bsips/bsip-0018.md

BSIP: 00018
Title: Revive BitAsset through buying Settlement Pool
Authors: Fabian Schuh
Status: Draft
Type: Protocol
Created: 2017-06-05
Discussion: https://bitsharestalk.org/index.php/topic,24322.0.html
Worker: FIXME

Abstract

BitAssets, i. e. market-pegged assets (MPA) like bitUSD in BitShares can suffer a "global settlement" event. After global settlement, the asset is effectively rendered useless. This BSIP proposes a protocol change to enable resolving a global settlement so that affected assets can be continued and put to good use again.

Motivation

The necessity of reviving bitassets has already been discussed in BSIP-0017, and is unquestioned.

Market-pegged assets, aka SmartCoins are among the core features of the BitShares blockchain and as such provide one of our unique selling points.

MPAs can suffer a "global settlement" event. A global settlement occurs when the least collateralized short position has insufficient collateral to buy back the borrowed SmartCoins at the current feed price. What happens then is that the MPA is tagged with a "settlement price", defined as the collateral ratio of the least collateralized short. All short positions are closed automatically, by collecting sufficient collateral into a settlement pool and paying out the remainder to the short's owners. MPA holders can use the forced settlement operation to receive their share from the settlement pool in exchange for their MPAs. Even after global settlement, market-pegged assets can still be transferred or traded, but they can no longer be borrowed.

Currently, in BitShares, there is no actual way to resolve the global settlement, but eventually, all significant holders will have to settle their positions to obtain BTS for their long position. Some dust will remain scattered all over the place, where the value of the dust position is lower than the fees required to get rid of it.

Rationale

When a market-pegged assets undergoes a global settlement, one of the crucial mechanisms that support the peg (namely "margin calls") is no longer available. However, other mechanisms, such as the "face-value", trading and settlement still exist and, unless the valuation of BTS decreases significantly, the outstanding debt (the BitAsset long positions) are still collateralized by approximately 100% through the settlement pool at the fixed settlement price.

This means, if a global settlement event happened on USD at a price of 1 bitUSD/BTS, then an outstanding debt of 1000 bitUSD would be backed by 1000 BTS in the settlement pool of the bitUSD asset and no other call positions would be open by anyone else. Every bitUSD long position could, in this case, claim BTS from the settlement pool at a rate of 1:1.

Proposal

All that is needed for the asset to be revived is:

• empty the settlement pool
• re-enable price feeds

Since after a global settlement, the collateral for the outstanding long positions are stored in the settlement pool, we here propose to obtain the funds in the settlement pool and its outstanding debt from the network. Since the collateral ratio of the settlement pool after a global settlement is 100%, obtaining the settlement funds in order to convert it into an open call position requires to also provide additional collateral or reduce the debt in order to not cause another global settlement or margin call right away.

Specifications

Bugfix: MPAs that have seen a global settlement cannot be settled after the price feed expires

It has turned out that force-settling an MPA requires a valid price feed even when the MPA has a settlement_price set. This is clearly a bug, since in that case the settlement price is independent from the price feed. Furthermore, publishing price feeds is no longer possible after a global settlement, so the time when settlement is possible at all is limited to the expiration period of the price feed of the MPA.

This bug will be fixed. See https://github.com/cryptonomex/graphene/issues/664#issuecomment-254056746 for a discussion.

Auto-revive empty bitassets

A bitasset is "empty" if nobody is holding a positive amount of it anymore. The only reasonable exception to this rule is the pool of accumulated fees belonging to the asset itself. This situation can occur after all holders of a globally settled asset have settled their position via forced settlement.

The emptiness of a bitasset can easily be determined. When the BitAsset is empty, the remainder of the settlement fund will be paid out to the issuer, the accumulated fees and the current supply are reset to zero, and the settlement price is cleared.

bid_settlement_funds_operation

This applies only to SmartCoins, not to Prediction Markets.

The idea of turning the settlement fund into a short position when its value has increased sufficiently can easily be extended. If the value of the settlement fund itself is not sufficient to create a sufficiently collateralized short position (in terms of price feed and MCR), an investor could volunteer to add the required amount of collateral to the fund and take ownership of the resulting short position (collateral+debt).

This operation is all that is needed empty the settlement pool and re-enable price feeds. It has the following payload:

• fee (asset_type): The operation requires a fee to be paid
• symbol (asset_id_typ): Symbol that has a settlement fund to be claimed.
• account (account_type): This account obtains the collateral as well as the debt (i.e. call position) and has to either pay additional collateral, provide shares of the BitAsset to reduce the outstanding debt, or a combination of both.
• additional_collateral (asset_type): Collateral paid by the account in order to support the call position
• obtain_settlement_funds (asset_type): The amount of settlement funds the account is willing to obtain

The operation works as follows:

1. It pays a fee
2. It reduces the account's balance by debt. The debt is used to reduce the outstanding shares of the globally settled BitAsset.
3. It reduces the account's balance by collateral. The collateral is used to initially support the accounts' call position. However, technically, only little additional collateral is required (if the valuation of the collateral hasn't change since the global settlement) if the owner accepts a margin call.
4. The global settlement flag is removed from the asset.
5. The asset is re-enabled such that price feeds can be produced again.
6. After sufficient price feeds, the asset can be borrowed again.

The required checks for the operation are:

• Has the asset globally settled?
• Are funds in the settlement pool?
• debt > 0 or collateral > 0
• obtain_settlement_funds <= settlement_pool
• the account has sufficient balance to cover additional_collateral

If the checks are successful, a call_order_object belonging to the investor will be created or updated as described above. Then, the settlement price and settlement_fund will be cleared.

The fee for this operation will be paid by the investor/recoverer. The fee is equal to the fee of the call_order_update operation.

Discussion

Sufficient Collateral

Given that at the time of claiming the settlement funds, the blockchain cannot know the valuation of the collateral, the user needs to ensure that sufficient collateral is provided to support the call position after the price feeds are refreshed. Otherwise, the asset will either experience another global settlement event right away, or the call position will be margin called. In any way, it is up to the user of the above operation to take that risk.

Partially Obtaining Settlement Funds

In the case a widely used BitAsset is globally settled, the costs of providing the collateral can be shared among multiple participants by means of only obtaining a fraction of the settlement pool.

BitAssets using BitAssets as collateral are unaffected

One huge advantage of this approach is BitAssets that are collateralized by other BitAssets are not directly affected by this proposal. Even though the economical debt of such asset may be argued about if the collateral asset experienced a global settlement, the technical debt is unaffected. Converting the settlement pool into a regular call position through this proposal would not only restore the original BitAsset, but also reset the collateral of the derived BitAsset.

Committee funded BitAsset Recovery

Cost vs. Profit

This operation opens an interesting cost vs. profit trade-off for those willing to take the risk of using this operation that we would like to discuss. Keep in mind that

• the valuation of the collateral may be volatile (e.g. in case of BTS)
• after global settlement, the long positions can settle and thus reduce the debt as well as the settlement pool

Market participants that are willing to take risk may want to obtain a larger chunk of a settlement pool as it means an instant short position.

Feeds

Re-collateralization is deliberately not restricted to the issuer of the globally settled bitasset. The intent here is to incentivize potential investors. Effectively, during an uptrend in the value of the collateral, this works like a reverse auction. A higher value of the collateral results in a lower required amount for re-collateralization, i. e. the chance/risk ratio increases. This incentive makes sense, because additional collateral is in the best interest of the holders of the settled BitAsset.

This "reverse auction" ends when the BitAsset is auto-revived by creating a short position for the issuer. At that point, an "investor" could re-collateralize with zero risk, which is no longer in the interest of the holders.

Summary for Shareholders

This proposal presents a flexible way of reviving a BitAsset that has experienced a global settlement event. The blockchain or shareholders do not need to take any risk as the proposal only offers a new way for market participants to (partially) revive the BitAsset.

Copyright

This document is placed in the public domain.