New mechanism to handle bad debt (black swan)

[pc]

Punishment doesn't work on the blockchain, because we only have accounts not identifiable individuals. With your punishment suggestion, everybody would just use sockpuppet accounts for shorting (and these sockpuppets don't even require LTM).
There is also no point in flagging defaulters in any way, because traders trade against the book, not against individual accounts. You typically don't know with whom you're trading (nor do you care).

In fact I think @abit 's suggestion is worse for shorters - in a BTS downtrend, most of them (except one) are effectively bailed out by the current black swan rules.

[R]

Operating a fractional reserve is not what bitUSD was meant to do, so during this temporary bad debt sell-off they aught to be labelled as fractional reservists or bad debt holders.

Bad gamblers don't deserve much sympathy, they aught to be highlighted as irresponsible parties on the DEX whom you should be cautious to interact with (not as bad as warning not at all to interact with, like known scammer labeling). Fair enough it shouldn't disqualify them from WP/Witness/Committee but their negative actions have direct negative consequences on the bitasset/BTS holders (potentially damaging the reputation of the BTS DEX) & that's something people will probably take into account when voting.

What do you think about preventing bad debt holders from borrowing new bitasset (same asset) until they re-collateralize their old position?

Anything within the established rule IS legit.

If a community is not inclusive enough it can't grow big. From this perspective, I don't think your suggestion is good for the community.

You have the right to propose changes anyway.

Which suggestions? All of them? Please be more specific.

I wasn't arguing about the legitimacy of your proposal, rather that the current design does not advertise allowing users to operate fractional reserves to the potential detriment of the bitasset holder, however under such circumstances such accounts aught to be labelled as 'bad debt holder(s)' until the bad debt position is resolved.

In real life, if you default on a large bank loan there are serious financial and credit rating implications (for the rest of your life) regardless of your inability to pay it back; you wouldn't get the same interest-rates, size of loan nor collateral requirements in the future. If I'm not mistaken, your current proposal effectively lets defaulters entirely off the hook compared to the current situation where a single defaulter takes every debt holder down with them as a weird form of collective debt holder punishment?

Fractional reserves are far worse than being temporarily labelled as a bad debt holder and receiving economic consequences (loss of LTM idea) until the bad debt position is closed, IMO.

[abit]

It'd be great if their account was partially nerfed until their under-collateralized position is bought off the market, like temp-disabling LTM (inflating their BTS DEX fees), perhaps disabling borrowing the same bitasset or even highlighting their account as a known "bad debt holder" within in the BTS DEX UI (similar to known-scammer account warnings)?

I think we'll gain little by doing so, because a) not like transfers, traders don't care who're trading with them in the market (which is the most efficient), and b) it can be easily get around with sock puppets.

True, you don't get any 'scammer' warnings within the market and nobody cares if they trade with scammers via the market (as long as the token you're buying isn't fake/fraudulent), but you may think twice about manually interacting with an entity which has 'bad debt holder' tagged against their BTS account.

Sock puppets could certainly get around the proposed 'punishment', but if they temporarily lost their LTM then they would begin paying larger fees across the entire DEX and they'd lose out on referral rewards - you can't transfer the 'registrar' once registered so this couldn't be evaded using sock puppets, unless you were defaulting on loans using sub-accounts instead of your main account..

Somewhat similar to a credit rating, it could help deter users from voting for said user's workers/committee/witness roles, who wants a defaulter to be in a position of power? 

Just saying, we should avoid labeling people. A person in poverty or has difficulties to manage his own financial status so unable to pay his bill or debt occasionally doesn't mean he is a scammer or not qualified for contributing as a worker or a witness.

Operating a fractional reserve is not what bitUSD was meant to do, so during this temporary bad debt sell-off they aught to be labelled as fractional reservists or bad debt holders.

Bad gamblers don't deserve much sympathy, they aught to be highlighted as irresponsible parties on the DEX whom you should be cautious to interact with (not as bad as warning not at all to interact with, like known scammer labeling). Fair enough it shouldn't disqualify them from WP/Witness/Committee but their negative actions have direct negative consequences on the bitasset/BTS holders (potentially damaging the reputation of the BTS DEX) & that's something people will probably take into account when voting.

What do you think about preventing bad debt holders from borrowing new bitasset (same asset) until they re-collateralize their old position?

Anything within the established rule IS legit.

If a community is not inclusive enough it can't grow big. From this perspective, I don't think your suggestion is good for the community.

You have the right to propose changes anyway.

[R]

It'd be great if their account was partially nerfed until their under-collateralized position is bought off the market, like temp-disabling LTM (inflating their BTS DEX fees), perhaps disabling borrowing the same bitasset or even highlighting their account as a known "bad debt holder" within in the BTS DEX UI (similar to known-scammer account warnings)?

I think we'll gain little by doing so, because a) not like transfers, traders don't care who're trading with them in the market (which is the most efficient), and b) it can be easily get around with sock puppets.

True, you don't get any 'scammer' warnings within the market and nobody cares if they trade with scammers via the market (as long as the token you're buying isn't fake/fraudulent), but you may think twice about manually interacting with an entity which has 'bad debt holder' tagged against their BTS account.

Sock puppets could certainly get around the proposed 'punishment', but if they temporarily lost their LTM then they would begin paying larger fees across the entire DEX and they'd lose out on referral rewards - you can't transfer the 'registrar' once registered so this couldn't be evaded using sock puppets, unless you were defaulting on loans using sub-accounts instead of your main account..

Somewhat similar to a credit rating, it could help deter users from voting for said user's workers/committee/witness roles, who wants a defaulter to be in a position of power? 

Just saying, we should avoid labeling people. A person in poverty or has difficulties to manage his own financial status so unable to pay his bill or debt occasionally doesn't mean he is a scammer or not qualified for contributing as a worker or a witness.

Operating a fractional reserve is not what bitUSD was meant to do, so during this temporary bad debt sell-off they aught to be labelled as fractional reservists or bad debt holders.

Bad gamblers don't deserve much sympathy, they aught to be highlighted as irresponsible parties on the DEX whom you should be cautious to interact with (not as bad as warning not at all to interact with, like known scammer labeling). Fair enough it shouldn't disqualify them from WP/Witness/Committee but their negative actions have direct negative consequences on the bitasset/BTS holders (potentially damaging the reputation of the BTS DEX) & that's something people will probably take into account when voting.

What do you think about preventing bad debt holders from borrowing new bitasset (same asset) until they re-collateralize their old position?

[abit]

It'd be great if their account was partially nerfed until their under-collateralized position is bought off the market, like temp-disabling LTM (inflating their BTS DEX fees), perhaps disabling borrowing the same bitasset or even highlighting their account as a known "bad debt holder" within in the BTS DEX UI (similar to known-scammer account warnings)?

I think we'll gain little by doing so, because a) not like transfers, traders don't care who're trading with them in the market (which is the most efficient), and b) it can be easily get around with sock puppets.

True, you don't get any 'scammer' warnings within the market and nobody cares if they trade with scammers via the market (as long as the token you're buying isn't fake/fraudulent), but you may think twice about manually interacting with an entity which has 'bad debt holder' tagged against their BTS account.

Sock puppets could certainly get around the proposed 'punishment', but if they temporarily lost their LTM then they would begin paying larger fees across the entire DEX and they'd lose out on referral rewards - you can't transfer the 'registrar' once registered so this couldn't be evaded using sock puppets, unless you were defaulting on loans using sub-accounts instead of your main account..

Somewhat similar to a credit rating, it could help deter users from voting for said user's workers/committee/witness roles, who wants a defaulter to be in a position of power? 

Just saying, we should avoid labeling people. A person in poverty or has difficulties to manage his own financial status so unable to pay his bill or debt occasionally doesn't mean he is a scammer or not qualified for contributing as a worker or a witness.

[R]

It'd be great if their account was partially nerfed until their under-collateralized position is bought off the market, like temp-disabling LTM (inflating their BTS DEX fees), perhaps disabling borrowing the same bitasset or even highlighting their account as a known "bad debt holder" within in the BTS DEX UI (similar to known-scammer account warnings)?

I think we'll gain little by doing so, because a) not like transfers, traders don't care who're trading with them in the market (which is the most efficient), and b) it can be easily get around with sock puppets.

True, you don't get any 'scammer' warnings within the market and nobody cares if they trade with scammers via the market (as long as the token you're buying isn't fake/fraudulent), but you may think twice about manually interacting with an entity which has 'bad debt holder' tagged against their BTS account.

Sock puppets could certainly get around the proposed 'punishment', but if they temporarily lost their LTM then they would begin paying larger fees across the entire DEX and they'd lose out on referral rewards - you can't transfer the 'registrar' once registered so this couldn't be evaded using sock puppets, unless you were defaulting on loans using sub-accounts instead of your main account..

Somewhat similar to a credit rating, it could help deter users from voting for said user's workers/committee/witness roles, who wants a defaulter to be in a position of power? 

[abit]

The account with collateral under 1 gets a negative entry for BTS and will be balanced to 0, when price of BTS is high enough again?

Isolating the problem is the best way dealing with this problem, but we need to make the barrier as high as needed to not get a black swan.
This fits better in a different topic:
https://bitsharestalk.org/index.php?topic=27315.0

IMHO bad debt (black swan) is unavoidable. Beating a dead horse is useless. Finding people who are willing to and can afford to buy out the bad debts is better.

By the way I prefer keeping similar discussions in one thread, so replying your comments in another thread here:

In this topic I want to discuss different ideas to prevent bad debt.

One idea was to handle margin positions depending on the collateral ratio.

Creating three groups for different ratios:
- 1.75>x>1.5: normal call price
- 1.5>x>1.25: reduced call price
- 1.25>x>1.00: sell to highest call order and reduce liquidity

What do you think ?

If I've understood correctly, you mean to force the owner of the debt position with highest collateral ratio to buy the position with lowest collateral ratio. It's an interesting idea, however I don't think it's ideal.
* forcing irrelevant parties to accept something is not good;
* if there is only one debt position, it can't buy itself, so a bad debt would appear anyway;
* if the position with lowest collateral ratio is much larger than the position with highest collateral ratio (which is very likely), the latter will face same situation quite soon

[abit]

It'd be great if their account was partially nerfed until their under-collateralized position is bought off the market, like temp-disabling LTM (inflating their BTS DEX fees), perhaps disabling borrowing the same bitasset or even highlighting their account as a known "bad debt holder" within in the BTS DEX UI (similar to known-scammer account warnings)?

I think we'll gain little by doing so, because a) not like transfers, traders don't care who're trading with them in the market (which is the most efficient), and b) it can be easily get around with sock puppets.

Do you not think that global settlement as it's currently implemented should trigger if a majority of a bitasset's supply have defaulted on their loans though? Or should the proposed mechanism operate for the full 100% of supply?

IMHO we should operate the new mechanism for the full supply (don't trigger global settlement at all). However, perhaps we can have an option for asset owners to choose when there is no supply: which mechanism she would adopt when a black swan event occurs.

[abit]

OP updated:

Update (2018-10-21):

1. There is an edge case which slightly affect the implementation: according to BSIP35, when a limit order is too small, it will be cancelled, otherwise will lead to "something-for-nothing" scenario which usually messes up UI. If the limit order is owned by the bad-debt-holder account, we don't like it to be cancelled, instead, we treat it like a debt position (which will overpay when filling the last Satoshi of collateral).

2. In case when the bad-debt-holder owns several bad debt limit orders for a same asset, is it better to combine the orders into one limit order and average out the selling price? I tend to say "yes", because a) it frees memory, and b) it increases the chance that all bad debts get filled, although it may lead to a larger order hanging in the market which may add psychological pressure to traders.

[bench]

The account with collateral under 1 gets a negative entry for BTS and will be balanced to 0, when price of BTS is high enough again?

Isolating the problem is the best way dealing with this problem, but we need to make the barrier as high as needed to not get a black swan.
This fits better in a different topic:
https://bitsharestalk.org/index.php?topic=27315.0

[R]

I like the idea of not performing a global settlement if a very small amount is under-collateralized, maintaining the normal function of the bitasset, but it does feel like the individual debt holder in said position is getting off lightly given that they defaulted on their loan.

It'd be great if their account was partially nerfed until their under-collateralized position is bought off the market, like temp-disabling LTM (inflating their BTS DEX fees), perhaps disabling borrowing the same bitasset or even highlighting their account as a known "bad debt holder" within in the BTS DEX UI (similar to known-scammer account warnings)?

Do you not think that global settlement as it's currently implemented should trigger if a majority of a bitasset's supply have defaulted on their loans though? Or should the proposed mechanism operate for the full 100% of supply?

[bitcrab]

BSIP-18 doesn't guarantee recovery either. If BTS continues to go down, neither solution will help.

@abit 's suggestion is better than BSIP-18 because it limits the damage to only the undercollateralized positions, while leaving the rest of the market intact.

Exactly, that's why I like it.

IMHO, in % sense, collateral requirements should be increased while market is bullish; then when market turns to bearish, there will be more spaces to release risks.

Interesting, I understand that logic, but am surprised to see you say it, since doing so would dis-incentivize trading and shorting in particular. Wasn't it you that said 175% collateral was too much in bullish conditions?

I know I've seen bitcrab and others talk favorably about allowing CR to go < 100% and "not to penalize debt holders", but I believe we should use the carrot and the stick to keep them trading by the rules, which help to keep the ecosystem safe and fair for all.

I believe abit means that in bull market 175% may be low and need to increase

exactly speaking, now I just do not want the independent <100% ratio debt position trigger global settlement, abit's suggestion here seems good.

[Thom]

BSIP-18 doesn't guarantee recovery either. If BTS continues to go down, neither solution will help.

@abit 's suggestion is better than BSIP-18 because it limits the damage to only the undercollateralized positions, while leaving the rest of the market intact.

Exactly, that's why I like it.

IMHO, in % sense, collateral requirements should be increased while market is bullish; then when market turns to bearish, there will be more spaces to release risks.

Interesting, I understand that logic, but am surprised to see you say it, since doing so would dis-incentivize trading and shorting in particular. Wasn't it you that said 175% collateral was too much in bullish conditions?

I know I've seen bitcrab and others talk favorably about allowing CR to go < 100% and "not to penalize debt holders", but I believe we should use the carrot and the stick to keep them trading by the rules, which help to keep the ecosystem safe and fair for all.

[pc]

BSIP-18 doesn't guarantee recovery either. If BTS continues to go down, neither solution will help.

@abit 's suggestion is better than BSIP-18 because it limits the damage to only the undercollateralized positions, while leaving the rest of the market intact.

[armin]

Actually, thinking about it more, this solution will cause a number of major problems:

1. As the price moves down sharply, there will be more and more "stuck" orders on the order book (accumulation)
2. The next time a bull market is in swing, the stuck orders will prevent the price from going to new highs

This solution is actually "shorting a bull market", meaning it creates a debt in a bear market (accumulated orders) that needs to be repaid when a bull market is in swing.

Thoughts?