You lock up 1.75 bts in contract.
You get 1 bts worth of loan (e.g. bitUSD)
... which means that you invested 0.75 BTS (1.75-1) to short 1 BTS worth of asset, which makes your leverage equal 1/0.75=1.33.
(1.75-1) => yes 1.75 stays in contract, 1 bts worth of asset leaves, but also there's debt of 1 to get it out so combined still down 1.75
to short 1 BTS worth of asset => yes asset sold for 1 BTS is a short, but so is 1.75 bts you have instead of 1.75 bts worth of asset
even holding 1.75 bts is already equivalent in gain/loss to 1x leverage short on bitUSD:bts
so you invest 1.75 BTS of total value (it's split into 1.75 bts locked, 1 bts money, -1 worth of asset debt = still 1.75 bts) to bitUSD: short 1 bts worth of asset + 1.75 bts worth of asset (locked in contract) = (1+1.75)/1.75=1.57
1.75 is used twice because your collateral is same coin as your position
I was confused too which is why I did the examples in that image that compared the net profit and loss, margin to spot, and confirmed they are magnified by 1.57x and one in steem article magnified by 1.98x
Concept of using same coin for collateral as the margin long is not new - poloniex allows max of 2.5x margin longs but people fund the collateral with same coin they are margin longing to get equivalent of 3.5x margin longs.
The new part is ability to use margin long as collateral for another margin long.
as for stacking
You start with just bitAsset of value B and you buy B worth of BTS with it. you have a specific ratio of BTS (B) to new bitAsset (A) you set, where B and A are value in same units. you decide collateral ratio B/A = y (>=1.75). For margin position you have to sell bitAsset to buy equivalent amount (A) of BTS. so now your active position is A of BTS and B of locked BTS paid by B of locked BTS, leverage is (active position)/(investment) = (A + B)/B = (B/y + B)/B = 1/y+1 = (1+y)/y = leverage
now lets take a step further. You still have B'=B/y=A unlocked units of BTS. If you borrow bitAsset (A') by locking that BTS (B'), using same collateral ratio, you now have: B'/A'=(B/y)/A' = y . New bitAsset is sold to get A' worth of BTS.
So if we ignore the past: Your new smaller position is A' of new BTS, B' of new locked BTS and you locked additional B' to do that. so new leverage = (A' + B')/(B') = (B'/y+B')/(B') = 1/y+1 - totally right, same leverage
However, unlocked units of bts A were converted to locked units and new unlocked units of BTS,
increasing the leverage on part of already leveraged margin. combined we have active position size of BTS: (locked B + locked B' + unlocked A') = B + B/y + B/(y^2), and still investment of B. so leverage = (1+1/y+1/y^2)
The bigger the ratio chosen, the less not locked position there is to increase the leverage on and thus effectiveness decreases
Expressions for leverage using collateral/debt ratio y will thus be:
leverage1 = (1 + y)/y
leverage2 = (leverage1 + y)/y = ((1+y)/y+y)/y
leverage3 = (leverage2 + y)/y = (((1+y)/y+y)/y+y)/y
leverage4 = (leverage3 + y)/y = ((((1+y)/y+y)/y+y)/y+y)/y
leverage5 = (leverage4 + y)/y = (((((1+y)/y+y)/y+y)/y+y)/y+y)/y
leverage6 = (leverage5 + y)/y = ((((((1+y)/y+y)/y+y)/y+y)/y+y)/y + y)/y
I was curious how far the price has to fall in % to liquidate you at various y
Seems adding more margin layers doesn't affect % price drop needed to liquidate position which is equal to (y-1.75)/y*100%
Adding more margin layers does increase the leverage which increases how much value you will be down in that liquidation
higher collateral ratio drops leverage and makes it harder to get liquidated
in example above using y=2 collateral ratio and 1.98x leverage, can only afford ~12% price drop before liquidation, this is due to pretty high maintenance margin being required at 1.75 ratio.
Simple 1.50x margin long also at ratio 2:1 but with only 12.5% drop allowed before liquidation
The same 1.50x margin long can be done with ratio of 3:1 with 41% drop tolerance by layering margin 5 times
That seems more usable.
p.s. if we do p2p lending markets, don't need to worry about high collateral ratios and let users decide, so setting y=1.1 collateral:debt ratio could give pretty great margin leverage:
