On the impossibility of paying all BitAssets debts on the Bitshares blockchain

[pc]

I didn't say that MSSR = 10% and GS were *sufficient* incentives. But at least there *were* incentives. Now there are none.

[Thul3]

Let's suppose that:

1 Bts = 1 USD and that Joe has 1000 Bts.

That means Joe has 1000 USD worth of BTS.

Joe uses his 1000 Bts to borrow 500 BitUSD at a CR = 2 from the Blockchain.

Then Joe uses his 500 BitUSD to buy 500 Bts from Ana. Ana who, being risk averse, stores those 500 BitUSD in a cold wallet.

Now Joe has 1000 Bts frozen as collateral on the blockchain and 500 Bts available in his wallet.

Joe uses his 500 Bts to trade and get some profits from Ken, who holds several cryptocurrencies but no BitUSD.

Suppose also that there are no more players in this little world.

As time passes, bts price decreases to 1 Bts = 0.5 USD, and Joe is margin called.

He wants to pay his debt immediately, he looks desperately for anybody who can sell him some BitUSD but there is none. Because all the created BitUSD is in Ana's cold wallet.

Even if Joe has made profits he will be unable to pay no matter what because no BitUSD is available in the market.

Under the current protocol, Joe portraits the situation of many debtors and Ana that of many BitAsset holders. The problem is solved if Joe is allowed to pay his debt in an asset other than BitUSD.

This is the systematical error i'm talking about which will always accure at a point no matter what price BTS has.
If the longterm holders of bitassets get a high % number of that existing bitasset it will always lead that people won't get their margin call eaten and that they can't close their debt anymore because there are not enough bitassets on the market.

The only possibility is to add more collateral which is needed twice the amount of bitassets.
However when seeing how price feeds get manipulated into a big down trend just by throughing a few million BTS on CEX than every debter is going to ask himself if it makes sense to put more collateral into the debt (which btw increases the risk instead of decreasing) when the price feed is being so easy manipulated and gamed.

1. MSSR - a large MSSR rewards holders for selling into margin calls. Because this mechanism leads to a premium on the market price (and because it is expensive for debt holders), MSSR has been reduced further and further, which has improved the peg but also removed the incentive to sell into margin calls.

Which leeds to a even bigger downtrend of BTS price

2. Global settlement aka Black Swan - global settlement is like a Damocles' sword pending above both BitAsset holders and debt holders. It sets a limit to the promise of stable value, and thus provides another incentive for BitAsset holders to sell their holdings, because if they stick to them for too long they will start losing value. Thanks to Global Settlement Protection, this threat has been muddied and partially removed.

People didn't sold their bitUSD even when GS accured.

[pc]

The problem is solved if Joe is allowed to pay his debt in an asset other than BitUSD.

No it isn't. How should it work?

1. Ana still has 500 bitUSD and relies on the settlement guarantee, i. e. she expects to be paid $500 worth of BTS whenever she wants to cash out.
2. The blockchain has created the bitUSD from thin air. It can only destroy them when they are paid back. If Joe pays his debt in BTC, then the blockchain can't burn the BTC, and even if it did the bitUSD would continue to exist.

I agree with your analysis that with many people sticking to their bitAssets instead of trading them the system can't work if the collateral is in a downtrend. However, BitAssets come with the promise of stable value. With that promise, it is only natural (and perfectly acceptable IMO) that people buy and hold BitAssets when BTS is in a downtrend.

What's missing is an appropriate incentive for BitAsset holders to sell their holdings, thus reducing the debt. The original design of BitAssets came with two such incentives, both of which have been effectively scrapped by now:

1. MSSR - a large MSSR rewards holders for selling into margin calls. Because this mechanism leads to a premium on the market price (and because it is expensive for debt holders), MSSR has been reduced further and further, which has improved the peg but also removed the incentive to sell into margin calls.

2. Global settlement aka Black Swan - global settlement is like a Damocles' sword pending above both BitAsset holders and debt holders. It sets a limit to the promise of stable value, and thus provides another incentive for BitAsset holders to sell their holdings, because if they stick to them for too long they will start losing value. Thanks to Global Settlement Protection, this threat has been muddied and partially removed.

[Sapiens]

Let's suppose that:

1 Bts = 1 USD and that Joe has 1000 Bts.

That means Joe has 1000 USD worth of BTS.

Joe uses his 1000 Bts to borrow 500 BitUSD at a CR = 2 from the Blockchain.

Then Joe uses his 500 BitUSD to buy 500 Bts from Ana. Ana who, being risk averse, stores those 500 BitUSD in a cold wallet.

Now Joe has 1000 Bts frozen as collateral on the blockchain and 500 Bts available in his wallet.

Joe uses his 500 Bts to trade and get some profits from Ken, who holds several cryptocurrencies but no BitUSD.

Suppose also that there are no more players in this little world.

As time passes, bts price decreases to 1 Bts = 0.5 USD, and Joe is margin called.

He wants to pay his debt immediately, he looks desperately for anybody who can sell him some BitUSD but there is none. Because all the created BitUSD is in Ana's cold wallet.

Even if Joe has made profits he will be unable to pay no matter what because no BitUSD is available in the market.

Under the current protocol, Joe portraits the situation of many debtors and Ana that of many BitAsset holders. I only see two possible solutions for this problem.

• Joe voluntarily closes his position. In that case, the collateral in excess of debt is returned back to Joe. Because there are still 500 BitUSD in the hands of Ana and those 500 BitUSD need to be backed by something, the collateral retained from Joe enters a pool of debt management that needs to be replenished by some fees.
• If Joe doesn't close his position before his CR falls below a certain threshold, his position (both debt and collateral) is taken over by the pool.  Much like in the traditional markets, long and short positions have closing dates and/or prices.

If, as is happening today, Joe increases his voting power by going into debt and uses that inflated voting power to prevent his position to be taken over, then the whole system is unsustainable. This is because Ana will eventually understand that her 500 BitUSD won't be backed justly and, being risk averse by hypothesis, she will leave the system. Ken, on his part, having only Joe to trade on a system which is controlled by Joe, will also leave, leaving Joe alone.