This is absolutely correct, bitAssets will always be worth more than their gateway products due to the risk imbalance and this has been brought up in several threads.
I don't think we are appropriately identifying the cause of the market imbalance, which is the transactions costs associated with the bitasset contract. In theory the contract should maintain a price of 1 bitassets : 1 underlying asset, but theory does not account for transaction costs that manifest in practice.
The short must consider a variety of transaction costs that the long position does not. If the short is margin called it must consider the cost of its collateral being sold at a discount due to the SQP. The short must also pay the cost of acquiring the bitassets that it owes. This cost stems from the illiquidity of the market. Thus, the SQP and liquidity of the market are priced into the contract. We can easily change the SQP, making illiquidity the primary consideration that increases the price of bitasset contract. Liquidity isn't something that just naturally occurs in a market, it must be provided by market makers (which is why it is crucial for Bitshares to provide this service). Even the largest markets by volume require market makers to produce the necessary liquidity to make these markets efficient.
Such a bot would borrow buckets of bitAssets (say bitBTC for example) and trade them exclusively in the bitBTC:GatewayBTC markets. However, if this MM to was only permitted to trade at 1:1, it would exhaust its supply of bitBTC and be left with a large basket of various GatewayBTC's that users would not buy back at 1:1 but only at 1:[1+premium]
Of course gateways could pledge to buy back their own gateway assets but they would need to absorb all the bitBTC created by this committee as reserves and all that created bitBTC liquidity would be absorbed and we would be right back where we started.
First let's identify who the market maker is selling these bitassets (BitBTC) to. The buyer of the BitBTC in the gateway market is a customer that has deposited real BTC and would like to use BitBTC to mitigate the risk of default. If the market maker sells BitBTC for GATEWAY.BTC, it now holds the deposit of that customer.
The customer has the following considerations:
- hold BitBTC because of its advantages over BTC
- trade BitBTC for other assets
- redeem BitBTC for its equivalent in BTS (i.e. through forced settlement or exchange at the BitBTC / BTS price
- redeem BitBTC for its equivalent in BTC
In case 1, if the customer does not want to redeem their deposit than the GATEWAY.BTC(that represents the customers deposit) will sit on the order book to be claimed by someone who would like to redeem BiTBTC for real BTC.
in case 2, the customer exchanges BitBTC for another asset, meaning there is now someone else that holds BitBTC and has the same aforementioned considerations.
In case 3, if the BitBTC is force settled, the customer would net less than if he had repurchased his deposit from the GATEWAY.BTC sell wall on the gateway market. The customer will only net a profit from exchanging BitBTC for BTS if the conversion rate from BiTBTC --> BTS --> BTC (BitBTC --> BTC) is greater than the 1:1 conversion supplied by the market maker. If the value the BTS acquired less the cost of conversion from BTS back to BTC is greater than the value of the BTC that could have been attained through the gateway market, the customer may take this route.
The factors that determine the cost of conversion are the spread of BTC / BTS markets, the transfer costs and the time it takes to transfer BTS from Bitshares to an external exchange, during which the BTC / BTS price could change. In general, this would be an inconvenient method of redemption by less advanced trader. It is far more convenient and easier for the customer to account for 1:1 conversion back to BTC instead of going from BitBTC --> BTS --> BTC.
Additionally, the premium placed on BitBTC in the BitBTC / BTS comes from shorts who as I acknowledged before are willing to pay a premium for bitassets because of the SQP and illiquidity of the market. Thus if SQP is reduced to 1 and the market maker provides liquidity in the gateway market, shorts can more easily acquire the bitassets that they owe and this premium would fall.
In case 4, the customer may want to withdraw a deposit from a different gateway than they originally deposited to. He will only do this if the conversion rate is as good as the one supplied by the market maker in the initial gateway market, or the difference between the two conversion rates is made up by some benefit from withdrawing from the other gateway.