One of the nagging issues we have been facing is what happens when the collateral behind a short position is not enough. Our options have been:
1) Freeze all markets until someone who holds BitUSD is willing to sell at a loss.
2) Debase BitUSD by allowing unbacked BitUSD to circulate
3) Debase XTS by issuing new XTS to cover the loss.
Test net 12 implemented Option #1... but this option depends upon someone being willing to "take one for the team" to restart the markets. This is a principle I don't like.
Debasing BitUSD everytime this happens would gradually break the peg and BitUSD would become an asset that is correlated to USD by some constant factor that changes slightly every time a short is blown out. This makes the system appear to be broken.
Option 3 was considered too risky because someone could manipulate the market to print up unbounded XTS. Fortunately we have introduced price feed / rate-of-movement restrictions that prevent this particular attack from yielding unlimited XTS. Without being able to attack in this manner Option 3 returns as the best overall approach.
What this means is that all XTS holders stand behind the "market peg" and that those who hold USD have a stronger peg.