Conclusion
I don't see the incentive for short sellers (BTA creators) to profit from creating BTA to keep supply=demand. Yes, short sellers will need to sell at a premium, thus driving the price away from the peg. What market force is driving it back towards the peg?
Similar thoughts crossed my mind... the hope i guess is that the demand for bitUSD is organic ( for the product as a payment) so the increased demand for the product will soon lead to increased company share price -BTS... but if the demand is for hedging the bts price we might be for some trouble...
There are only three places from which money can come: Longs, Shorts, and Innocent 3rd Parties.
The Longs want a product that has as its core feature something that is always worth at least $1 (with a ton of liquidity) and which cannot be called/converted into something else except in extreme market events which the longs equate to "never".
The Shorts want leverage, with minimal margin requirements. They never want to be called, yet want the liquidity to cover at any point in time.
If the longs can never be called (to keep BitUSD fungible and usable as a currency) then how can the Shorts be guaranteed liquidity? The easy answer is to say "they are not guaranteed liquidity". In which case every short is taking a speculative bet about the liquidity (ability to buy USD) in the future.
Depending upon his assessment of the future ability to buy USD the short will charge different premiums. There are two sources to buy BitUSD, from USD holders wanting liquidity and from future shorts. A short can always trust that eventually USD holders will want liquidity, especially since everyone looking to buy BTS should be buying BitUSD which they will sell for BTS providing liquidity to the shorts.
So what remains is the "deflation of BitUSD" caused by shorts backing further and further from the price feed as BitUSD holders HODL and never sell except at just below what Shorts are willing to sell at. I think that this scenario ignores other market realities:
1. The further BitUSD gets from $1 the more incentive there is for for BitUSD holders to take profits and sell.
2. The further BitUSD gets from $1 the less demand there is to buy BitUSD
3. The further BitUSD gets from $1 the more demand there is to short BitUSD
So what remains is a scenario where a larger player buys up BitUSD and holds it ransom for a high premium in a bear market and forcing shorts that want to stop their losses to pay a price. This is a form of short-squeeze and is present in all markets that allow shorts. This same whale that the shorts complain about when they want to cover is the whale that provided them liquidity when then wanted to enter their position.
In other words, whenever the price is above $1 neither party is guaranteed liquidity at the price they entered the position at and the market is balanced.
You cannot have BitUSD go to infinity without BTS going to 0 and the further BitUSD gets from real USD the more people will use real USD to buy BitUSD to sell for BTS. All liquidity for using BTS to buy BitUSD will dry up very quickly once it gets too far from the feed. BTS holders wanting USD would simply opt for the real thing. Therefore we know that there exists a narrow range in which BitUSD will actually trade and it will have a floor of $1 and a likely ceiling of $1.10.
The only other solution is to have scheduled "black swans" (aka global forced settlement) which is good for traders but bad for merchants and consumers.