Let's suppose that:
1 Bts = 1 USD and that Joe has 1000 Bts.
That means Joe has 1000 USD worth of BTS.
Joe uses his 1000 Bts to borrow 500 BitUSD at a CR = 2 from the Blockchain.
Then Joe uses his 500 BitUSD to buy 500 Bts from Ana. Ana who, being risk averse, stores those 500 BitUSD in a cold wallet.
Now Joe has 1000 Bts frozen as collateral on the blockchain and 500 Bts available in his wallet.
Joe uses his 500 Bts to trade and get some profits from Ken, who holds several cryptocurrencies but no BitUSD.
Suppose also that there are no more players in this little world.
As time passes, bts price decreases to 1 Bts = 0.5 USD, and Joe is margin called.
He wants to pay his debt immediately, he looks desperately for anybody who can sell him some BitUSD but there is none. Because all the created BitUSD is in Ana's cold wallet.
Even if Joe has made profits he will be unable to pay no matter what because no BitUSD is available in the market.
Under the current protocol, Joe portraits the situation of many debtors and Ana that of many BitAsset holders. I only see two possible solutions for this problem.
- Joe voluntarily closes his position. In that case, the collateral in excess of debt is returned back to Joe. Because there are still 500 BitUSD in the hands of Ana and those 500 BitUSD need to be backed by something, the collateral retained from Joe enters a pool of debt management that needs to be replenished by some fees.
- If Joe doesn't close his position before his CR falls below a certain threshold, his position (both debt and collateral) is taken over by the pool. Much like in the traditional markets, long and short positions have closing dates and/or prices.
If, as is happening today, Joe increases his voting power by going into debt and uses that inflated voting power to prevent his position to be taken over, then the whole system is unsustainable. This is because Ana will eventually understand that her 500 BitUSD won't be backed justly and, being risk averse by hypothesis, she will leave the system. Ken, on his part, having only Joe to trade on a system which is controlled by Joe, will also leave, leaving Joe alone.