Liquidity has a Price -> Adding Maker / Taker

[bytemaster]

Much of the debate around BitAssets being bootstrapped focuses around improving liquidity. Liquidity is what gives people confidence in a price and/or value. If you cannot be guaranteed a buyer ON DEMAND then spreads increase.

To gain immediate liquidity you must compromise price. The more you lower your asking price the more likely you will find an immediate buyer for the asset you wish to sell.

So the question becomes *when* do you make the decision to compromise price for liquidity? 

1. At the time you buy the asset you lock in your liquidity price?
2. At the time you sell the asset you take what you can get?

The current BitAsset 2.0 system is superior to prior systems because the participants lock-in the price of liquidity-on-demand before entering the contract. As a buyer of a BitAsset I pay $1.10 for 1 BitUSD knowing I have locked in liquidity with a maximum downside of $0.10 if I need instant liquidity. 

As a short I am simultaneously pricing the cost of providing liquidity and the risk of dollars rising against my position.  After assessing the risks I agree to sell short at $1.10 per BitUSD.  If someone buys it from me, and then immediately demands liquidity (settlement) then I profit 10%. 

The result is that any short who gets force settled is existing at FAVORABLE price, they collect the full premium relative to the price feed.

We have constructed an asset (BitUSD) that is extremely favorable for the BitUSD holder (guaranteed price floor and liquidity).   To get these benefits, it comes at a price which is paid to the short.  Those who claim the market is "unbalanced" and favors the BitUSD holder over the short ignore the fact that the short gets to NAME THEIR PRICE.  In other words, the short gets to set the price at which BitUSD is created.

While the short gets to set the price at which BitUSD is created, they must buy back from the market to cover.  This means that BitUSD holders + future shorts get to set the price at which BitUSD can be destroyed.

This means the market can function perfectly so long as all participants trade BitUSD according to supply/demand for this asset class and the parties factor in the risks.

So if we want to increase liquidity all that is required is to trade at the proper price.   There is nothing we can do to decrease the premium (spread) because risks can be moved/reallocated but not destroyed.

Socializing the risks can take pressure off of individual traders and help bootstrap the system.  Socializing these risks means offsetting some of the costs.

The BitShares network can offer a reward to those who keep orders on the book at the best price. Namely, those who have open orders to sell BitUSD at the lowest price could be paid a bonus in BTS *IF* they are also short BitUSD.

Currently Shorts must cover the cost of liquidity, while BitShares collects the profits (market fees). If market fees for BitAssets were redirected to shorts who provide liquidity and create the supply in the first place then we would be adding a revenue source to shorts which will lower their costs and reduce the spread.

Maker - the person who has an open order on the books that is unfilled
Taker - the person who places an order that matches an open order.

If the Taker pays a market fee, and the Maker receives the market fee then we can incentivise people to keep orders on the books. In reality this simply means not charging a market fee for any order that stays on the books for a minimum length of time.

But Maker/Taker can only go so far because it does nothing to compensate for things like price feed risk, volatility risk, or the probability that BitShares will fall in value. These are risks that are global (inherent in BTS) and thus the traders in the market can only price it in.  The BTS holders are the ones betting on the system, they are the ones who profit from its success, and they are the ones that "own" the risk. In a sense they are the ones that must pay the cost of mitigating that risk and lowering the premium.

So if we want to have BTS holders reduce the premium without exposing BTS holders to outright abuse caused by providing a market maker at the price feed, then we need to subsidize those who do provide a market maker. This gives BTS holders a "Fixed Cost" that cannot be abused, while reducing the average cost to those creating BitUSD.

Suppose that open orders to sell BitUSD paid a yield in BTS that was significant. For a certain amount of yield we could find plenty of participants willing to short BitUSD and sell near the feed. All we need to do is define a budget and a payout equation that rewards those who are SHORT and have orders placed near the feed AND keep them there for a while.  An algorithm that is also efficient to implement will be required.

The result of this would be similar to paying people to take a risk that BTS falls in value.  In other words, we can arbitrarily stimulate demand to create BitUSD (ie: simulating a bull market in BTS) by guaranteeing profits to those who place orders.  In principle if we could pay interest to those who are short then that would be best, but unfortunately anyone can easily short to themselves. This means that we can only pay those who keep open orders on the books near the feed. If you attempt to "short to yourself" then you fill your open order and stop earning interest. 

With the right size reward the liquidity problem can be solved while keeping the costs to BTS holders fixed. 

 

[JonnyBitcoin]

Sounds like a very good idea to me.

Just a thought.
If all smartcoins can be settled at the price feed which is guaranteed locked in liquidity why don't we have the GUI show that liquidity in the form of a buy wall at the settlement price. 

So for every bitUSD in circulation there would be a buy order shown in the GUI at the bitUSD settlement price.

[abit]

If all smartcoins can be settled at the price feed which is guaranteed locked in liquidity why don't we have the GUI show that liquidity in the form of a buy wall at the settlement price. 

So for every bitUSD in circulation there would be a buy order shown in the GUI at the bitUSD settlement price.

I think svk already did that (or as an experiment) and posted a picture in the committee proposal thread.
Since there is a daily X% limit of settlement, and a waiting period before a settle order executes, it's not a simple "buy wall"

[monsterer]

Suppose that open orders to sell BitUSD paid a yield in BTS that was significant. For a certain amount of yield we could find plenty of participants willing to short BitUSD and sell near the feed. All we need to do is define a budget and a payout equation that rewards those who are SHORT and have orders placed near the feed AND keep them there for a while.  An algorithm that is also efficient to implement will be required.

What about having longs pay the shorts the yield in times of oversupply and visa versa for undersupply?

[yvv]

Suppose that open orders to sell BitUSD paid a yield in BTS that was significant. For a certain amount of yield we could find plenty of participants willing to short BitUSD and sell near the feed. All we need to do is define a budget and a payout equation that rewards those who are SHORT and have orders placed near the feed AND keep them there for a while.  An algorithm that is also efficient to implement will be required.

What about having longs pay the shorts the yield in times of oversupply and visa versa for undersupply?

Imo, this is a nice idea. You can do this with interest/demurrage. Interest would increase bitUSD supply, demurrage would destroy it.

[bytemaster]

Suppose that open orders to sell BitUSD paid a yield in BTS that was significant. For a certain amount of yield we could find plenty of participants willing to short BitUSD and sell near the feed. All we need to do is define a budget and a payout equation that rewards those who are SHORT and have orders placed near the feed AND keep them there for a while.  An algorithm that is also efficient to implement will be required.

What about having longs pay the shorts the yield in times of oversupply and visa versa for undersupply?

Defining over/under supply is the challenge.  A negative interest rate would simply be another way that the BitUSD holder could pay the premium.  Rather than paying $1.10 up front, they would pay $1.02 up front and then $0.01 per month.

Because of the way we have defined things this would mean a merchant that receives BitUSD as payment would have a much smaller "guaranteed premium" and he would be forced to pay interest for the period of time between when he receives payment and when he liquidates.  The system would no longer be neutral to participants that hold BitUSD.  BitUSD would become something worth at least $1.00 with a negative interest rate. A negative interest rate creates a net present value less than $1.00.   You could achieve the same thing by saying that BitUSD is worth at least $0.99 in which case all you are doing is shifting the price and doing nothing about the premium.

Anything that merely reallocates value between shorts and longs will not reduce premium and spread nor increase liquidity. It will just change the equilibrium price. It is a 0 sum game.

The only way to offset the system risks (BTS falling in value, price feed lag/variance, liquidity, etc) is to not make the market participants pay for it. The person who should pay for it is those who benefit from reducing those costs. In other words, there is a 3rd party who is benefitting from every trade and the existence of BitUSD: the BTS holder.   This is the party that is getting "something for nothing"... the BTS holder profits when people use the system.  Markets need a jump start.  The BTS holder is the one who must finance the jump start because they are the ones who benefit once it is up and running.  The market shouldn't depend up permanent cash infusions,  because once it is up and running it can go on its own.  It is chicken and the egg.  So whatever system we devise needs to focus on "short term kickstarter" and be very focused on keeping orders on the books at the best prices possible. 

Rather than having the BTS holder fund all capital for the orders, it can "borrow" the capital required to place orders and gain leverage on its ability to kickstart a market.   Say we wanted an orderbook with a depth of $200K within 10% of the trading price.     We could either put 200K of BTS holder funds at risk to place those orders, or we can borrow 200K of funds from other users who take the risk.  We can borrow $200K for less than $20,000 per year while greatly reducing our risk.  Granted the interest is a cost, but it is short term. Eventually the market will gain in natural liquidity from traders and the interest rate can fall until it costs nothing to keep 200K of liquidity on both sides of the book.

[abit]

In other words, there is a 3rd party who is benefitting from every trade and the existence of BitUSD: the BTS holder.   This is the party that is getting "something for nothing"... the BTS holder profits when people use the system. 

Many would say: why the value/price of a bts is still too low   

The BTS holder is the one who must finance the jump start because they are the ones who benefit once it is up and running.

They would say: I need to take out more money? No!

Rather than having the BTS holder fund all capital for the orders, it can "borrow" the capital required to place orders and gain leverage on its ability to kickstart a market.

Who borrow from who?

[sittingduck]

Two options: wait for the market to naturally grow to stop complaining or provide funds to incentivize the Martin's to grow to accelerate things.

Being afraid to spend money to make money is the biggest thing that can hold us back. 

The only thing we need to do is make sure he spend money in the right place failure to spend money is a surefire way to die

[tonyk]

almost great idea... however I do not think you can borrow your way to pay the premium [or enough of it] of an option with no expiration date [that is the premium that the shorts have to calculate and then use as a premium over the 1:1 peg ]. Paying straight up the whole premium is arguably even more crazy.

the best you can do is give the shorts part of the %-age fees paid by the bitWhatever buyers. How much will this help? No clue... but will help some.



On a semi related note - paying for stuff to just sit on the orderbook in arbitrary distance from the market price is ... somewhere between inefficient and manipulative, depending on how much you subsidize it - Are you gonna pay them  the whole risk of being filled [assuming they have no desire to place the order lacking the subsidy?] or just for some of it?

[edit]
 ohh you want the bitAsset holders to pay the interest?. I failed to get that from the OP.
While paying it to the shorters is something definitely worth discussing, I have no clue how the public will react to a currency that makes you pay interest for holding it.
Paying the interest to people for just holding orders on the order book is still a not a good idea at all, as described above.

[monsterer]

BitUSD would become something worth at least $1.00 with a negative interest rate. A negative interest rate creates a net present value less than $1.00.   You could achieve the same thing by saying that BitUSD is worth at least $0.99 in which case all you are doing is shifting the price and doing nothing about the premium.

Under the positive/negative yield design, bitUSD holders would pay interest only when there is an oversupply and would *receive* interest when there is an undersupply. On average the net value would be $1.00.

[JonnyBitcoin]

The ability to place relative orders would make the market much more efficient.

It would mean everyone can add liquidity and not have to readjust orders all the time.

By "relative orders" I mean the ability to place orders at the feed price with + or - a percentage that you choose.  The order moves in parallel with the feed.

Are there plans to introduce this feature?

[BunkerChainLabs-com]

Free money for participating.. whats not to like? 

[clout]

The ability to place relative orders would make the market much more efficient.

It would mean everyone can add liquidity and not have to readjust orders all the time.

By "relative orders" I mean the ability to place orders at the feed price with + or - a percentage that you choose.  The order moves in parallel with the feed.

Are there plans to introduce this feature?

Can this not be achieved by placing orders in a gateway market? Instead of worrying about the price of BTS relative to the bitassets underlying you could just provide liquidity in the market where the conversion rate is stable.  If there is liquidity in gateway markets then the effects will spread into the BTS/Bitasset market as well.

Additionally If these shorts that we are incentivizing to be market makers provide liquidity for the gateway market with the bitassets they borrow then they maintain a net long position in BTS and do not incur the cost of BTS / Bitasset price movements.

I would be in favor of this proposal if it incentivized neutral market making (ie market makers with net long positions in BTS) because then the BTS shareholders do not have to pay for the risk of a falling BTS price. It would also encourage people to deposit to gateways in order to acquire bitassets. Upon exchanging the borrowed bitasset for its corresponding gateway assset, the short position (the market maker) would then hold the gateway asset (a demand deposit for the real asset) as collateral. Thus, the bitasset acquired from this process is not only backed by 200% its value in BTS but also 100% its value in the gateway asset (for all intents and purposes, the real asset). The holders of bitassets attained through the gateway market would then have a choice of "settling" their position in BTS (from forced settlement or the exchange of bitasset for BTS) or BTC (from the gateway market maker that holds their original deposit)

[Ander]

This sounds to me like yet another overly complicated solution which will end up having a flaw and get exploited by someone, causing others to lose money.

If only we had a bunch of funds and could have a community fund that kickstarted the liquidity on major bitassets by providing buy and sell walls, like Nubits (which actually works!)  This wouldnt need to be the final solution, but it qould kickstart liquidity enough for traders to get established in the markets, and then once enough traders were providing liquidity, it wouldnt be needed anymore.

[abit]

This sounds to me like yet another overly complicated solution which will end up having a flaw and get exploited by someone, causing others to lose money.

If only we had a bunch of funds and could have a community fund that kickstarted the liquidity on major bitassets by providing buy and sell walls, like Nubits (which actually works!)  This wouldnt need to be the final solution, but it qould kickstart liquidity enough for traders to get established in the markets, and then once enough traders were providing liquidity, it wouldnt be needed anymore.

Agree