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Offline monsterer


With the bitAssets 2.0 proposal, forced settlement at the feed price means the blockchain essentially becomes a market maker, because it will need to be able to exchange USD for BTS when the existing book is insufficient to meet demand.

This simple exchange process exposes the blockchain to inventory risk. Inventory risk occurs when a market maker holds more of one currency than it does of the other - the risk is that the currency it holds the greater quantity of could fall in price leading to further risk and potential cascade of losses.

A market maker is risk neutral if they hold equal value on both sides of the market. Then, they are essentially in a hedged position. This is exactly equivalent to an equal match of bitUSD longs and shorts.

Whenever the blockchain is forced to settle at the feed, it must be able to respond to the change in demand by altering the price it is able to settle at. However, in the current design, this will not happen instantly, it relies on the feed price changing. This will only happen after arbitragers have taken advantage of the profit available between the price on an external exchange and the price on the internal exchange. Once this has happened, only then will the feed price update to compensate for this discrepancy.

IMO the gap between any large settlement and the blockchain's ability to adjust to it will mean the blockchain will lose every time. Thoughts?


« Last Edit: May 29, 2015, 11:39:42 AM by monsterer »
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Offline xiahui135

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Re: Forced settlement makes the blockchain a market maker
« Reply #1 on: May 27, 2015, 11:51:09 AM »
Yes, the settlement function is to do the market make.
But maybe the market make not be code in bts blockchain will be better.
The market make should be done with trades and adoption.

Offline xiahui135

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Re: Forced settlement makes the blockchain a market maker
« Reply #2 on: May 27, 2015, 11:55:23 AM »
I will check the ether rule. It seems they have a better rule, not code the market make in the blockchain.

(We just code to make super USD, but lack limit of super USD. This will broke the balance)

Offline liondani

Re: Forced settlement makes the blockchain a market maker
« Reply #3 on: May 27, 2015, 12:01:06 PM »
what about the relative order future... Has bytemaster abandoned it totally?
In that way "all"** users are market-makers? Not?


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Offline sittingduck

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Re: Forced settlement makes the blockchain a market maker
« Reply #4 on: May 27, 2015, 12:12:45 PM »
Block chain is never exposed to risk.   The risk of loss is priced into a premium.  The feed should rarely be called upon to settle because better prices can be found above the feed.


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Offline Xeldal

Re: Forced settlement makes the blockchain a market maker
« Reply #5 on: May 27, 2015, 12:38:27 PM »
With the bitAssets 2.0 proposal, forced settlement at the feed price means the blockchain essentially becomes a market maker, because it will need to be able to exchange USD for BTS when the existing book is insufficient to meet demand.

This simple exchange process exposes the blockchain to inventory risk. Inventory risk occurs when a market maker holds more of one currency than it does of the other - the risk is that the currency it holds the greater quantity of could fall in price leading to further risk and potential cascade of losses.

A market maker is risk neutral if they hold equal value on both sides of the market. Then, they are essentially in a hedged position. This is exactly equivalent to an equal match of bitUSD longs and shorts.

Whenever the blockchain is forced to settle at the feed, it must be able to respond to the change in demand by altering the price it is able to settle at. However, in the current design, this will not happen instantly, it relies on the feed price changing. This will only happen after arbitragers have taken advantage of the profit available between the price on an external exchange and the price on the internal exchange. Once this has happened, only then will the feed price update to compensate for this discrepancy.

IMO the gap between any large settlement and the blockchain's ability to adjust to it will mean the blockchain will lose every time. Thoughts?

The blockchain is not a traditional market maker and does not actually hold a balance.  It does not need to balance its books or hedge in any way.   Although technically it is holding the BTS collateral of the shorts, this is still not the same as having a balance.  All funds are held by the market participants.  The blockchain is simply able, at a users request, to close a short and unlock the collateral.  Its also only operating on one side of the market,  I'm not aware of any way the blockchain can sell your bUSD.

Block chain is never exposed to risk.   The risk of loss is priced into a premium.  The feed should rarely be called upon to settle because better prices can be found above the feed.


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Offline monsterer

Re: Forced settlement makes the blockchain a market maker
« Reply #6 on: May 27, 2015, 01:41:22 PM »
The blockchain is not a traditional market maker and does not actually hold a balance.  It does not need to balance its books or hedge in any way.   

Although technically it is holding the BTS collateral of the shorts, this is still not the same as having a balance.  All funds are held by the market participants.  The blockchain is simply able, at a users request, to close a short and unlock the collateral.  Its also only operating on one side of the market,  I'm not aware of any way the blockchain can sell your bUSD.

As I understand it, the forced settlement will eat through the orderbook first, but will then actually start to issue BTS to make up the difference between the available orders and the price feed. This issuing creates the effective inventory imbalance.
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Offline monsterer

Re: Forced settlement makes the blockchain a market maker
« Reply #7 on: May 27, 2015, 01:45:48 PM »
Block chain is never exposed to risk.   The risk of loss is priced into a premium.  The feed should rarely be called upon to settle because better prices can be found above the feed.

As soon as the blockchain starts issuing BTS to meet a settlement request, it takes on inventory risk.
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Offline Xeldal

Re: Forced settlement makes the blockchain a market maker
« Reply #8 on: May 27, 2015, 01:58:02 PM »
The blockchain is not a traditional market maker and does not actually hold a balance.  It does not need to balance its books or hedge in any way.   

Although technically it is holding the BTS collateral of the shorts, this is still not the same as having a balance.  All funds are held by the market participants.  The blockchain is simply able, at a users request, to close a short and unlock the collateral.  Its also only operating on one side of the market,  I'm not aware of any way the blockchain can sell your bUSD.

As I understand it, the forced settlement will eat through the orderbook first, but will then actually start to issue BTS to make up the difference between the available orders and the price feed. This issuing creates the effective inventory imbalance.

I don't think its designed to issue anything.  Its simply forcing the least collateralized shorts to cover at the feed.  There can't exist a situation where there is more bUSD being sold/settled then there are available BTS from locked short collateral, so no reason to issue new BTS.   Assuming normal conditions, not a black swan.

Thats my understanding anyway, I would not support issuing new BTS for forced settlement.

Offline bytemaster

Re: Forced settlement makes the blockchain a market maker
« Reply #9 on: May 27, 2015, 06:12:18 PM »
No BTS is issued by forced settlement EVER.
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Offline monsterer

Re: Forced settlement makes the blockchain a market maker
« Reply #10 on: May 27, 2015, 07:53:23 PM »
No BTS is issued by forced settlement EVER.

Thanks for the clarification - I remembered hearing something about infinite liquidity at the feed, which is what sparked this post, but looking for the reference recently, I was unable to find it again.
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Offline monsterer

Re: Forced settlement makes the blockchain a market maker
« Reply #11 on: May 29, 2015, 11:39:16 AM »
Ok, well I guess the conclusion must be that if the blockchain does not issue BTS in a forced settle, the blockchain cannot lose out due to arbitrage, however, the shorts will?
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Offline maqifrnswa

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Re: Forced settlement makes the blockchain a market maker
« Reply #12 on: May 29, 2015, 11:47:37 AM »
Ok, well I guess the conclusion must be that if the blockchain does not issue BTS in a forced settle, the blockchain cannot lose out due to arbitrage, however, the shorts will?

Yes, if someone is force settling below the market, they themselves are paying a "premium" for the convenience. BM has a theory to also make them pay an additional premium based on liquidity, too, by moving the BTA sell wall away from the external feed value proportional to the trading value's deviation to the external feed.
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Offline monsterer

Re: Forced settlement makes the blockchain a market maker
« Reply #13 on: May 29, 2015, 01:04:52 PM »
Yes, if someone is force settling below the market, they themselves are paying a "premium" for the convenience. BM has a theory to also make them pay an additional premium based on liquidity, too, by moving the BTA sell wall away from the external feed value proportional to the trading value's deviation to the external feed.

Forced settlement of bitUSD shorts by longs cashing out to BTS is a bitUSD sell, which should, by rights, push up the price of BTS leading to a worse settlement price as the cash out volume increases.
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Offline monsterer

Re: Forced settlement makes the blockchain a market maker
« Reply #14 on: May 29, 2015, 08:08:48 PM »
Correct, whenever someone forces settlement or the Black Swan ProtectionTM kicks in, the price of BTS will be naturally forced towards the moon.

So the worst that can happen when people panic and trigger the escape hatch is that you make money on your BTS(due to logical buy pressure).  Do you agree now that this is much better than the old "panic sell your BTS because the 30-day rule is clunky 30-day rule"  ?

I'm not sure you fully understood my point. In the 2.0 design, the shorts are settled at the feed price, meaning there will be no reactionary rise in the BTS price to compensate for all the bitUSD selling - this will lead to the arbitrage opportunities which will mean the shorts lose out.
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