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bsips/bsip-0038.md

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BSIP: 0038
Title: Add target collateral ratio option to short positions
Author: Abit More <https://github.com/abitmore>
Status: Draft
Type: Protocol
Created: 2018-03-05
Discussion: https://bitsharestalk.org/index.php?topic=25924.0,
            https://github.com/bitshares/bsips/issues/51
Replaces: 0035 (partly)
Worker: To be done

Abstract

When a short position is margin called, some of its collateral will be sold and some or all of its debt will be covered accordingly.

However, usually more collateral will be sold, in comparison to the minimum amount required to be sold to maintain the maintenance collateral ratio (MCR) requirement.

This BSIP proposes a protocol change to let shortes (borrowers) have control over selling how much collateral when being margin called.

This BSIP depends on BSIP 31.

Motivation

As discussed in this forum post, current process gives manipulators big chance to short BTS and make money and increase the risk of black swan, thus hurts the BTS ecosystem. Many participants in the discussion agree that usually it's not really required to cover all debt (thus selling more collateral) when being margin called.

After BSIP 31 is in place, shorters will have more chance to not cover all debt on margin call, but it's not 100% guaranteed, and they can only accept the result passively.

Rationale

Different shorters have different expectations when being margin called:

  • some want to close their short positions completely to cut losses;
  • some want to sell as little collateral as possible to keep remaining short positions as large as possible;
  • some want to sell more than minimum required collateral to reduce the possibility of being margin called again in the near future, but don't want to close their short positions completely.

With a new "target collateral ratio" option, all these expectations can be met.

The Definition of Target Collateral Ratio

"Target collateral ratio" is an optional value which can be set onto a short position, when the position being automatically liquidized (margin called), sell no more than required collateral until collateral ratio of the position reaches this value.

  • Default value: not set, which means to sell as much collateral as possible, which is same to current behavior.
  • When the value is set but below MCR, use MCR.
  • When matching a margin call order with a force settle order, ignore this option.

The Math

Let prices described below be in terms of debt / collateral, e.g. how much CNY per BTS.

A margin call order can be matched with a limit order as either maker or taker, in any case, there would be a matching price. We can solve an equation as follows:

target_CR = new_collateral / ( new_debt / feed_price )
          = ( collateral - max_amount_to_sell ) * feed_price
            / ( debt - amount_to_get )
          = ( collateral - max_amount_to_sell ) * feed_price
            / ( debt - max_amount_to_sell * match_price )
=>
max_amount_to_sell = (debt * target_CR - collateral * feed_price)
                     / (target_CR * match_price - feed_price)

The result is a rational number, need to be rounded up to an integer.

Then, the maximum debt it wants to cover can be calculated as:

max_debt_to_cover = max_amount_to_sell * match_price

It need to be rounded up to an integer as well.

Specifications

call_order_object

The call_order_object stores current status of a short position.

Need to add a new field into it:

  • optional<uint16_t> target_collateral_ratio;

Same to other collateral ratios, the actual ratio is the value divided by GRAPHENE_COLLATERAL_RATIO_DENOM aka 1000.

Due to the uint16_t data type, the new field's maximum value is 65535, which means 6553.5%.

call_order_update_operation

The call_order_update_operation is used to open, update and close short positions. It contains an extensions field:

  • extensions_type extensions;

Need to override data type of this field so it can include the new "target collateral ratio" option.

call_order_update_evaluator

The call_order_update_evaluator is used to evaluate and apply the call_order_udpate_operation. Need to add logic:

  • only allow target_collateral_ratio to be set after the hard fork;
  • set/update/clear target_collateral_ratio field of call_order_object accordingly. Specifically,
    • set or update the field if it presents in the operation and is valid,
    • clear the field if it doesn't present in the operation or is not valid.

proposal_create_evaluator

The proposal_create_evaluator is used to evaluate and apply the proposal_create_operation, which can contain zero or more call_order_udpate_operation objects. Need to add logic:

  • only allow target_collateral_ratio to be set after the hard fork.

Call Order Matching and Filling

After a call order get matched with a limit order and about to fill,

  • if target_collateral_ratio is not set, process as before;
  • if target_collateral_ratio is set, calculate maximum amount of collateral for sale according to the equation described above, then process as before.

Rounding

Rules about rounding are defined in BSIP 35.

The rule for matching a limit order with a call order need to be revised as (new rules in bold):

  • if the call order is receiving the whole debt amount, which means it's smaller and the short position will be closed after the match, round up its paying amount;
  • otherwise,
    • if the call order has target_collateral_ratio set and is receiving the maximum debt amount calculated with target_collateral_ratio, see the call order as smaller, try to round up its paying amount;
      • for edge cases, if the call order's collateral ratio would not increase after being partially filled due to the round-up (which may even cause a black swan event in an extreme scenario), see its target_collateral_ratio as "not set" for this time, re-apply the filling rules for this match.
    • otherwise, the call order is larger, round down its paying amount.
      • if the limit order would receive nothing, cancel it (it's smaller, so safe to cancel);
      • otherwise, calculate the amount that the limit order would pay as round_up(receiving_amount * match_price). After filled both orders, if the limit order still exists, the remaining amount might be too small, so cancel it.

UI/UX

The new option need to be presented and can be used in UI after the hard fork.

When there are call orders to be filled, if target_collateral_ratio option is set, UI need to show exact amounts of collateral that another trader is able to buy according to the equation described above.

Discussion

With this BSIP, we provided a tool that can be used by shorters to keep their positions, however, it's not always the best strategy to keep as large position as possible, sometimes it's even more risky than just cutting losses. Nevertheless, how to use the tool, is up to the traders to decide.

Summary for Shareholders

"This is how it should work."

Copyright

This document is placed in the public domain.

See Also