plan to publish an article in some media to introduce the evolution of smartcoin, post here in advance for review, if any thoughts please share.
BackgroundIn 2013 BitShares introduced the concept of smartcoin, which is designed to track the value of fiat with BTS as collaterals to back the value, actually smartcoin like bitUSD or bitCNY is a service provided by the shorts to the longs. bitUSD/bitCNY is operated by creating an order book between those who wanted leverage on BTS and those who wanted price stability. To provide liquidity for those who purchased bitUSD/bitCNY, bitUSD/bitCNY holders were allowed to force settle the least collateralized short positions at the price feed plus an offset after 24 hours delay with limited amount. This created an effective margin call and assured buyers of bitUSD/bitCNY that their token was always worth about 1USD/CNY worth of BTS. The system also designed ways to handle bad debt, which has been global settlement but now it is global settlement protection.
Some key parameters can be adjusted to adapt to the market, they are:
MCR: Maintenance collateral ratio, it defines the least collateral ratio a debt position should have, if CR fall under MCR, margin call will be triggered, this parameter is maintained by witnesses.
MSSR: Maximum short squeeze ratio, the margin call orders will be forced placed at feed price/MSSR, it can be seen as penalty to margin called positions and reward to those who eat the margin call orders, this parameter is maintained by witnesses.
Force settlement offset: if define the fee that the smartcoin holders need to pay while issue force settlement. this parameter is maintained by committee.
In the past these parameters have been changed for several times, taking bitCNY as an example, MCR is changed from 1.75 to 1.6, MSSR is changed from 1.1 to 1.05 and then 1.02, force settlement offset is changed from 0 to 2%.
Another big change is the introduction of TCR(Target Collateral Ratio), with setting a TCR, while a debt position is margin called, not all the collateral will be placed in margin call order, the order amount will be calculated out based on the logic that paying debt with the got smartcoin via the sold amount will increase the CR to TCR.
Core consideration on rule updateIf we compare bitCNY with Maker DAI, we can find that DAI business has little impact on ETH price, and ETH has a big enough market cap to support DAI supply, on the other hand, bitCNY business has big impact on BTS price, and as BTS market cap is so low bitCNY can succeed only when BTS price have a big rise up.
In the past years Bitshares community experienced a lot short attacks, at the early time of BTS2.0, all the smartcoins were set MCR=1.75 and MSSR=1.1, TCR (Target Collateral Ratio) is not introduced yet, while the market is in down trend and provide good chance to shorts, shorts will sell BTS in large volume to speed up the down trend of BTS price to make margin call, if some big debt positions is margin called, all the collateral of the position will be sold at feed price/1.1, which will lead to further price fall and more margin calls, while the “death spiral”make disaster and BTS price has no space to fall further, the shorts that has accumulated big amount of smartcoins will come out to eat the big margin call orders, shorts benefit most while the whole BTS ecosystem is in huge disaster.
Even we suppose there is no shorting attack in bear market, the high MSSR will always speed up the down trend of BTS price, and prohibited the system to provide enough smartcoin supply.
what the system responded to crisis finally aggravated the crisis, the same story repeated in each market cycle，BTS become a game field that speculators enjoy but the ecosystem cannot grow up, BTS community has to answer the following questions:
How to resist shorting attack?
How to provide incentive for creating smartcoin supply?
How to respond to crisis?
In long time Bitshares follow the traditional risk control logic of traditional mortgage loan and leverage trading to ensure security, but essentially Bitshares is a stable coin issuing system, the key difference is that traditional mortgage loan and leverage trading system do not have the problem of base currency supply, which is the key issue of Bitshares smartcoin system, any rules that ignoring the base currency supply will not lead to success, any measure that pursue security via punishing margin call will not make sense.
Below shows the candle chart of BTS/bitCNY pair at UTC 1st May, 5:49, several days before BTS price has risen up to 0.52CNY and then returned to 0.32CNY after several big falls, at 30th April and 1st May it went up a little to 0.34CNY, at the time bitCNY has a premium of more than 5%, different than before, as MSSR has been reduced to 1.02, so the margin call orders(yellow orders) is at 0.3549CNY, 3% more higher than the top sell orders, in the past 3 days, these yellow orders just stayed there without any partly being eaten.
This “yellow orders highly placed” phenomenon have some effect: first, it make shorting attack more difficult, low MSSR lessen both the “death spiral”effect and the profit space of shorting attack; second, it lower the risk of borrowing bitCNY at low CR, because at this scenario even when a position is margin called there is also a high possibility that the margin call orders stay for long time without being eaten and disappear after the BTS price recover; third, this “yellow orders highly placed” phenomenon avoid the deflation of bitCNY.
In long time smartcoins lack a mechanism of encouraging creating supply in high premium scenario, but now I see possibility to build such a mechanism via MSSR, if we adjust MSSR to a suitable value, it can encourage smartcoin supply in high premium scenario and at the same time keep the possibility of bad debt low enough.
We can see currently bitCNY is in such a status, an about 4.8% premium encourage speculators to borrow with CR=MCR and buy more BTS, we can also see that bitCNY supply keep almost unchanged while BTS price fall from 0.4CNY to 0.32 CNY, the mechanism works. However according to observation, when BTS price rise up to about 0.5CNY, bitCNY premium will fall under 2%, and the encouraging mechanism will not work, if we need it to work at that price, we need an even lower MSSR.
So in my view, MSSR value selection depend highly on the market depth of the smartcoin, it is time for bitCNY to try a lower MSSR such as 1.01 and 1.02 is a low enough MSSR for bitUSD.
Bad debt handlingIn the past months bitUSD has experienced global settlement and revived, bitCNY has also been at the edge of global settlemet but is protected by witnesses.
Global settlement(GS) is a bad way to handle bad debt, it is just like suicide, it collect all the collaterals into one global settlement pool and sell in fixed price, while none can borrow more smartcoins. When bitUSD is global settled, bitUSD holders are hurt as bitUSD is devaluated, debt positions with high CR are also involved unfairly, stop bitUSD borrowing makes it difficult for bitUSD to revive.
Comparatively, the core idea of GS protection is not allowing feed price to fall under GS price, this cannot be understood as simple “faked price”, actually it is “we try best to avoid bad debt, but if it really happen for some positions, we will keep the book value of all positions not bad and wait for the market to solve it, while keep the borrowing feature continue and gs price can also go down while margin call orders are eaten or force settlement happen. Which minimize the devaluation of smartcoin”.
BSIP58 is implemented on bitCNY and bitUSD, the problem is it still depend on witnesses' operation, a better solution is to include the logic in the core code - remove GS by not allowing feed price under GS price.
There is no way to completely avoid bad debt, what we can do is to minimize the possibility and the possible harm to all the parties in the market.
ConclusionTo cultivate smartcoin ecosystem, we need to include reasonable incentive in the rules, which will make BTS longs get advantage in the long-short game when smartcoin is in obvious premium.
MSSR will be reduced toward 1 step by step, to ensure the incentive to BTS longs and good pegging. this will limit the premium of smartcoin. this will also provide solid support to BTS price in bear market when smartcoin is in high premium.
Force settlement will limit the discount of smartcoin.
to be continued...
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