How much collateral is required when shorting an asset? 100%?
Does a 10 second update mean that the asset would have to appreciate 100% in less than 10 seconds for there to be an uncovered loss?
It seems like that would virtually never happen for any widely traded asset.
The biggest risk seems like if the price drifts far enough away from the real asset to shake people's confidence. So if BitUSD gradually drifts down to 80% value of USD, then who would go long? At that point, people might start to think it's going to zero, and that will be a self fulfilling expectation.
It seems like some kind of instability in the system, or perceived risk could cause the initial wedge between the Bit price and the real price, and once that wedge is established, and people see the price diverging from the real price, they will no longer trust the market to correct to the value of the real asset. Once they don't believe the market will correct, then they won't take long positions which will make it impossible for the market to correct.
You need 200% collateral.
So to short you need 100% MORE than the current value of the asset (i.e. 200% total). So unless the asset appreciates more than 100% in 10 seconds there will not be any uncovered losses, right?
If the price starts falling that is an opportunity for shorts to cover at a profit. There is implicit demand for the bitassets in the form of the backing collateral - if nobody wants to hold BitUSD then there won't be any bitUSD because it will all have been taken out of circulation.
If the price starts falling, that is an opportunity for shorts to cover at a profit. But suppose the shorts think the price is going to zero. They won't want to cover at a profit at 80% because they think the market is going to collapse and they can make a much bigger profit at 0%.
Meanwhile, the people who are long have a choice. They can exit their position at 80%, taking a 20% loss compared to the real asset, or they can hold and hope the market corrects. If some people exit at 80% that will drive the price further down as they absorb the short sellers looking to cover. This price decline will further erode confidence. Now those who are long face the same choice they did a moment ago, but now can only exit at an amount lower than 80%. A few more given in and close their positions, thinking things don't look good. The price sinks further. Finally you have a classic run on the bank where all the long holders have given up on the market correcting the price, and are just trying to get out with some percentage. What am I missing?
Also, it seems like a well funded short seller could manufacture the initial price differential by simply offering to sell as much of the BitAsset at 80% the price of the real asset as long holders can absorb. Eventually the longs will run out of buying power/enthusiasm. Then the price will sit at 80%, people will start to realize the market is not correcting, and the panic selling I described above will start. What am I missing?