How Global Settlements work

In very rough market conditions, the BitShares Blockchain can put a smart coin (such as bitCNY and bitUSD) into so called global settlement. This article tries to clear some uncertainties about how this works.

BitAssets briefly explained

On the BitShares Blockchain, every unit of a bitAsset in existence (think: 1 bitUSD) is collateralized with the core native token BTS. When borrowing 1 bitUSD, at least $1.75 worth of BTS need to be locked away. This is required to protect against market volatility of BTS and ensure that 1 bitUSD is backed by at least $1 worth of BTS.

During major market movements, some loans went far below 175% collateralization which resulted in margin calls being put into the markets to close those loans by buying back their debt in bitUSD from the internal markets and closing the loan or at least reduce their debt sufficiently.

At times, market may be unable to absorb these margin calls which lead to their collateralization being reduced further.

Global Settlement

If valuation of BTS drops further, the least collateralized loan of bitUSD may reach only $1.10 worth of BTS supporting it (100% + short squeeze protection ratio). At this point, the smart contract implementing the collateralized loans on the BitShares Blockchain performed a global settlement at the current call price.

What happened during Global Settlement

The global settlement resulted in:

All open loan positions are settled at the call price. Excess collateral is given back to the user.
Collateral is aggregated in the so called settlement fund which now holds all BTS to back outstanding bitAsset with 100% ratio.
Holders of units of the bitAsset are not affected directly by the global settlement

Example: bitUSD global settlement
For example, if you had a position with 2x collateral during a global settlement @ 0.0511 USD/BTS, half of your collateral will be returned to you, the other half is used to support outstanding bitUSD. With all backing BTS being aggregated to the settlement fund, there may be 150M BTS in the settlement that support 7,5M bitUSD as collateral. Assuming a valuation of $0.049 per BTS, this corresponds to $7.35M worth of BTS backing 7,5M bitUSD, or in other words $0.98 per bitUSD.

Consequences of the Global Settlement

As a consequence of the global settlement,

creating new collateralized loans (borrowing) is suspended,
margin calls are disabled, and
settlements execute immediately against the settlement fund and at the price of the global settlement.

How to proceed

Even though we have seen a global settlement, thanks to the implementation of BSIP18, bitAssets can be revived by two independent mechanisms:

Since price feeds continue on, the BTS in the settlement fund may in the future be sufficient to reach the minimum collateral ratio (currently at 175%), at this point, the bitAsset will automatically revive and borrowing as well as margin calls will be re-enabled.
The settlement fund and corresponding loans are auctioned sufficiently to cover the minimum collateral ratio. When that happens, the bitAsset will be re-enabled in a subsequent maintenance window.
When all units of the bitAsset are settled and the settlement fund reaches zero, the bitAsset will be re-enabled.

BitShares Blockchain Foundation
spokesperson@bitshares.foundation
https://bitshares.foundation

Official Public Face and Sole Spokesperson of the BitShares Blockchain {more}