Overview of BitShares' Internal Mechanisms
BitShares is a high-performance decentralized exchange (DEX), and one of its core innovations is the introduction of Market-Pegged Assets (MPAs), also known as SmartCoins, such as bitUSD and bitCNY. These SmartCoins are designed to track the price of real-world assets, with their value backed by the core token BTS as collateral. To ensure the price peg of SmartCoins and the overall stability of the system, BitShares has designed two key mechanisms: Forced Liquidation and Forced Settlement.
Forced Liquidation / Margin Call Mechanism
Definition and Purpose
The Forced Liquidation mechanism, similar to a Margin Call in traditional finance, aims to protect SmartCoin holders (i.e., lenders) from potential losses. When a user borrows SmartCoins by collateralizing BTS (essentially shorting that SmartCoin against BTS), a lending position is formed. This mechanism ensures that the borrowed SmartCoins are always sufficiently collateralized.
Trigger Conditions and Execution Method
- Trigger Conditions: Forced liquidation is triggered when the collateralization ratio of a lending position falls below the "Maintenance Collateral Ratio (MCR)" set by BitShares witnesses. Typically, SmartCoins require 100% or more BTS collateral, often exceeding 200% in practice.
- Execution Method: The system automatically sells the collateral (BTS) on the market to buy back the borrowed SmartCoin at market price, thereby closing the position and repaying the debt. This process aims to restore the collateralization ratio to a safe level or completely close the risky position.
- Protection Measures: BitShares also has "Short Squeeze Protection (SQP)" and "Maximum Short Squeeze Ratio (MSQR)" to prevent short positions from suffering excessive losses during extreme price fluctuations or market manipulation.
Forced Settlement Mechanism
Definition and Purpose
The Forced Settlement mechanism is designed for SmartCoin holders (i.e., the "long" side), allowing them to convert their SmartCoins into an equivalent amount of BTS at a fair price when market liquidity is insufficient. The core purpose of this mechanism is to ensure that SmartCoins can maintain their price peg, allowing holders to convert them into collateral even in low trading volume situations.
Trigger Conditions and Execution Method
- Trigger Conditions: Any SmartCoin holder can request forced settlement at any time.
- Execution Method: When a forced settlement request is made, the system closes the lending/short position with the lowest collateralization ratio and sells its collateral (BTS) to fulfill the settlement request. This effectively converts the SmartCoin into BTS.
- Daily Limit: To prevent manipulation due to external price fluctuations, the system usually sets a maximum daily settlement volume, for example, 2% as defined by the committee.
- Fee Mechanism: In February 2020, a proposal (BSIP 87) suggested introducing a "forced settlement fee rate," allowing asset owners to configure this fee, which would be paid in collateral assets when forced settlement is executed, to increase network revenue.
System Stability and Risk Considerations
The Forced Liquidation and Forced Settlement mechanisms together form the cornerstone of BitShares SmartCoin price pegging. Through automated market actions, they adjust positions when collateral values fluctuate, thereby maintaining the value peg of SmartCoins to their target assets. SmartCoin holders benefit from forced settlement, ensuring their asset's value peg; while borrowers/short sellers must maintain sufficient collateralization ratios to avoid liquidation risk.
However, these mechanisms are not without risk. In extreme market volatility, such as a sudden and rapid drop in the value of the core BTS token, the collateral may become insufficient to buy back market-pegged assets at the new actual exchange rate, leading to a "black swan event." In such cases, SmartCoins may be settled at a price unfavorable to users, exposing them to the volatility risk of BTS. Users should fully understand these risks before participating and can check the real-time trend of BTS and related information on market platforms like Svmuu.
Trading Channels
The BitShares core token BTS can be traded on exchanges that support it. As of the time of writing, users can find BTS trading pairs on CEXs such as MEXC and Gate. Please note that trading cryptocurrencies involves risks, and it is recommended to verify platform information and market liquidity before trading.
