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General Discussion / Proposed modification of the whole margin system for Smart Assets
« on: May 25, 2021, 10:29:46 pm »
Dear Bitshares community,
Much has been said and suffered regarding the debt system currently operating the smart asset creation on the bitshares platform. The following proposed mechanism of this margin call system has the following advantages over the current system:
The proposed new mechanism operates as follows:
Of the above points, the most controversial is (2), in which positions whose CR falls below 1 are deleted and both collateral and debt are transferred to the remaining, more collateralized positions. Despite this, (3) and (4) are thought to alleviate the burden of this transfer for the remaining higher-collateral positions and increase their possible reward. Overall, the proposed new protocol is way better than the current one. It has better treatment for both holders and debtors of the smart asset and also stronger incentives and better guarantees for all the involved players.
Expecting the best of you all,
Sapiens.
Much has been said and suffered regarding the debt system currently operating the smart asset creation on the bitshares platform. The following proposed mechanism of this margin call system has the following advantages over the current system:
- As long as a debtor has collateral above MSSR, he will never be margin called nor fall victim of Global Settlement, independently of the state of other debtors.
- As long as a debtor has collateral above MCR, he will never be force-settled.
- If implemented before, the proposed mechanism would have avoided most, if not all, of previous Global Settlements .
- With the new protocol, debtors are incentivized to adjust their positions for the benefit of the community. This is much better than the current mechanism which punishes them whenever harsh conditions appear.
- Holders of smart assets are protected and the peg is maintained until the very last possible moment.
- Dex's liquidity and liquidity pools usage is increased.
- A new, innovative market of debt positions is created and with it, a new source of income for the DAC appears.
- Committee is released from the urgency to randomly adjust parameters in order to prevent GS, thus creating better stability for the whole ecosystem and avoiding much of the recent drama
The proposed new mechanism operates as follows:
- GS is not activated whenever CR of the least collateralized position falls below 1 but when (total collateral in existence) < (total debt in existence)x(MSSR). This way, GS would not happen as a consequence of the state of the weakest debtor but from the behavior of all debtors as a whole.
- The above alone implies that some positions could have negative CR. To prevent this, those positions are simply deleted once they reach CR<1 and their debt and collateral is transferred to the remaining, better collateralized positions. This would reduce the CR of those better positions, but it also increases their total debt and total collateral. So, if those positions (which are most likely held by more experienced traders) manage to keep themselves open during sharp declines in bts price, their reward will be much more bigger.
- Whenever (2) happens, in order to alleviate the burden on the remaining, active positions, all fees for the corresponding market are distributed among them.This way, those positions get compensated for taking on the collateral and debt of the deleted positions. Also, this creates an incentive for those who are willing to open new positions with fresh collateral and so, push BTS price upward.
- Whenever any position has CR < MSSR, an automatic operation (or a bot) is activated that takes the smart Asset from LPs and either buys the corresponding margin wall or force settles that low collateral position, which, at that moment should be at a premium price. Probably there are already some bots doing similar arbitrage. So, this point is optional. In case of implemented, profits from this operation can also be distributed among the remaining debtors.
- Processes (3) and (4) are run until CR > MCR for all existing positions.
- Force settling positions whose collateral is above MCR constitutes unfair and terrible customer service to the users that lend themselves to the hustle of creating smart assets. However, force-settling cannot be totally eliminated because it is a competitive advantage over other platforms that don't have it and, if we don't have a plus over them, then people won't see a need to switch to us. So, force settling is allowed only upto the debt of those positions with CR < MCR. That new condition would required that, If someone wants to get rid of his smart assets and there is no such low CR positions, he must use the markets or the LPs. This has the additional benefit of increasing activity in the DEX.
- In order to allow debtors to exit their positions when they simply are not willing to hold them any longer, an auction system for those positions is created, So, any debtor can sell his position at any time. Also, a system in which any member of the community can offer to buy any debt position is implemented.
- Finally, if under the most super extreme conditions, all positions, one by one, are deleted, and after having all debt and collateral being transferred to the last, most stronger debtor, and after receiving help from fees and bots, he also falls below CR=1, then GS happens and bidding for collateral is allowed. Manipulating feed producers in order to prevent collateral bidding is also terrible costumer service, in my opinion.
Of the above points, the most controversial is (2), in which positions whose CR falls below 1 are deleted and both collateral and debt are transferred to the remaining, more collateralized positions. Despite this, (3) and (4) are thought to alleviate the burden of this transfer for the remaining higher-collateral positions and increase their possible reward. Overall, the proposed new protocol is way better than the current one. It has better treatment for both holders and debtors of the smart asset and also stronger incentives and better guarantees for all the involved players.
Expecting the best of you all,
Sapiens.