HERO Basics

A cryptocurrency that has the properties and advantages of Bitcoin, but is also capable of maintaining price parity with a globally adopted currency (e.g. U.S. dollar), would have incredible high utility for convenient and censorship-resistant commerce. This has been achieved by BitShares’ market pegged assets (MPA), a new type of freely traded digital asset whose function has been designed to track the value of a underlying conventional asset by means of contracts for difference (CFD).

A SmartCoin (synonym for MPA) is a cryptocurrency that always has 100% or more of its value backed by the BitShares core currency (BTS), to which they can be converted at any time.

Market Pegged Assets

What makes market pegged assets unique is that they are free from counterparty risk even though they resemble a contract backed by collateral. This is achieved by allowing the network itself (implemented as a software protocol, or smart contract) to be responsible for securing the collateral and performing settlements.

Three mechanisms align market forces to trade a smart coin (like the hero) at it’s designed valuation. These have proven to work reliably over the curse of 2 years since inception o the bitUSD (a smartcoin pegged to the value of one U.S. dollar):

Collateralized Asset with a Face Value

Knowing that each HERO is collateralized by at least 150% of it’s value in the crypto currency BitShares, and having a public opinion of the individual price of each share (rather token), rational traders only trade towards the peg – the supposed value of each token.

As an example, you may ask yourself, would you sell $120 in coins for a single $100 bill?

Margin Calls

If a short position (someone having put collateral in the contract in order to obtain/borrow HERO from the blockchain) fails to manage the collateral and the HERO:BTS market moves against it, a margin call will appear if the collateral ratio falls below the maintenance collateral ratio of the HERO. This causes the smart contract to take the collateral and autonomously buy back HEROs in the HERO:BTS market. This results in a market force that trades towards the peg.

Warning

A margin call may buy from the order books from the current feed price up to the maximum short squeeze ratio (e.g. 10%) above peg. This may result in financial loss if collateral is not properly maintained.

Settlement into BitShares

Each long position of HERO (i.e. when you hold HERO) can be settled into the underlying collateral, i.e., BitShares core tokens BTS. This compares to an option to convert a debt claim against a company into shares/stock of this company.

When drawing this option (i.e., initiating a settlement), the position will be converted into shares of the underlying collateral at the price feed (a offset/fee may apply).

The collateral obtained from a settlement is provided by the short position with the smallest collateral ratio.