I read a lot in here about the market peg for bit asset...
I know what the concept means, but except for pre-defined market consensus, I don't see how it can peg to the USD value. Is market consensus a sufficient force to keep the peg?
My understanding of shorting is selling something you don't have (and borrow) for a fixed price in the future, betting the price will drop so you'll be able to buy it cheaper later and make a profit. (Am I right?) But how does shorting could get the value of bitusd to drop compared to usd and affect the peg?
Shorting is indeed selling some asset you borrowed, however not for a fixed price in the future (this would be forward trade), but at the currently prevailing (spot) market price. In the future, the short seller "covers" his short position by buying the asset at then prevailing (spot) market price, and returns the asset to the lender.
with regards to the peg, as far as I understand - there is a mechanism in place within bitsharesX which enables willing market participants (arbitrageurs) to make profits whenever bitUSD moves far away from the USD value, expressed in BTSX terms. I might be still missing some important reasoning behind the peg, e.g. prediction markets stuff. Are there implicit or explicit penalties in place for both shorts and longs, in case bitUSD were to stabilize around 0.5 USD? or 1.5 USD?
Yet
- whenever bitUSD is reasonably undervalued vs. USD (which recently meant somewhere below 0.75), such arbitrageurs establish their longs in bitUSD (buying bitUSD with BTSX), thus moving its price higher somewhat closer to the peg, adjusted for BTSX/USD rate moves. To neutralise the risk that BTSX price increases in USD terms while peg readjusting, they would simultaneously buy corresponding BTSX amoung for USD on some centralised exchange. Finally, positions are unwound, when achieving profit after peg readjusted: sell bitUSD for BTSX, and sell BTSX for USD.
- whenever bitUSD becomes expensive vs. USD (which currently means somewhere above 0.95), then arbitrageurs can go short bitUSD by "borrowing bitUSD from bitsharesX", e.g. issuing for that very purpose newly created bitUSD into the hands of the willing buyers. Short sellers have to collateralise their positions by certain amount of their BTSX - which ensures that they don't simply run away if their short position loses value. The act of satisfying bitUSD demand with newly issued bitUSD contributes to bitUSD price downward pressure vs. BTSX, again moving bitUSD closer to USD peg. Still, to neutralise the risk of BTSX falling in USD terms while peg readjusting, such short sellers would exchange correspondent amount of their BTSX holdings into USD on some centralised exchange for the duration of their trade. Finally, positions get unwound, either when achieving profit after peg readjusted, or via "margin call": bitUSD short gets covered with BTSX collateral released, and buy back BTSX for USD on the centralised exchange. At short covering, bitUSDs previously created by bitsharesX for the shorting purpose, get simultaneously destroyed (e.g. borrowed asset is returned to the issuer).
Note: arbitrageur shorting bitUSD, who is also BTSX bull, risks missing BTSX rally while performing arbitrage. Therefore BTSX bulls should simply short sell overvalued vs peg bitUSD, thus contributing to the peg, while carrying the risk of BTSX fall vs USD.
Implementing all this sounds difficult, but arbitrage will be automatised as the market matures and so becomes more efficient.