Bitasettes and the "black swan" (Daniel Larimer)

Bitasettes and the "black swan" (Daniel Larimer)

The black swan is a very unlikely, but still possible event. The concept was first introduced by Nassim Nicholas Taleb in his book The Black Swan: Under the Sign of Unpredictability. All debts and contracts are vulnerable to sudden and unexpected market fluctuations, and it would be unreasonable for investors to ignore these events, which are more common than I would like to believe. Bitassets (BitAssets), such as BitUSD and BitGold, are no different from any other financial tool and have certain limits beyond which they can not maintain their link to the market. Today I would like to consider which scripts lead to a binding failure, and how the BitShares network automatically responds to them.

Unlikely

According to Wall Street standards, BitShares is extremely conservative in its credit policy, because it allows customers to borrow only up to 33% of the value of their collateral. Most banks consider it quite conservative to lend 80% of the value of collateral and often reach almost 100%. The loan is secured until the value of the collateral is greater than the borrowed amount.

In the case of BitShares, we assumed that the collateral (in the BTS tokens) could be as volatile as Bitcoin in the worst days. In a matter of days, he lost 25% or more of his value. Not so long ago Bitcoin in just 7 days lost 42% of its value, and with it almost all the altcoyins. Such a level of oscillation is within the limits allowed by the Bitasset design, but leads to margin calls for many short positions (shorts).

To "break" BitUSD, the cost of BitShares should decrease by 67% in a market where no one wants to sell enough BitUSD to cover all existing shorts. From a purely practical point of view, this fall would have to occur for several days in thin markets, where no price rebound is expected. Such a situation is possible and can be caused by an innumerable number of events, most likely errors in the code, hacking wallets or government actions.

As much as we do not want to pretend that this will never happen, we can say with confidence that at some point this will happen with some bitasetas, because even if the BTS does not lose its value, the value of gold or silver can grow by 300 %, while the price of BitShares will remain the same. Thus, the Black Swan can not be due to the fault of BitShares or even crypto currency.

Setting a black swan

For bitasseots, we define the "Black Swan" as a situation where the value of the least secured short position is less than the balance obtained on the basis of the median price from the quotes published by the witnesses. When this happens, the network can no longer store the binding, without attracting the assets of equity holders or other shorts. Socialization of this risk will be reflected either on shorts that were active in maintaining their collateral, or on holders who were not actually participants in speculation. Given that the potential costs of maintaining the binding are unlimited, we decided to repay BitUSD's debts with an available security.

Instead of trying to keep the binding at any cost, BitShares provides the opportunity to buy out BitUSD for the minimum price at around $ 1 USD or by the collateral ratio of the least secured short position. It was also decided to set for BitUSD such conditions that it could be automatically converted at any time to BTS at the interest rate of the least secured short.

The least provided shorts will not get back anything, and all the other shorts will receive the remainder of their deposit after the calculation. All are counted at the same price.

Impact of quotations

The decision to attack the "Black Swan" is made on the basis of quotations from witnesses from the top. Under normal market conditions, almost all transactions are made at a price approved by the persons exposing the warrants. All shorts and related orders determine the restrictions that protect them from arbitrary price changes in quotations by the witnesses. Even the call margin can not be fulfilled if the highest bid price is lower than the call margin price and is within 10% of the price of the quotes. In fact, the witnesses can confirm the call margin, but they can not organize it if the market does not agree.

In low liquidity markets, witnesses can provoke margin calls, but only pretending that the collateral is worth less than it actually is. In a very unlikely scenario, when they manage to manipulate the market and quotes, they can provoke liquidation in the case of the "Black Swan". If this happens, first of all it will affect the owners of BitUSD, which will receive BTS, whose real value is much higher than the dollar. It is understood that an obvious "attack" did not lead to a real drop in the price of BTS, otherwise it would be a real "Black Swan".

In other words, if prices and the market were compromised, most of the risk of artificially forced liquidation will have to