The impact of a reserve fund on stable coins

[bob_ggg]

I am studying the issue of stable coins and I would like to share a few ideas to get feedback from experts.

Stable coins (CNY, USD, Euro) are a feature of Bitshares that is growing in importance. Market Pegged Assets (MPA) benefit the Bitshares system through paid transactions and by reducing the velocity of the tokens since the collateral required to create a unit of an MPA is anywhere between 2.5 to 3 times the value of the pegged asset.
It is easy to anchor an MPA to the underlying tokens in a market that sees an appreciating token, but in presence of a significant volatility the value of the collateral can rapidly decrease and create a cascade effect, forcing a loop that develops as follows
1.   The most exposed collateral is sold to close the associated short positions
2.   The previous buyer of the pegged asset is now the owner of the underlying tokens; since they do not cover the need for stability, the tokens are sold to get price stability from fiat
3.   The token sale decreases the value of the tokens
4.   This decrease reduces the value of collateral of other short positions
If there is confidence in the pegging system, the seller of tokens for Fiat could buy of MPA at the lower valuation, providing that there is ample supply of the MPA during a market dump.  If this issue were solved, the feedback loop would be reduced in speed and would reach stability at a lower point in a gentler way. It is worth analyzing a simple example assuming that
•   The number of tokens stored in support of an MPA be worth 3 times the value of the pegged asset
•   An MPA denominated in USD is created when 1USD=1BTS
•   The value of 1BTS decrease to 0.5USD forcing the liquidation of the short position
•   The owner of the MPA reopens the position at the lower value buying a new MPA representing an USD. For sake of simplicity, we assume that the liquidation procedure be automatic and hidden to the owner of the MPA who has a renewed position on the same token.
When the first version of the MPA is created, 3 BTS were stored in reserve, while during the second generation of MPA the number grows to 6. Obviously, every liquidation doubles the number of token stored in reserve, creating an exponentially negative loop that counteracts the selling pressure on the BTS.
The issue here is that offering MPA in this situation requires the short seller to take a leveraged position while the market is heading south with significant risk. For this reason, an algorithmic monetary policy could target the number of tokens supporting MPA or, equivalently, the offering of MPAs as an objective way to detect a situation of monetary stress.
A way to reduce the risk of the leveraged position relies on paying an interest on the reserve deposit in situation of stressed market. A decrease of value of the token could be due to several macroeconomic situations, one being the activity of a central bank that increases the interest rate and reduces the money supply. In this case, the MPA are disadvantaged since they do not pay any interest. At the same time, the suppliers of MPA allocate capital in a situation fraught with risk.
If an algorithmic central bank were able to pay an interest rate large enough to counteract the flight of investors, then the variation of the external interest rate would be matched by the internal one.
This policy requires the setup of a reserve fund holding currency MPA. This setup must be carried out during a phase when the external monetary policy is relaxed. The accumulated bitCNY, bitUSD, etc should be used to pay an interest rate on MPAs stored in the BTS system.
The precise algorithmic approach is clearly open to discussion, but the implementation of such a policy requires the choice of an appropriate timing for the accumulation of MPAs such as the one we have now. This policy can coexist with the “burning” of tokens to reduce the monetary aggregate and provide a more stable setup for the issuance of MPA.
As already shown by the communication policy of the most reputable central banks, a monetary strategy requires a clear way to communicate it to the markets and a way to show that “whatever it takes” it will be implemented.