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Topics - Sapiens

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Dear Bitshares community,

Much has been said and suffered regarding the debt system currently operating the smart asset creation on the bitshares platform. The following proposed mechanism of this margin call system has the following advantages over the current system:

  • As long as a debtor has collateral above MSSR, he will never be margin called nor fall victim of Global Settlement, independently of the state of other debtors.
  • As long as a debtor has collateral above MCR, he will never be force-settled.
  • If implemented before, the proposed mechanism would have avoided most, if not all, of previous Global Settlements .
  • With the new protocol, debtors are incentivized to adjust their positions for the benefit of the community. This is much better than the current mechanism which punishes them whenever harsh conditions appear. 
  • Holders of smart assets are protected and the peg is maintained until the very last possible moment.
  • Dex's liquidity and liquidity pools usage is increased.
  • A new, innovative market of debt positions is created and with it, a new source of income for the DAC appears.
  • Committee is released from the urgency to randomly adjust parameters in order to prevent GS, thus creating better stability for the whole ecosystem and avoiding much of the recent drama

The proposed new mechanism operates as follows:
  • GS is not activated whenever CR of the least collateralized position falls below 1 but when (total collateral in existence) < (total debt in existence)x(MSSR). This way, GS would not happen as a consequence of the state of the weakest debtor but from the behavior of all debtors as a whole.   
  • The above alone implies that some positions could have negative CR. To prevent this, those positions are simply deleted once they reach CR<1 and their debt and collateral is transferred to the remaining, better collateralized positions. This would reduce the CR of those better positions, but it also increases their total debt and total collateral. So, if those positions (which are most likely held by more experienced traders) manage to keep themselves open during sharp declines in bts price, their reward will be much more bigger. 
  • Whenever (2) happens, in order to alleviate the burden on the remaining, active positions, all fees for the corresponding market are distributed among them.This way, those positions get compensated for taking on the collateral and debt of the deleted positions. Also, this creates an incentive for those who are willing to open new positions with fresh collateral and so, push BTS price upward.
  • Whenever any position has CR < MSSR, an automatic operation (or a bot) is activated that takes the smart Asset from LPs and either buys the corresponding margin wall or force settles that low collateral position, which, at that moment should be at a premium price. Probably there are already some bots doing similar arbitrage. So, this point is optional. In case of implemented, profits from this operation can also be distributed among the remaining debtors.
  • Processes (3) and (4) are run until CR > MCR for all existing positions.
  • Force settling positions whose collateral is above MCR constitutes unfair and terrible customer service to the users that lend themselves to the hustle of creating smart assets. However, force-settling cannot be totally eliminated because it is a competitive advantage over other platforms that don't have it and, if we don't have a plus over them, then people won't see a need to switch to us. So, force settling is allowed only upto the debt of those positions with CR < MCR. That new condition would required that, If someone wants to get rid of his smart assets and there is no such low CR positions, he must use the markets or the LPs. This has the additional benefit of increasing activity in the DEX.
  • In order to allow debtors to exit their positions when they simply are not willing to hold them any longer, an auction system for those positions is created, So, any debtor can sell his position at any time. Also, a system in which any member of the community can offer to buy any debt position is implemented.
  • Finally, if under the most super extreme conditions, all positions, one by one, are deleted, and after having all debt and collateral being transferred to the last, most stronger debtor, and after receiving help from fees and bots, he also falls below CR=1, then GS happens and bidding for collateral is allowed. Manipulating feed producers in order to prevent collateral bidding is also terrible costumer service, in my opinion.

Of the above points, the most controversial is (2), in which positions whose CR falls below 1 are deleted and both collateral and debt are transferred to the remaining, more collateralized positions. Despite this, (3) and (4) are thought to alleviate the burden of this transfer for the remaining higher-collateral positions and increase their possible reward. Overall, the proposed new protocol is way better than the current one. It has better treatment for both holders and debtors of the smart asset and also stronger incentives and better guarantees for all the involved players.

Expecting the best of you all,


Let's suppose that:

1 Bts = 1 USD and that Joe has 1000 Bts.

That means Joe has 1000 USD worth of BTS.

Joe uses his 1000 Bts to borrow 500 BitUSD at a CR = 2 from the Blockchain.

Then Joe uses his 500 BitUSD to buy 500 Bts from Ana. Ana who, being risk averse, stores those 500 BitUSD in a cold wallet.

Now Joe has 1000 Bts frozen as collateral on the blockchain and 500 Bts available in his wallet.

Joe uses his 500 Bts to trade and get some profits from Ken, who holds several cryptocurrencies but no BitUSD.

Suppose also that there are no more players in this little world.

As time passes, bts price decreases to 1 Bts = 0.5 USD, and Joe is margin called.

He wants to pay his debt immediately, he looks desperately for anybody who can sell him some BitUSD but there is none. Because all the created BitUSD is in Ana's cold wallet.

Even if Joe has made profits he will be unable to pay no matter what because no BitUSD is available in the market.

Under the current protocol, Joe portraits the situation of many debtors and Ana that of many BitAsset holders. I only see two possible solutions for this problem.
  • Joe voluntarily closes his position. In that case, the collateral in excess of debt is returned back to Joe. Because there are still 500 BitUSD in the hands of Ana and those 500 BitUSD need to be backed by something, the collateral retained from Joe enters a pool of debt management that needs to be replenished by some fees.
  • If Joe doesn't close his position before his CR falls below a certain threshold, his position (both debt and collateral) is taken over by the pool.  Much like in the traditional markets, long and short positions have closing dates and/or prices.

If, as is happening today, Joe increases his voting power by going into debt and uses that inflated voting power to prevent his position to be taken over, then the whole system is unsustainable. This is because Ana will eventually understand that her 500 BitUSD won't be backed justly and, being risk averse by hypothesis, she will leave the system. Ken, on his part, having only Joe to trade on a system which is controlled by Joe, will also leave, leaving Joe alone.

General Discussion / A thought experiment on Bitshares.
« on: October 01, 2019, 04:26:48 pm »
A thought experiment about bitshares:

Let's suppose 1Bts = 1 USD.

Joe has 1000 bts which represent 1000 votes to him on the Bitshares ecosystem.

Joe uses his bts to borrow 500 bitUSD at a CR=2

He then uses those 500 bitUSD to buy 500 bts. Now he has a voting power of 1500 on the ecosystem.

He now uses this 500 bts to borrow 250 BitUSD and buy more bts. His voting power now is 1750.

And so on, and so forth.

Eventually, with an investment of 1000 bts Joe duplicates his voting power.

When bts price goes down, Joe uses his newly acquired (and created out of thin air) voting power to coerce every witness into faking the price-feed and into breaking the Peg.

He also wants the MCR to be brought down to 1.1 instead of 1.6. He has found that, with such low MCR, his initial 1000USD could be converted to 10K worth of voting power.

He argues that because he IS the community, he has right to change the rules. He argues that because he IS the community, he must not keep the deals he agreed upon at the moment of opening his debt positions.

Other businesses and people that rely on BitAssests trustworthiness, are also part of the community but, of course, they are not AS important.

Bitshares brand may also be damaged by the move, but that's not AS important.

Now, with an altered price-feed, Joe can go into as much as debt as he wants. For, he will never be margin called, forever. Ever creating more and more shitty BitUSD.

Question #1: Who is Joe?
Question #2: Do you think Joe will stop here?

Answer to question #1: Joe is any weak spirit who falls prey of his greediness and the wrong set of incentives. If, according to the Bitshares protocol, voting power can be created out of thin air, at the sole expense of borrowing BitAssets into existence then, by the law of probability, somebody will exactly do as Joe.

So, what's the conclusion? The whole process of SmartAssets creation need to be re-designed. The collateral is not held by the debtor but by the blockchain as a guarantee. Thence, its voting power cannot be held by the debtor either. Also, if any given entity can increase its voting power by creating debt then, as a consequence, the decision making of the blockchain is being transferred to the most impulsive and risk avid individuals. This must not be the case, if we pretend this blockchain to grow strong.

Answer to question #2: No


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