How likely is it to happen?
The event we are looking at here is called a "flash crash" and must result in a 50% fall in *real value* in less than an hour. I would wager not even BTC has seen this particular event happen. Lets assume that there are $1 million BitUSD created when the market cap was $100 Million and share supply was 2B. That means there are $2 million in XTS backing it. A 65% "flash crash" happens which means the collateral is only worth $700,000 and the market cap is now $35 Million. An additional $300K of XTS would be created to raise capital to cover the loan. This would represent a 0.85% dilution event.
I would hope that transaction fees which will soon include market fees will be more than 0.8% per year.
Now the question is what is the ratio of BitUSD (and other BitAssets) to market cap. In this case it was 1%. The MAXIMUM ratio is ~33% based upon current rules which means almost all XTS would be locked up as collateral and the remaining XTS held in reserve to buy back USD to cover the collateral. Under this situation a 65% flash crash would result in a $8.5 million short fall which would mean a 25% dilution event.
So the question remains is this.... are the shareholders entitled to "make profits no matter what"? I think that shareholders are playing a risk-reward game where if the market peg holds and volatility is kept in check then they earn a very nice dividend. If the delegates are reliable, avoid down time, etc shareholders profit. However, for every profit opportunity comes a potential loss and in this case the primary cause of losses is a fall in XTS value by over 50%
There is one other type of event that is not addressed... if Gold and Silver go to the moon relative to XTS.... I would be very surprised to see their price double in just one hour, but it could happen.
One last thing I would like to point out is that a rapid fall in price would not execute immediately because the trading range would hit. The delegates would have to "confirm the fall" by lowering their feeds *or* the moving average would have to catch up. This "time delay" protects against most short-term false-alarms.
As a shareholder, if you think XTS is over-valued you should buy BitUSD. Holding BitUSD is supporting system as much as holding XTS. You can then minimize your risk of dilution and/or benefit from the dilution if it were to happen. I suspect you could even do this:
If you have 1% of the XTS and you own 1% of the BitUSD then you are fully hedged against dilution. To keep numbers simple... lets assume the following:
100 XTS supply
You own 1 XTS
10% dilution event occurs...
10 new XTS are created, devaluing your 1 XTS to .9 XTS (original)
You get 1% of these 10 new XTS or .1 bringing your total to 1.1 XTS
Congrats, you just avoided all dilution with a slight hedge. But it is better than that!
Your USD at least doubled in value relative to XTS.
So it is still possible for someone to "buy" protection against dilution. However, I think looking at a single number "% of the system" you own as having tunnel vision and ignoring the bigger picture. You are part of an economic system where all players (BitUSD and XTS holders) have a stake in the systems success. Both parties are equal players and the risk/reward is always balanced between them. Anything we do to help XTS holders hurts BitUSD holders. Both parties benefit more from a solid BitUSD peg than from single-minded chase for deflation.
So I encourage everyone to look at both sides of the market as team players in a new economic system and every team player is responsible for allocating resources to minimize their own losses and thus the system grows in value for everyone.