This addresses one of my previous rants about the supply-side of bitassets. From the supply-side approach, I think it illustrates that SQP should be a percentage of SWAN not FEED.
1) When BID < (CALL=debt/collatoral*.175), then a forced margin call is made which destroys a bitasset.
2) During a short squeeze, 1 bitA is worth more than 1 corresponding asset (e.g., 1 bitUSD > 1 USD). That means there is an under-supply of bitA. When in under-supply, avoid destroying bitassets. In fact, people should have an incentive to short above the highest bid since they are being paid a premium [footnote].
3) Since bitA should not be destroyed, margin calls should be avoided until DEBT/COLLATERAL=1, that is, the SWAN value. SQP should enforce this.
Therefore, SQP should be a function of SWAN. You want it as close to SWAN as possible while still giving a cushion to force collatoralization and avoid the swan. Since FEED and SWAN are not functions of each other, setting SQP to a fraction of FEED doesn't necessarily perform proper squeeze protection, and in fact could potentially push the short squeeze in the wrong direction by destroying bitA that are already overvalued.
[footnote] Pricing bit assets is becoming a little clearer. The system enforces:
SWAN < bitUSD/BTS < USD_FEED
A/USD_FEED < bitUSD/BTS < USD_FEED
where A is the least collateralize debt/collateral ratio (in units of bitA/BTS)
So there are two arbitrage opportunities:
If I think USD_FEED should go down (that is BTS value increasing), I want to short at USD_FEED so I make a profit no matter what (or at worst, break even).
If I think USD_FEED will increase (BTS value decrease), I want to buy bitA at close to SWAN as I can, as I will make a profit no matter what (or at worst, break even).
Therefore, as long as BTS is increasing in value (i.e., making a profit), I will want to short as close to USD_FEED as I can get.