Also, as a practical matter from trading...
I've invoked forced settlement many times in both bitCNY and bitUSD ...actually, today has been a weird bitUSD trading experience in that people have been dumping at about 6%-7% below peg all afternoon and i've been the highest bidder soaking up the supply. Since I can't find anyone else to buy anywhere near peg, i've been invoking forced settlement. If there were some penalty for doing this, or if assets were only 95% collateralized, i'd be doing the same stuff but at 15%+ below feed. What's the point of that?
The way i've seen forced settlement is that it acts as a natural supply reduction mechanism when we have imbalances and not enough buyers. It brings supply down to what the market is actually willing to support.
I'd speculate the reasons BitUSD holders are willing to offer a 6/7% discount today rather than waiting for 1-1 in 24 hours is because they think BTC is surging so fast that they can make up the difference. If forced settlement was 1-1 with a 4% fee they still would be unlikely to sell much lower than a 7% loss because they're unlikely to make up a 7% loss. So in a way 1-1 might be of limited value other than to traders like yourself who are able to make good daily gains in these scenarios.
While from the shorts perspective a lot of them are going to wake up tomorrow having been unexpectedly force settled and then have to compete with each other if they want to rapidly re-short but then find there are not a lot of willing BitUSD longs because they all want to be in BTC atm so this will disrupt the market, discourage shorts and ultimately raise premiums. A 4% fee would have forced longs to wait 24 hours because it wouldn't make sense to sell at a 9-10% loss today and shorts would have received some compensation for having provided liquidity.
If liquidity close to 1-1 was something we wanted to provide to SmartCoin customers then liquidity subsidies would be the way to do it rather than disrupting the market, negatively impacting shorts & raising the premium the way the current system does imo.
i guess my main point is that i don't see changing collateralization or charging fees to force settlement as materially changing premature forced settlement; traders will rationally price all of this in from the start. They'll offer less for smartcoins to account for either a discount to par collateralization or to capitalize the fee ex ante. Then they'll still force settle and induce unplanned early settlement on short positions.
this process of capitalizing fees ex ante comes at the cost of losing 100% asset backing for our smartcoins, which then hurts the PoS marketing message of being able to get at least the full pegged value at any time. It's a much easier story to sell that 1 bitUSD can be settled at any point for 1 USD worth of BTS. It's unnecessarily damaging to sell merchants on getting 0.95 on the dollar or whatever.
Shorting is for professionals, or those at least willing to keep an eye on positions, up margin when needed if they want to keep positions from being called. If being force settled is something a prospective shorter is concerned with, they should set collateral sufficiently high to make it a non-issue. This will still be an issue with charging fees to force settle, or eroding collateral requirements.
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