New mechanism to handle bad debt (black swan)

[Sapiens]

The debt holders concern about global settlement and BitAsset Holders concern about under collateralized, there is solution available for both parties but need some changes on BSIP18 - Revive BitAsset through buying Settlement Pool.

Propose Solution:
1. Rather than force close all margin positions and move to settlement pool, the new solution is force close MCR <1 Margin Positions only and move to settlement pool, this will solve debt holders concern about global settlement.
2. Same as BSIP18, everyone can Use BTS to bid for those debts in settlement pool but we need to give them incentive to do so because investors will prefer to create new margin position rather than use MCR 1.6 to revive those debt.
3. Asset Owner set a new parameter call Minimum ReCollateral Ratio (MRR) eg. MRR 1.1
4. With MRR 1.1, investors can use 0.1 BTS to obtain 1 BTS Debt, this is a huge incentive for investors to keep BitAsset fully collateralized, this will solve BitAsset Holders concern about under collateralized.

Thanks for your contribution Bangzi,

The apparent problem of this approach is that, if people can get BTS at a premium price, they will not buy in the market, that would simply create a downward pressure on price. Also, the deeper structural causes of GS wouldn't be attacked.

I invite everyone to please read the following document, so that a bigger picture of whole issue emerges:

https://steemit.com/bitshares/@aguerrido/feedback-loops-and-analysis-of-bitshares-architecture-in-relation-to-smart-assets-sustainability

[Sapiens]

Hey guys, I wrote the following analysis regarding the issue. GS is only the manifestation of some more profound structural flaws in the Bitshares protocol. Given all that this community has build during the last years, I am fairly convinced that correcting this flaws will take us to the next level.

It's a pretty long read but, nonetheless worth the time.

Abstract


Eliminating the negative impact of Global Settlement events (GS) is certainly a priority for the Bitshares ecosystem. Currently, GS is widely regarded by the Bitshares community as a natural consequence of harsh market conditions, bad debtors and poor marketing strategy. Contrary to this perspective, I maintain here, that GS might be the consequence of some other more fundamental factors in the dynamics of the whole Bitshares protocol. I postulate that if these factors are modified, the probability of a GS or a similar event is drastically reduced almost immediately and may even tend to disappear in the long term. These factors include, but may not be limited to, two feedback loops currently present in the dynamics of workers’ financing and Margin calls. This work attempts to elucidate the architectural nature of the problem, out of which GS is only an inevitable result. Also, a new mechanism is proposed.   

Here is the link:

https://steemit.com/bitshares/@aguerrido/feedback-loops-and-analysis-of-bitshares-architecture-in-relation-to-smart-assets-sustainability

[kingscrown]

The debt holders concern about global settlement and BitAsset Holders concern about under collateralized, there is solution available for both parties but need some changes on BSIP18 - Revive BitAsset through buying Settlement Pool.

Propose Solution:
1. Rather than force close all margin positions and move to settlement pool, the new solution is force close MCR <1 Margin Positions only and move to settlement pool, this will solve debt holders concern about global settlement.
2. Same as BSIP18, everyone can Use BTS to bid for those debts in settlement pool but we need to give them incentive to do so because investors will prefer to create new margin position rather than use MCR 1.6 to revive those debt.
3. Asset Owner set a new parameter call Minimum ReCollateral Ratio (MRR) eg. MRR 1.1
4. With MRR 1.1, investors can use 0.1 BTS to obtain 1 BTS Debt, this is a huge incentive for investors to keep BitAsset fully collateralized, this will solve BitAsset Holders concern about under collateralized.

I've been thinking of something vaguely similar, but I think there are some significant issues.

Here is one concern with this proposal: (I'll use BitUSD as an example.) What if BTS continues to fall after one of these force-settle events happens? Then you'll effectively have two "different" BitUSDs -- the stuff that's fully-collateralized, and the stuff that is collateralized only by the little bit of BTS in its own settlement pool. Even with your low MRR, BTS doesn't have to drop all that much for it to be very expensive for someone to bail out the settlement pool, so it could conceivably sit there for a very long time.

In a really nasty market, there could easily be millions of BitUSD sitting undercollateralized in settlement pools. If things get bad enough, you could have so much BitUSD in the settlement pools that BitUSD is, overall, undercollateralized -- even though the usual mechanism is still operational.

This question is one of the core ones I'll be dealing with if my research worker is approved.

yes and theres no way to solve it at this point.

[biophil]

The debt holders concern about global settlement and BitAsset Holders concern about under collateralized, there is solution available for both parties but need some changes on BSIP18 - Revive BitAsset through buying Settlement Pool.

Propose Solution:
1. Rather than force close all margin positions and move to settlement pool, the new solution is force close MCR <1 Margin Positions only and move to settlement pool, this will solve debt holders concern about global settlement.
2. Same as BSIP18, everyone can Use BTS to bid for those debts in settlement pool but we need to give them incentive to do so because investors will prefer to create new margin position rather than use MCR 1.6 to revive those debt.
3. Asset Owner set a new parameter call Minimum ReCollateral Ratio (MRR) eg. MRR 1.1
4. With MRR 1.1, investors can use 0.1 BTS to obtain 1 BTS Debt, this is a huge incentive for investors to keep BitAsset fully collateralized, this will solve BitAsset Holders concern about under collateralized.

I've been thinking of something vaguely similar, but I think there are some significant issues.

Here is one concern with this proposal: (I'll use BitUSD as an example.) What if BTS continues to fall after one of these force-settle events happens? Then you'll effectively have two "different" BitUSDs -- the stuff that's fully-collateralized, and the stuff that is collateralized only by the little bit of BTS in its own settlement pool. Even with your low MRR, BTS doesn't have to drop all that much for it to be very expensive for someone to bail out the settlement pool, so it could conceivably sit there for a very long time.

In a really nasty market, there could easily be millions of BitUSD sitting undercollateralized in settlement pools. If things get bad enough, you could have so much BitUSD in the settlement pools that BitUSD is, overall, undercollateralized -- even though the usual mechanism is still operational.

This question is one of the core ones I'll be dealing with if my research worker is approved.

[abit]

The debt holders concern about global settlement and BitAsset Holders concern about under collateralized, there is solution available for both parties but need some changes on BSIP18 - Revive BitAsset through buying Settlement Pool.

Propose Solution:
1. Rather than force close all margin positions and move to settlement pool, the new solution is force close MCR <1 Margin Positions only and move to settlement pool, this will solve debt holders concern about global settlement.
2. Same as BSIP18, everyone can Use BTS to bid for those debts in settlement pool but we need to give them incentive to do so because investors will prefer to create new margin position rather than use MCR 1.6 to revive those debt.
3. Asset Owner set a new parameter call Minimum ReCollateral Ratio (MRR) eg. MRR 1.1
4. With MRR 1.1, investors can use 0.1 BTS to obtain 1 BTS Debt, this is a huge incentive for investors to keep BitAsset fully collateralized, this will solve BitAsset Holders concern about under collateralized.

I think bidding doesn't solve the issue that bitcrab described.

Bidding only happens when price recovered. But we need to encourage people to add collateral or reduce debt when price is low.

Before the higher collateralized positions get margin called or force-settled, the position owned by the pool (which should have lower CR) should be matched and filled first. That said, competing on eating margin calls is much more efficient than bidding.

[abit]

More discussions in https://github.com/bitshares/bsips/issues/179

[Thom]

Sounds like a good thing to try @Bangzi. I don't see a downside, unless it's too complex or difficult to implement. I applaud you recognizing the concern of under-collateralization.

I do suspect however that the problem with this approach will be in identifying only the under-collateralized accounts in a workable fashion, but let's see what the devs say about it.

If it were easy to identify those accounts, I would love to see them published. Perhaps public shaming might be an adequate disincentive to minimize the behavior.

[Bangzi]

The debt holders concern about global settlement and BitAsset Holders concern about under collateralized, there is solution available for both parties but need some changes on BSIP18 - Revive BitAsset through buying Settlement Pool.

Propose Solution:
1. Rather than force close all margin positions and move to settlement pool, the new solution is force close MCR <1 Margin Positions only and move to settlement pool, this will solve debt holders concern about global settlement.
2. Same as BSIP18, everyone can Use BTS to bid for those debts in settlement pool but we need to give them incentive to do so because investors will prefer to create new margin position rather than use MCR 1.6 to revive those debt.
3. Asset Owner set a new parameter call Minimum ReCollateral Ratio (MRR) eg. MRR 1.1
4. With MRR 1.1, investors can use 0.1 BTS to obtain 1 BTS Debt, this is a huge incentive for investors to keep BitAsset fully collateralized, this will solve BitAsset Holders concern about under collateralized. 

[bitcrab]

this mechanism has a big problem.

say, when one time bad debt appear, bad debt positions have been converted to sell orders in 0.04~0.06bitUSD with debts, however, as the market price fall sharply to 0.02bitUSD, bitUSD is off peg, devaluated to about 0.6USD.

which means, feed price is 0.02USD, DEX price is 0.033 bitUSD.

then bitUSD holders begin to exploit debt position owners with force settlement.

this is unfair to the debt position owners and will not help things to recover.

[akledirs]

I think such fund - bad idea. We get problem with differently collateralized debts. If all holders bitasset will want settle it, somebody not get full collateral.
Better do dinamicaly MSSR without manipulation feedprice (bsip42) - if collateralize down, then rise up margin % and after peak 1.2 down. (CR 1.75->1.2 : MSSR 0.02->0.19, CR 1.2->1.0 : MSSR 0.19-0).
For holders - peak moment - fine signal for exit from MPA with maximum premium, and after this moment there is time for action for savings own money.
For borrowers - stimulation not have very low CR and rise up it.

[Thom]

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.

True, I agree. However, lets not rely on an edge case to base our policy / decisions on. We definitely need a way to dis-incentivize traders who habitually break the rules (in this case allowing collateral to drop under 100%, or whatever minimum standard is set by committee).

Every crypto ecosystem needs to have a quality, "ungamed" reputation system. How can you argue against that when most crypto projects rely on a diverse / dispersed group of people with widely varied cultures and different levels of knowledge (about any subject, but especially economics, technology and geo-politics)? There are quite a few arguments that would end sooner and be less disruptive to communities if we had this. With that said tho rep systems are difficult to create in a way that can't be gamed or undermined in some way. Just look at how controversial flagging is on steemit as evidence.

We need to balance the needs of ALL users of BitShares, and that's not an easy task. Nobody, including traders, should get away with breaking our consensus rules without a penalty. No penalty is an incentive to break rules. IDK if a consensus to temporarily revoke LTM status can be gained or if it is the best way to do it, but I'm willing to bet if that were the penalty 2 things would happen for sure:
1 - traders and perhaps a few others will complain loudly
2 - traders would not allow their collateral to drop low enough to trigger LTM revocation, at least not twice.

IMO traders have a stronger voice here than hodlers. Not enough dedication / involvement towards longevity and utility for all longterm.

I keep hearing about the impossible trinity, what about the impossibility of this trinity:
1) Safe trading (protection from undercollaterized assets which could lead to a catastrophic cascade collapse, as we're on the verge of in mainstream / centralized / manipulated ecomomy)
2) low to zero collateral for short positions (i.e. < 100%)
3) guaranteed redemption of collateral (with some exceptions)

The only item of those 3 which does NOT currently have consensus is item #2. If tight peg is valued over items 1 or 3 then make an official proposal to  alter the rules and campaign shareholders or the few proxies in control of this ecosystem to gain consensus on it.

[xeroc]

OP updated. MSSR plays a role.

Thank you!

[abit]

I like the idea in general.
What I am not clear about is the "price" at which the bad-collateral-account would buy back from market.
Do I assume right that this would be what we used to call SWAN price (100%)?

I still believe people should pay a premium if they do not monitor the collateral properly. With 100%, they pay "nothing" extra from the market and
get out of the position "for free" - the entire stash. I still like the idea of starting to punish unmaintained call positions. Either by removing the SQPR in case the ratio goes below, say 150%, or say the OPs proposal is applied already at 105%.

OP updated. MSSR plays a role.

[xeroc]

I like the idea in general.
What I am not clear about is the "price" at which the bad-collateral-account would buy back from market.
Do I assume right that this would be what we used to call SWAN price (100%)?

I still believe people should pay a premium if they do not monitor the collateral properly. With 100%, they pay "nothing" extra from the market and
get out of the position "for free" - the entire stash. I still like the idea of starting to punish unmaintained call positions. Either by removing the SQPR in case the ratio goes below, say 150%, or say the OPs proposal is applied already at 105%.

[abit]

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.

True. Also there are bag holders don't want to be bailed out.