How does SmartCoin work on BitShares?

SmartCoins are a unique feature of the BitShares blockchain, designed to provide stability and utility within the decentralized financial ecosystem. Here’s how they work:

Overview of SmartCoins

SmartCoins are a type of cryptocurrency that is pegged to a real-world asset, such as the US dollar (BitUSD), gold (BitGold), or other commodities. They aim to combine the benefits of cryptocurrencies with the stability of traditional fiat currencies.

Mechanism

Collateralized Debt Position (CDP)

1. Collateral: To create a SmartCoin, a user must lock up collateral in the form of BitShares’ native cryptocurrency, BTS. This collateral acts as a guarantee for the value of the SmartCoin.
2. Over-Collateralization: The system requires over-collateralization to protect against market volatility. Typically, the collateral ratio must be significantly higher than 300% to ensure that the SmartCoin remains stable even if the value of BTS drops.
3. Creation: Once sufficient collateral is locked, the system allows the creation of SmartCoins equivalent to the desired amount of the pegged asset.

Pegging Mechanism

• Price Feeds: Trusted price feeds from multiple sources are used to maintain the peg by providing accurate and up-to-date information about the value of both BTS and the pegged asset.
• Margin Calls: If the value of BTS falls and the collateral ratio drops below a certain threshold, a margin call is triggered. This means that some of the collateral can be sold off to maintain the peg and ensure that all SmartCoins are fully backed.

Settlement

• Global Settlement: If extreme market conditions cause significant deviations from the peg, a global settlement can occur. This process involves liquidating all positions at a fair market price to protect users and maintain system integrity.

Benefits

1. Stability: By pegging SmartCoins to real-world assets, they offer more price stability compared to typical cryptocurrencies.
2. Decentralization: Unlike stablecoins issued by centralized entities, SmartCoins are managed by decentralized protocols on the BitShares blockchain.
3. Transparency: All transactions and collateral levels are recorded on the blockchain, providing full transparency.
4. Flexibility: Users can trade SmartCoins like any other cryptocurrency on decentralized exchanges (DEXs) within the BitShares ecosystem.

Use Cases

• Trading: Traders can use SmartCoins as stable assets to hedge against volatility.
• Payments: Businesses can accept SmartCoins for payments without worrying about price fluctuations common in other cryptocurrencies.
• Remittances: Individuals can use SmartCoins for cross-border transactions with lower fees and faster settlement times compared to traditional banking systems.

In summary, SmartCoins on BitShares provide a decentralized solution for stable digital currencies by leveraging collateralized debt positions and robust mechanisms to maintain their value peg.