Recently at Decentral in Vancouver we had a meetup with Max Wright to discuss BitShares and BitUSD:
This inspired me to write a blog about a possible attack on BitUSD and similar derivative currencies:
I am wondering - has there been some analysis done on this subject by the BitShares developers and if so, how do they assess the risk involved with a similar attack?
I think it's a good exercise to look at these attacks in general.
1) Not sure about your statement that a currency is inert. Currencies are dynamic with a lot of factors that move them in the forex market. BTS is also an asset like company shares so it's even more dynamic.
2) There are traders/speculators/investors that try to evaluate pricing every moment so the idea that you can move the market and it will remain the way you left it is an odd introductory statement.*
3) I have to read Currency Wars, but a lot of times governments try to artificially manage their currencies and the free market eventually puts governments back in their places. As long as the design allows free market participation, any type of manipulation will be difficult and can work itself out.
4) I do agree rapid moves up and down of BTS can cause some margin pressure, but as long as trades are at the market it's not that easy to manipulate because accumulating or selling aggressively will push the market against you. Also anyone can enter the market at anytime so new collateralized positions will be entering/exiting continually.
5) Your example should be logarithmic because the returns from one level to each level 200 to 300 to 400 is 100%, 50%, 33% returns respectively...and going back down is -25%, -33%, -50%... not sure how realistic the increasing margin levels are in your example... Rather than escalating it could very well be pretty level or random as market participants move in and out at various times with various levels of collateral. The CFD is just a wealth transfer back and forth.. you can double your returns or double your losses... the nature of volatility is a bigger issue than margin calls and that's something shorts/bitUSD creators have to manage...
6) Your first scenario of shorting in an external market is incredibly difficult. You need traders on both sides of a market. A prediction market or offline exchange needs someone going long to your short. I remember someone mentioning Bitcoin miners can short off-exchange, attack the Bitcoin network and make money. While theoretically possible, you still have to generate large enough buy orders off-market and this would be an incredible difficult challenge, especially since a large short position will eventually leak and be a signal to the larger exchanges what is happening. It should raise eyebrows of anyone off-exchange to take the other half of a massive short bet.
*Note: I do concede and have mentioned before that prices and avg shareholder's perceived value are not always intimately connected, especially in an illiquid stock. For example a company with 10 million shares can have 9.9 million shares owned by long term investors that think the shares are worth $2/sh for a total perceived market cap of $20 million. If 100k shares are traded among speculators and traders at 50 cents and $1/sh, and if the long term owners don't support the market and buy more or care what the market exchange rate is, the perceived market cap would be $5 - $10 million. Hence traders can dictate the market cap...that's why there should be a caveat with external price feeds especially in illiquid markets. Or perhaps collateralization should be tied to liquidity/trading volume. It is good to consider various kinds of attacks considering the disconnect between prices and value.