This is an interesting topic which can be used to analyze the Compumatrix Stablecoin cUSD against cBTC. cBTC as you well know is the only collateral used to make cUSD.
BitShares created a whole series of stable coins named SmartCoins. To review them, let’s take BitUSD as an example.
BitShares guarantees that BitUSD is always worth at least 1$, as there is a feature in blockchain that guarantees the purchase of BitUSD at the price of 1$ in 24 hours.
In fact, when you buy BitUSD, you open a long position on BitUSD. “You can think of it like this: You go to the ‘bank’ (the bank being a smart contract on the BitShares blockchain), and ask for 100 BitUSD. In order for you to get them from the bank, you need to lock away collateral worth at least 2x of what you want to ‘borrow’ from the bank. So you lock up $200 worth of BTS in a smart contract and the blockchain will issue new BitUSD for you and send it to you. These BitUSD are your ‘debt’ against the bank. You can only get back your collateral if you pay back the debt (the 100 BitUSD).
That way, each BitUSD is backed by at least $2 worth of BTS locked away in a smart contract”.
“If the value of the collateral falls below a certain threshold (175%), your position will be “margin called” i.e. liquidated by the smart contract by means of buying back the debt directly from the internal exchange — everything left from collateral will be sent back to your account”.
Since all operations are processed by blockchain and no human factor is involved, transparency is absolute. There are no doubts here.
BitShares platform’s trade fee is low and constitutes 0.01213 BTS. BTS today is $0.145378, i.e. trade fee is about $0.001$. That is a very good price!
However, there is a big spread between “ask” and “bid” prices.
If you buy at ask price, you’ll pay more than $1.06 for each BitUSD. Besides, you have to consider fees when buying BTS (or some other cryptocurrency) for fiat currencies, since you don’t have an opportunity to buy BitUSD directly. In such case, the fee will be much more 6%, which is very expensive.
BitUSD looks like a stable coin. Let’s see the ratio chart BitUSD/USD for the last 3 months:
We can observe approximately 5% fluctuation. That is not good.
The second bad thing is that you have to deposit 200% as your collateral in order to buy BitUSD. If BTS price goes up, you will be able to withdraw a part of your collateral. On the other hand, if price goes down, smart contract on blockchain can liquidate your position on BitUSD if you fail to add required amount of BTS to your collateral. Still, it can happen if price goes down by 175%.
Let’s take a look at BTS/USD ration chart to make an approximate assessment of this scenario.
Here we clearly see that during last 3 months the price of BTS dropped from 0.6$ to less than 0.2$. It means you would get a margin call on your BitUSD by smart contract if you don’t add some BTS to your collateral. That is a real downside. That is definitely not what you expect to see after you got back from vacation and get in touch again with a world of cryptocurrencies.