I have an unrelated question about how Bitshares operates, if you will indulge my ignorance for a moment. Let us suppose I purchase BitUSD, and then the value of BTS drops such that the party that went long BTS to create my BitUSD receives a margin call. The issuer does not meet the margin call, which I presume causes a liquidation. What happens to my BitUSD at that point?
TLDR: Liquidation only happens if the collateral can be sold. If no buyers want to buy the collateral right now, there will be no liquidation until buyers appear!
The margin call causes a "cover order" to be issued on the market, it attempts to buy back the BitUSD at the feed price. This order is funded by the collateral. The cover order is created automatically by the blockchain. When the cover order is matched, the liquidation proceeds: The BitUSD bought by the cover order is destroyed, and any leftover collateral will be returned to the short issuer, less a 5% fee taken by the blockchain (treated the same as other transaction fees).
In addition, shorts expire after 30 days [1]. The same cover process happens, but in that case there is no 5% fee.
From the long holder's point of view, what does this look like?
If you are just hanging on to your BitUSD, nothing happens.
If you place a sell order, your sell order will be matched against cover orders.
We require $3 worth of collateral to create $1 worth of BitUSD, and force the cover when its value drops to $2. So very extreme price movements would be required to break the peg, that no reasonable, legitimate cryptocurrency with decent market cap has ever experienced.
[1] This period was originally one year, but was changed later. Existing shorts were "grandfathered," otherwise we would have been changing the terms of financial derivative products
after people had already bought them! Since BTS price has been rocky, most of these grandfathered shorts have been margin called, but a few still exist.