Hi cob,
Thanks for this informative post. Really appreciate the quality of your analysis : The value of bitUSD is protected by its decentralized nature.
One question:
You mention: "Any user can create a BitUSD by locking up at least 2 dollar's worth of BTS as collateral." To me, this is an area of (market) risk as a drop in the BTS value may impact the reliability of the BitUSD.
Do you know whether there are mitigation for this?
To illustrate my question: I collateralize 5 BTS today and receive 2 bitUSD. The price of BTS halves the next day. How can bitUSD keep its value? Only by the long term expectation of a higher BTS value?
Thanks again for the good post.
I believe the blockchain forces the issuer to cover his position when the collateral gets too low.
The system also starts with the tokens that have the least collateral. So if you don't want to be the one to get called up to cover your position you can put in 10x the collateral if you want!
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Bitshares kind of hacks its way around this. If your collateral ratio ever falls below 1.75, you get put on the Margin Call list; the account with the lowest collateral ratio on this list immediately gets its entire short position put on an order book to buy back BitUSD at a 10% premium. For small drops in the BTS price this is fine; it effectively penalizes the accounts with the lowest collateralization, and serves to reduce the supply of BitUSD.
For large drops in the BTS price, this can be a complete catastrophe. If a short position is ever undercollateralized (collateral ratio <1), BitUSD has a stroke and shuts down, immediately closing all short positions and leaving only a little BTS in a shared collateral pool.
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