Think of it like a home equity loan (HELOC).   Let's say you have a $500k home and you take a $250k loan on it and you get cash.  You can now spend, save  or invest the cash.  You don't have to pay interest to a bank either.   That's how bitUSD/Smartcoins work. 

Banks should require a lot more collateral to create new money, but they don't so there are greater systemic risks in the modern economy.

The collateral requirements are this high because the crypto currency BTS is highly volatile and we need to ensure the peg even if the price drops by more than 30%. I assume that once the internal markets become more liquid, the committee might be able to reduce the maintenance collateral ratio for some assets, but I don't see this happening in the near future.

Hi Dan, still trying to get my head around this, could you explain why points 4 and 5 are advantageous, please?

CG

1.  Bitshares supports many pegged assets letting the shareholders decide which ones and to what extent they want to support.  This gives free-market variety and is ideal for an exchange.
2. The Steem Dollar is the only backed-asset on Steem.  All Steem holders are in the position of backing the steem dollars.

At very liquid market you dont't have to be BTS bull to short BTC - you're just playing the waves.

posted on a branch .. ;/

.

>  There is currently $100K worth of BitUSD backed by $9M worth of BitShares. This means that the ultimate source of value backing BitUSD is 60x greater than NuBits.

$9M is the entire market cap of BitShares at the moment. Since not all BTS are tied into collateral for bitUSD, I doubt that the ratio is 60x, but it is surely more than 4x. Would be great to have a simply way to call this kind of data from the node.

I find the terminology a bit confusing too. If I understand it correct, you can think of "borrowing" in this case as creating or issuing new bitUSD tokens. You would have to back these tokens with your own funds as collateral. You are "borrowing" a newly issued bitUSD from "the network" in the sense that 1) You can return that bitUSD to "the network" at any time to get your collateral deposit back 2) "The network" can reclaim its bitUSD back at any time (i.e. when your collateral becomes less than a threshold or when some sort of forced settlement is required) by buying bitUSD on the market on your behalf using *your* collateral funds, keeping (and supposedly destroying) the purchased bitUSD, and handing over the remaining collateral to you.

Well, I didn't mean to compare it. I merely wanted to show that the underlying  mechanics are superior and (maybe wrongly) assumed people reading this article know how nuBits works. Thanks for reminding me to better stay more neutral.

I'll try to answer based on what I remember off the top of my head, but it has been a while since I've looked at this stuff in detail (so @xeroc, @dan, or anyone else please correct me if I am wrong).

> In the event of a margin call that cannot be fully 'covered/filled' below the 10% short squeeze protection; how is the remaining outstanding BitUSD covered?

If I remember correctly, I believe the margin call acts as a limit order up to that 10% offset price. That means if it isn't fully filled at the time of margin call, it just sits there in the order books until it is filled. If a margin call order sits in the order books without being filled long enough as the collateral price changes, it is possible that the least collateralized short position can become undercollateralized. The moment this happens, it triggers a global settlement for all BitUSD holders at the highest price possible that the least collateralized short position can support. This means smartcoin holders are forced out of their long position into the underlying collateral (BTS in the case of the BitUSD asset) at a price a little less than the price feed. This event should in theory be extremely unlikely to happen (there would likely be enough liquidity in the order books within 10% of the current price to satisfy the margin calls instantaneously) that we call it a "black swan" event.

> In the event of a force settlement (collateral is taken from those traders that have the lowest collateral ratio and the bitUSD are used to reduce their debt), am i right in thinking that their BitUSD balance / debt will decrease from this operation?

The conversion happens at the force settlement price, which is typically the same as the price feed (although it can be any percent offset away from it in the shorts favor, and in fact  there is a [somewhat](https://steemit.com/bitshares/@cyrano.witness/before-entering-into-a-smart-contract--read-the-fine-print) [controversial](https://steemit.com/bitcny/@cyrano.witness/bitcny-holders-beware-of-imminent-devaluation) [proposal](http://cryptofresh.com/p/1.10.286) happening right now to change that offset from 0% to 1% for the BitCNY smartcoin). So the amount of BitUSD being converted (which is ultimately destroyed) in a force settlement is the amount reduced from the debt of the short position with lowest collateral ratio, but then enough of the collateral asset is taken (BitUSD amount times the force settlement price) from that short position to give to the user who requested the force settlement. If the debt amount of the short position with the lowest collateral ratio is not enough to cover the BitUSD amount being converted, then that short position will be fully closed at the force settlement price (and the excess collateral will be given to short position owner) and then the blockchain will move on to the next short position (in order of increasing collateral ratio) to take care of the rest of the BitUSD amount yet to be converted.

> Q. In the event of a margin call that cannot be fully 'covered/filled' below the 10% short squeeze protection; how is the remaining outstanding BitUSD covered?

As described by @arhag, the margin call will result in a order on the market with a 10% limit (again, 10% is currently defined per-asset as the short squeeze protection ratio, it could be something else eventually - In the beginning of BitShares 2, it even was 50%!)

> Q. In the event of a force settlement (collateral is taken from those traders that have the lowest collateral ratio and the bitUSD are used to reduce their debt), am i right in thinking that their BitUSD balance / debt will decrease from this operation?

@arhag again describe it perfectly. I intentionally keep a single detail out of the description above to make it more simple to understand: The force settlement price may not be identical with the feed price per se. In fact, all bitassets (that are owned by the committee-account) do have a 0% offset from the fee price **except** bitCNY which was recently increased to 1% as an experiment. As @arhag pointed out, this was and still is a controversial discussion.