BITSHARES:Issuance and Supply of Collateralized Smartcoins

A BitShares MPA can be viewed as a contract between an asset buyer seeking price stability and a short seller seeking greater exposure to BTS price movement. The open source BitShares software protocol implements a decentralized marketplace for MPA where all transactions are recorded on the shared block chain ledger and the software enforces the market rules. This block chain based marketplace is referred to as the decentralized exchange or internal market (c.f., section 4) to distinguish from external markets such as websites that facilitate the exchange of government issued currencies with cryptocurrency.

SmartCoins are tokens of a particular MPA (e.g. bitUSD). They use the concept of a contract for difference, and make the long side fungible. For the purpose of this discussion, we will assume that the long side of the contract is BitUSD and that the backing collateral is BTS (the BitShares core asset).

In practice, bitUSD are created on the BitShares blockchain when a BTS holder asks the network for them by handing over collateral to the network, essentially locking them in a contract for difference.

In summary, the following set of market rules apply to all market pegged assets (for the sake of simplicity, we here focus on the MPA bitUSD):

• Anyone with BitUSD can settle their position within an interval3 at the settlement price (identical to the feed price).
• In this case, the least collateralized short positions would be margin called and their collateral would be used to settle the

• The price feed is the median of many sources that are
updated at least once per hour.
• Short positions never expire, except by hitting the main-
tenance collateral limit, or being force-settled as the least
collateralized at the time of forced settlement (see point 2).
• In the event that the least-collateralized short position lacks enough collateral to cover at the price feed, then all BitUSD positions are automatically force settled at the price of the least collateralized short (black swan event,

These simple rules enable a price floor of $1.00 for 1.00 BitUSD. A simple metric for testing the validity of our claim is to demonstrate that, if you can find someone willing to sell 1.00 BitUSD for $1.00, that it would be the cheapest option for buying BTS. This means that 100% of the buying demand for BTS would be available to give liquidity to BitUSD holders as a priority over BTS holders.