How Global Settlements work

in bitshares •  16 days ago

How Global Settlements work

In very rough market conditions, the BitShares Blockchain can put a smart coin (such as bitCNY and bitUSD) into so called global settlement. This article tries to clear some uncertainties about how this works.

BitAssets briefly explained

On the BitShares Blockchain, every unit of a bitAsset in existence (think: 1 bitUSD) is collateralized with the core native token BTS. When borrowing 1 bitUSD, at least $1.75 worth of BTS need to be locked away. This is required to protect against market volatility of BTS and ensure that 1 bitUSD is backed by at least $1 worth of BTS.

During major market movements, some loans went far below 175% collateralization which resulted in margin calls being put into the markets to close those loans by buying back their debt in bitUSD from the internal markets and closing the loan or at least reduce their debt sufficiently.

At times, market may be unable to absorb these margin calls which lead to their collateralization being reduced further.

Global Settlement

If valuation of BTS drops further, the least collateralized loan of bitUSD may reach only $1.10 worth of BTS supporting it (100% + short squeeze protection ratio). At this point, the smart contract implementing the collateralized loans on the BitShares Blockchain performed a global settlement at the current call price.

What happened during Global Settlement

The global settlement resulted in:

  • All open loan positions are settled at the call price. Excess collateral is given back to the user.
  • Collateral is aggregated in the so called settlement fund which now holds all BTS to back outstanding bitAsset with 100% ratio.
  • Holders of units of the bitAsset are not affected directly by the global settlement

Example: bitUSD global settlement
For example, if you had a position with 2x collateral during a global settlement @ 0.0511 USD/BTS, half of your collateral will be returned to you, the other half is used to support outstanding bitUSD. With all backing BTS being aggregated to the settlement fund, there may be 150M BTS in the settlement that support 7,5M bitUSD as collateral. Assuming a valuation of $0.049 per BTS, this corresponds to $7.35M worth of BTS backing 7,5M bitUSD, or in other words $0.98 per bitUSD.

Consequences of the Global Settlement

As a consequence of the global settlement,

  • creating new collateralized loans (borrowing) is suspended,
  • margin calls are disabled, and
  • settlements execute immediately against the settlement fund and at the price of the global settlement.

How to proceed

Even though we have seen a global settlement, thanks to the implementation of BSIP18, bitAssets can be revived by two independent mechanisms:

  • Since price feeds continue on, the BTS in the settlement fund may in the future be sufficient to reach the minimum collateral ratio (currently at 175%), at this point, the bitAsset will automatically revive and borrowing as well as margin calls will be re-enabled.
  • The settlement fund and corresponding loans are auctioned sufficiently to cover the minimum collateral ratio. When that happens, the bitAsset will be re-enabled in a subsequent maintenance window.
  • When all units of the bitAsset are settled and the settlement fund reaches zero, the bitAsset will be re-enabled.

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What would be an incentive to participate in the auction? In what situation would I profit from providing collateral for a globally settled MPA?

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Basically, you provide the collateral that is missing to get back to maintenance collateral ratio and in return you get a call/debt position already. If you were to do the same by "borrowing", you'd still need to find a buyer for your bitUSD. During auction, there is debt already sitting there to be bid for.

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Your profit from auction is made by taking part of the settlement fund. For instance, you are bidding 100 BTS, and if success, you'll have a margin position with 175 BTS as a collateral. You got these 75 BTS as a bonus.

Apart from this, you are taking risk of further BTS price drop and be margin called loosing both your own 100 BTS and 75 "profit" BTS.

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It seems like the system already has 100% collateral (at GS price). So when 75% more is collected, then it is revived - assuming the same price. So when you bid 75 BTS, you get a net position of 75 BTS: 175 BTS in collateral and -100 BTS worth of MPA. That's exactly what you paid. Net zero (if indirect effects are discarded). So the only way to profit is to participate and wait for the price to rise.

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But now price is < GS price and thus 75% of 1 bitUSD cost you more in BTS.. but same in $.

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Could it be that it works as follows:

  • The system (no one) owns all the globally settled short positions (MPA and debt).
  • At revival, all the short positions are given to those who have bidded, in proportion to their bids, and none left to the system. Regardless of amounts bidded.

If that's how it works, then assuming there's 1 000 000 bitUSD shorts and 20 000 000 BTS debt (at $0.05 / BTS), and 175% MCR, then the revival would happen when there's either 35 000 000 BTS in collateral, BTS goes to $0.0875, or something in between. Would the following also be true: I bid 1BTS in collateral, and no-one else bids anything, then BTS goes up to $0.0875. I get the debt of $1M and collateral position with 20M BTS.

Anticipating a revival, that would be a pretty interesting opportunity.

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In the auction, those that have provided higher collateral ratio have priority over those with less collateral providing in bids

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So they aren't distributed in proportion to funds bidded? Can the result be that I commit funds but don't receive the short position?

As long as a man from the street can't understand what you are talking about, crypto money will not become mainstream. I even can't access my account on the new bitshares website anymore. What is going on there?

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Indeed. "Very rough market conditions" hmmm ... doesn't sound very mathematical to me. Actually sounds arbitrary.

Actually sounds like bitCNY investors (whales, on committee) are successful stealing from bitUSD investors. Is that "very rough"?

What's the difference between bitusd and dai