I wanted to start a new thread to clear the air and establish some basic facts:
1. "Proper" documentation has existed since June 8th in a prominate location linked directly from the home page of bitshares.org
(
https://bitshares.org/technology/price-stable-cryptocurrencies/)
2. For the past 6 months we have discussed in great length the various challenges and tradeoffs that must be made. There is nothing "new", "unexpected" or "flawed" in how the market is behaving.
3. I have stated that I don't know the best tradeoffs for the market, but we did parameterize everything so that we could experiment with it all and the spoils go to whoever figures out the magic equation.
4. The presence of "forced settlement" is meant to maintain correlation to outside prices, not to set the price. The actual price should be higher than the forced settlement price, hence the feed becomes a price FLOOR. In general there should always be money to be made by offering to buy BitCNY with more BTS than you could get with forced settlement and then turning around and selling that BitCNY for even more BTS. New BitCNY only enters the market when the price of BitCNY gets high enough to cover all of the liquidity risks. In principle, someone who is short BitCNY and gets force settled is getting a HUGE deal. They are effectively covering at the lowest possible premium (0), but unfortunately in exchange for getting the lowest possible premium, they do not get to choose the best possible time to exit their position.
5. There is a daily limit on the percent of BitCNY supply that can be force settled. Thus only the bottom X% of collateral holders are subject to risk.
There are many reasons why we added "forced settlement" because it a feature of all derivative contracts. Without forced settlement BitUSD holders must pay for liquidity by selling for less than a dollar, with forced settlement the BitUSD holders must pay for liquidity in advance by buying for more than a dollar. The difference for BitUSD holder and the Shorter is that the forced settlement feature gives them certainty on what that cost/price of liquidity is in advance, whereas under the old rules, there is no way to predict future liquidity or whether there will be any when you need it.
All of that said, the conclusion is that the value of BitCNY is greater than 1 CNY and anyone selling BitCNY for 1 CNY is assuming 100% of the cost of liquidity in the BitCNY / CNY market.
If someone is buying / selling BitCNY in the BitCNY / BTS market using a bot based on a data feed from other markets then they are assuming 100% of the price feed risk. Any deviations between the actual price feed and the the trader's internal models can result in risks. They also assume responsibility for 100% of the risk due to price-feed-latency and short-term market movements.
The conclusion from this is that if you are going to borrower BitCNY and sell it into the market, then you should be prepared to be force settled at an "average price" rather than the instantaneous price. Being short for "short-term" trading is the most dangerous unless you provide sufficient collateral to avoid getting settled.
Bottom line, the market can price all of the risks which are highest during low liquidity, and get lower as liquidity improves. Someone who steps up to provide liquidity can "trust" in that liquidity and offer a competitive price over those who must trust someone else to provide liquidity. Bottom line, someone should buy up a lot of BitCNY at a price above 1.0 and then turn around and provide liquidity in the range of 1.05 to 1.06. The liquidity provider will make all of the money from back and forth trades and the shorts wouldn't really have to worry about getting force settled once there was ample liquidity.