selling the bitcoins for USD and then buying them back.
If I were running SR, I wouldn't answer your question: no need to release operational details. But my guess is that he/she has deep bitcoin pockets, and two weeks of SR volume is less than the number of bitcoins they have on hand. So long as the price doesn't drop more than 50%, they'll be fine, and will hopefully recoup losses by gains when the price rises.
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There might be an obvious answer for this but, where do the extra Bitcoins come from?
My guess is SR has set himself up as an options market maker, willing (and hopefully) to buy and sell the hedges. If roughly the same $ amount of buyers and sellers buy protection, there is little risk to SR. In fact, he should be able to make some money off this. The problem will be if only sellers by protection, then he'll have to start adjusting the cost of these hedges.
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Me: I don't want to know...the less we know about each other--and SR--the better the chances of this site surviving...seems there are some heavyhitters feel threatened by SR, and even a *little* info gets into the news...so, how, what, or where he gets and keeps btc is of no concern to me...long may he reign in the dark corners of the world he's chosen...
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I'm diggn' this idea A LOT!!! Yea, I think that SR will make money off this, in the long run. I don't care how it's done as long as it works..
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SR does make a profit from each transaction, actually, so this is pretty conceivable. They probably have confidence that the BTC, with its ups and downs, will be stable enough for people in it for the long haul. Of course, they also make it quite clear that they reserve the right to cancel, so I guess the real test is ahead.
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SR is making bitcoins real...we turn it into a serious currency, not just a political statement...and the world is quickly getting away from statism anyway...this is just the beginning...eventually the whole idea of seperate countries will just be a quaint thing that we'll read about on wiki. Open all the borders, have one currency, one language...and...something: oh yeah--give everybody a gun!
And also, we'll issue paper currency representing bitcoins! Ha ha ha...;)
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How does this work?
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So as a buyer, would this make prices more stable for me?
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Similar to my proposal but better! SR will do the hedging without need for collateral. Awesome guys. I know there are privacy and LEO concerns and such, but you guys need to find a way to open source this stuff. Bar none, you guys offer the best bitcoin payment system and the bitcoin ecosystem could really benefit from your code.
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Can my picture be on the new BTC paper? Kidding of course. It would be funny to have a picture of Bill gates or someone like that on it. It struck me funny when I imagined paper BTC and what could go on it..
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I feel slow and stupid, but I still don't understand how this works. Where does the extra BTC come from?
Like, if someone buys something for $100 at 10 BTC at 10 USD, and the exchange rate drops to 5 USD by the end, that would be 20 BTC by the end.
Where does the extra 10 BTC come from?
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This is really unknown, but most likely SR is footing the bill. It can go both ways. SR will probably ending up making money in the long run, hopefully.
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yeah, hopefully SR is not actually holding the escrow in cash by doing an FX transaction for each hedge -- that would definitely be traceable since it needs to go through an exchange.
And as I understood it, only sellers have the option to hedge, and buyers simply go along for the ride if the seller chooses to do so. If that's correct, that rules out SR playing market maker and taking both sides assuming an equal number of buyers and sellers hedge (as someone suggested may be the case).
I'd bet SR maintains a master hedge book that hedges the aggregate value of all hedged transactions and rebalances every day. These could be two completely separate accounts and unlinked in any way.
Anyways, it's probably best if we don't know. I'm all for open knowledge, but unfortunately our respective governments don't respect individual freedom.
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One possibility would be that SR mined a large number of BTC at virtually no cost, had no way to effectively monetize them, and came up with the idea for SR as a result. This would explain the hedging issue: he has a large pool to draw from in case of a down market. And he has both been a large part of the legitimization of the BTC as a real digital currency AND put together a business model that will be the envy of many people.
I don't think, however, they'll ever make a movie about him like they did the Zuck. haha! :D
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yea, we're hiding the nuts and bolts on this one "for security purposes" ;) Thanks for being understanding about the lack of transparency.
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Good luck. But you know what they say about security through obscurity...
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Perhaps SR played a small role in the whole MtGox incident..... Kidding of course.... or maybe they really did... I guess we'll never know.
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I just switched to hedged. I wish i did it before this drop though haaha
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joeblow2 - interesting theory :-D so far with the slide down of BTC it's only what can keep it running (a reserve of many coins).
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The past couple of days the BTC value diminished by about 40% at one point. SR didn't immediately stop the hedging, even for new orders.
If the market follows its usual pattern, the BTC will now drift up slowly until it reaches 80-85% of its previous value.
As SR has shown himself to be quite adept at matters of anonymity, finance, etc. I think we can safely assume that this was an event that he had foreseen when setting up the hedging feature.
What is not known, and will never be known, is how many of the outstanding order will actually have to be paid out using the reduced BTC values before the BTC drifts upward enough that it meets the average value of all the bitcoins that SR has in his possession. Regardless of that figure, the appearance is that the depth of SR's bitcoin pool is sufficient to weather a very significant devaluation of the BTC.
Bravo again SR! :)
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Sellers pay a hedging fee on top of the listing fee a buyer pays for buying product. These funds are used in the hedging pool.
Also, a few exchanges are offering short sales on BTC in the near future (about damned time so there is a lot more liquidy and a damned price floor on drops, for fucks sake), so I would be SR will probably start levering out short sales against its long hedge holdings. At least that's what I would be doing.
A guy from citigroup has a pretty high-tech btc exchange in beta right now. I'm interested to check it out once it opens to the public, as it will have futures and options from what I'm reading (Then I can do my own hedging!)
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If say the order was hedged, but ended up with a refund (package loss), will the refunded % be hedged too?
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Yes, refund is hedged also when refund is given. Value in US (what you pay in coins) when item is marked in transit, but less to around 4% for buy/bid price.
IMO,still better to pay 4% (vendor pays it when he choose hedge and when order is finalized) then leave it exposed to unstable market.
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thanks for the updated info SR
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I don't understand why people is so troubled with "where is the extra bitcoin coming", it comes from the market fluctuation itself.
Lets say that a customer buys my Driver License for 90 bitcoins.
It is hedged at its current market value in dollars.
Lets say that $1 dollar = ฿3 Bitcoins, then ฿90 bitcoins = $270 dollars.
So now my hedged escrow shows= $270 as a pending payment.
When the customer receives my License at his home and he happily liberates the escrow, but now the bitcoin appreciated, lets say that now $1 dollar = ฿5 Bitcoins, so the escrow pays me only ฿54 bitcoins.
So Silk Road ends up keeping ฿36 bitcoins... plus the 4% bid/ask spread which is actually an extra profit since they are the ones exchanging it.
So basically you wouldn't actually be receiving ฿54, but ฿51.84.
Of course when the bitcoin depreciates, they may use those ฿36 bitcoins to pay another guy the extra bitcoins to cover him up.
Lets say that someone pays me for my Driver licenses with ฿90 bitcoins, it is hedged $1 dollar = ฿3 Bitcoins, then ฿90 bitcoins = $270 dollars.
Now the price of the bitcoin is ฿2.5 when the hedge is liberated, SR pays me: ฿108.
Customer deposited ฿90, I got ฿108, the extra ฿18 would come from the fund before (the ฿36, remember?)
And again SR keeps 4% of the conversion.
As long as the price of the market fluctuates, the hedge will be healthy and the final balance would tend to zero.
As long as the price of the bitcoin appreciates, the hedge will be accumulating more and more bitcoins.
The price of the bitcoin depreciates, the hedge will be running dangerously low and they may need to use their own savings.
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Peach, you're close, but not exactly right. All of your math is right. Yes, the dollar amount received would be fixed for the seller and the bitcoin amount would fluctuate based on the market.
However, the "extra" bitcoins aren't coming from any "fund", so it doesn't matter at all if the market appreciates or depreciates. And there is no "dangerously low" situation and no one will have to "use own savings".
Going back to your example:
A customer buys your drivers license for 90 bitcoins.
It's hedged in dollars and 1 dollar is 3 bitcoins, so you, as a seller will receive a dollar value of $270 minus fees upon finalization.
During the time before the customer finalizes, let's say bitcoins depreciate to 2 bitcoins to the dollar. You would receive ($270/2 bitcoins) or 135 bitcoins.
Now where do these 45 "extra" bitcoins come from?
When the customer places the order, 90 bitcoins leave the customer's account. Then SR immediately sells 90 bitcoins to the market in exchange for $270. So SR now has $270, not 90 bitcoin. When the customer finalizes, SR uses the $270 to re-purchase bitcoins. Remember during this time bitcoins depreciated to 2 bitcoins per $1, so $270 will now buy 135 bitcoins. Then SR deposits those 135 bitcoins into the sellers account.
The fee you pay for hedging covers the cost of SR having to sell then repurchase the bitcoins, plus a small margin for conducting the trade for you.
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I don't understand why people is so troubled with "where is the extra bitcoin coming", it comes from the market fluctuation itself.
Lets say that a customer buys my Driver License for 90 bitcoins.
It is hedged at its current market value in dollars.
Lets say that $1 dollar = ฿3 Bitcoins, then ฿90 bitcoins = $270 dollars.
So now my hedged escrow shows= $270 as a pending payment.
When the customer receives my License at his home and he happily liberates the escrow, but now the bitcoin appreciated, lets say that now $1 dollar = ฿5 Bitcoins, so the escrow pays me only ฿54 bitcoins.
So Silk Road ends up keeping ฿36 bitcoins... plus the 4% bid/ask spread which is actually an extra profit since they are the ones exchanging it.
So basically you wouldn't actually be receiving ฿54, but ฿51.84.
Of course when the bitcoin depreciates, they may use those ฿36 bitcoins to pay another guy the extra bitcoins to cover him up.
Lets say that someone pays me for my Driver licenses with ฿90 bitcoins, it is hedged $1 dollar = ฿3 Bitcoins, then ฿90 bitcoins = $270 dollars.
Now the price of the bitcoin is ฿2.5 when the hedge is liberated, SR pays me: ฿108.
Customer deposited ฿90, I got ฿108, the extra ฿18 would come from the fund before (the ฿36, remember?)
And again SR keeps 4% of the conversion.
As long as the price of the market fluctuates, the hedge will be healthy and the final balance would tend to zero.
As long as the price of the bitcoin appreciates, the hedge will be accumulating more and more bitcoins.
The price of the bitcoin depreciates, the hedge will be running dangerously low and they may need to use their own savings.
That's not how a hedge works. If that was the case SR would be taking a huge risk, there's no reason to assume the fluctuations of the market will net to zero. According to wikipedia "Hedging is the practice of taking a position in one market to offset and balance against the risk adopted by assuming a position in a contrary or opposing market or investment." So like Isa says, to hedge against fluctuations in the price of bitcoins to dollars you simply buy an equivalent amount of dollars. Then when the bitcoins go up the dollars go down and vice versa so your position is always the same as when you began the hedge. If you gained bitcoins the extra coins come from the sale of the dollars at the higher rate, if you lost bitcoins the loss is realized when selling the dollars for a lower amount.
SR's position is always nuetral, the gain or loss from the change in value is realized by the party that invested in the coins that SR sold.
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Well, my scheme makes sense considering that bitcoins are actually programmed to eventually increase value in time by controlled deflation.
If bitcoins keep appreciating, the total amount of bitcoins accumulated in SR's arcs would substantially increase.
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^"controlled deflation".
If rational markets actually existed you would be correct. However, that is a theory that gains immense popularity during bull markets, whereas "uncontrollable" aspects measured via technical analysis gain popularity during bear markets (people don't want to admit they are the cause of BOTH cyclical price increases and cyclical price decreases).
Rational markets have been thoroughly debunked, several times (the theory always comes back though).
Bitcoins to USD are a tiny fraction and basd on their circulation they should be worth 100 - 1000x more than they are. If markets were rational...
SR's hedge is a risk-neutral hedge, meaning there is a "book" with USD/BTC rates overall and they buy and sell to match the cumulative total of members of the community.
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anarcho47
We are not talking about the fiat currency and the free market we have in our current economy.
We are talking about a programmed feature in the bitcoin economy where there will be a fixed total amount of currency in circulation. It will definitely force a hyper-deflation in the next couple of decades, and it probably will become gradual as the challenge to mine these coins increases.
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anarcho47
We are not talking about the fiat currency and the free market we have in our current economy.
We are talking about a programmed feature in the bitcoin economy where there will be a fixed total amount of currency in circulation. It will definitely force a hyper-deflation in the next couple of decades, and it probably will become gradual as the challenge to mine these coins increases.
I'm not arguing about fiat currencies and free markets (although to be honest those two terms should not be included in the same sentence as synonymous entities).
What I'm saying is that, despite all of the arguments of "tangible value" in bitcoins because of processor cycles and blah blah, the only thing that gives bitcoins its value is the overall market's willingness to accept it to act in the capacity of money - namely, to be a unit of account, a unit of savings, to be hard/impossible to counterfeit, to be portable, and to be divisible.
The world COULD wake up tomorrow and nobody would want gold. Gold's price was fixed for 28 years and the monetary base inflated over 1000% from 1933, yet markets outside of the central bank discount window (i.e. jewelry bulk purchases, mine sales, etc) didn't push the value of gold any high and they could have. All you are doing when you buy gold is making a probability play based on a pretty outstanding track record that humankind will at some point treat it as money again. Which means it will retain at least some modicum of value.
The same goes for bitcoins. Mining difficulty doesn't matter in irrational markets, only how market participants FEEL. We will probably see bitcoins drop off agin as the US dollar strengthens, because we are in a bear market, where people flee for cash and cash equivalents (this also makes credit near-worthless). This will not bode well for BTC, not for the mid-term anyway. Once we see a return to buillishness we will see a willingness for alternative assets, BTC among them. There may be a time when BTC appreciate to over $100 USD/coin, but it will not be soon. The real litmus test is if bitcoin can last. So many great ideas have been quashed by the state as they are true competition to fiat currency and expose the inherent theft and violence of a legal tender monopoly (see Liberty Dollar founder - specifically that he is labelled as a "domestic terroriest" and rotting in jail for offering a competing alternative to the USD). if bitcion can somehow manage to survive the state, and I don't mean the state actually being able to kill bitcoin itself because that's virtually impossible, but instead survive the persecution of its users, we might be talking.
Until then, I treat it as a hot potato.....
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I have nothing to add, you said it all. :)
"There may be a time when BTC appreciate to over $100 USD/coin, but it will not be soon."
That's precisely what I was referring to, as I specified it in my previous post:
"...in the next couple of decades..."
The irrationality of markets are short-mid term, but all markets tends to become efficient over time.
Yes, we are living in a house of mirrors, markets jumping and falling with self-fulfilled prophecies, but in the very long term, big picture-wise, the trend of the market is not all that irrational.
The only reason that eGold has fell is because it was a major money laundering scheme and they were absolutely aware of it. Also it fell because it has an owner, it was centralized.
The persecutions of bitcoin users are very highly unlikely. I mean, if even we at SR (with the full weight of senators) aren't capable of putting a dent in SR, then what are the chances of bringing down the innocent seller of alpaca socks.
The real challenge and trial-of-fire would be to have a self-sufficient bitcoin economy, where we don't need to exchange to any other currencies in the world for purchase of supplies and goods whatever we need within the bitcoin economy.
If that ever happens, no nation will be able to stop the bitcoin ever.
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Yep, they are just like all the other currencies, except they don't have any particular 'state' saying they are their official money. Unless you consider the online world a 'country', but even most of the online world, doesn't accept them...they might, someday, but not today....
But, for example, once the dollar got off the gold standard, it doesn't have any worth either....could sink overnight....all you've got to do is, say, look at the 'peso' anywhere....take aregentina...
It's all a crapshoot, as far as having any currency goes...this one is a little weirder, too, right now, but hell, read the history of money...or Christ, read Neal Stephenson's Cryptonomicon .... if you don't see btc in that novel, then you need to read it again...hell, I"m going to read it again... :)
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When the customer places the order, 90 bitcoins leave the customer's account. Then SR immediately sells 90 bitcoins to the market in exchange for $270. So SR now has $270, not 90 bitcoin. When the customer finalizes, SR uses the $270 to re-purchase bitcoins. Remember during this time bitcoins depreciated to 2 bitcoins per $1, so $270 will now buy 135 bitcoins. Then SR deposits those 135 bitcoins into the sellers account.
On an SR scale, this would be horrendously inefficient. If his hedging system had become sophisticated enough to make this inefficiency acceptable, why would he still be running SR rather than trading in larger markets?
On the other hand, given the range of btc fluctuation, a hedge 'pool' would have to be vast.