This paper provides a comprehensive exploration of short selling on the BitShares blockchain, examining its functionality, procedures, and implications. Throughout the discussion, examples like HONEST.CNY and HONEST.USD are used to illustrate key concepts.
Short selling is a strategic financial maneuver that enables participants on the BitShares blockchain to increase exposure to BTS and provide liquidity to BitAssets such as HONEST.CNY, HONEST.USD, and more. This paper elucidates the step-by-step process involved in short selling, encompassing borrowing, margin calls, settlement, selling, collateral ratio updates, and covering.
Participants can borrow BitAssets from the BitShares network by providing sufficient collateral. The collateral ensures the stability of the borrowed assets and is subject to key parameters, including the settlement price, maintenance collateral ratio (MCR), maximum short squeeze ratio (MSQR), short squeeze protection (SQP), and call price (CP).
The BitShares network has the capability to initiate margin calls on positions lacking adequate collateral for their borrowed BitAssets. Margin calls occur when the highest bid falls below the call price but exceeds SQP. In such cases, the margin position is compelled to sell its collateral, with the proceeds used to buy back the borrowed BitAsset and close the position.
Holders of any BitAsset can request settlement at a fair price, resulting in the closure of borrow/short positions with the lowest collateral ratio. The collateral is sold to complete the settlement, with a daily volume limit imposed to prevent exploitation.
After borrowing BitAssets, users can sell them on corresponding markets at prices determined by willing buyers, thereby completing the short-selling process.
Short position holders can adjust their collateral ratio to adapt to market conditions. Increasing the ratio locks additional BTS as collateral, while reducing it requires repayment in the corresponding BitAsset to the network.
To close a short position, participants must hold the borrowed BitAsset to return to the BitShares network. The returned BitAssets are deducted from the supply, and the collateral is released and returned to its owner.
Short sellers have the flexibility to choose their place in line for settlement, with a 2% daily settlement limit enforced by the committee. This precautionary measure gives shorters 24 hours to add collateral in response to potential margin calls. Market manipulation risks are addressed through the transparent nature of the process, allowing both short and long participants equal opportunities to influence the market.
Short selling on the BitShares blockchain, exemplified by tokens like HONEST.CNY and HONEST.USD, presents a sophisticated mechanism for managing exposure to BTS and enhancing liquidity. The outlined procedures ensure transparency, fair market practices, and the prevention of undue market manipulation in the evolving landscape of decentralized finance.
