Comment by joosters
3 years ago
As per Matt Levine:
...The way the traditional system works is that if you have a margin loan, and the value of your collateral declines, your broker calls you up and says “hey we need more collateral,” and you either post more collateral and it’s fine, or you don’t post more collateral and your broker liquidates your position. Or sometimes you say something like “hang on I’ve got another call, I’ll call you back after lunch,” or “sorry I don’t have the money right now but I am a good customer and you know I’m good for it,” or “I don’t have the money right now but I’m pretty sure prices can only recover from here so why don’t you let it ride for a day or two,” or whatever, and you don’t post more collateral but your broker doesn’t liquidate your position because you’re a human and your broker is a human and everyone is embedded in a repeated social game with fuzzy rules
For every seller, there must be a buyer. With a defi "code is law" approach, if every contract automatically tries to execute a sell at the same time, the price will fall until there are enough matching buyers, and if there still aren't enough buyers when BTC hits $0.0000001 then the sell orders will just not execute. Smart contracts do not eliminate the problem of liquidity risk, they merely assume it away.
Yes. It seems not appreciated by some that price need not move continuously, but it can jump, and it can also go to zero (or if it cannot: no buyer can be found at the smallest possible positive price).