Author Topic: [untrue] Forced settlement makes the blockchain a market maker  (Read 4059 times)

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Offline xiahui135

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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 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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