Author Topic: Why a lending market is crucial  (Read 1450 times)

0 Members and 1 Guest are viewing this topic.

Offline morpheus

  • Full Member
  • ***
  • Posts: 81
    • View Profile
Why a lending market is crucial
« on: January 12, 2016, 12:12:44 am »
The risk/reward for users who generate bitassets and then sell those bitassets doesn’t currently work. 



Example:  Suppose bitusd is trading at 300 bts/usd.  I think this price could go to 100 bts/usd.  I create 1 usd with 2x collateral, or 600 bts and sell it for 300 bts – I now have a total of 900 bts collateralizing 1 usd.  If the price goes to:



No trader in their right mind would take those odds – max gain of 50% and a max loss of 100%.  That is why you see the premium charged.  Also, the guaranteed forced settlement at parity makes it worse.

As we have seen, bitasset buyers are reluctant to pay these high premiums.  A lending market can potentially alleviate this discrepancy.  The bitasset creator can generate bitassets and lend them instead of selling them and earn a risk-free rate of return.  This will put the bitasset creator in their true role as a lender, not a borrower (which they have been forced into).  Any bts holder could target markets with the highest loan demand and highest interest and create bitassets to loan in those markets to earn a risk-free return on their bts. 

Also, reducing forced settlement to 99% of spot universally would help.  Combining this with the lending market could potentially bring trading to near parity.

IMO, this will bring the dex into a more typical leveraged derivatives market where incentives are aligned between all parties - lenders, speculators, and investors.

Offline lil_jay890

  • Hero Member
  • *****
  • Posts: 1197
    • View Profile
Re: Why a lending market is crucial
« Reply #1 on: January 12, 2016, 12:23:53 am »
The risk/reward for users who generate bitassets and then sell those bitassets doesn’t currently work. 



Example:  Suppose bitusd is trading at 300 bts/usd.  I think this price could go to 100 bts/usd.  I create 1 usd with 2x collateral, or 600 bts and sell it for 300 bts – I now have a total of 900 bts collateralizing 1 usd.  If the price goes to:



No trader in their right mind would take those odds – max gain of 50% and a max loss of 100%.  That is why you see the premium charged.  Also, the guaranteed forced settlement at parity makes it worse.

As we have seen, bitasset buyers are reluctant to pay these high premiums.  A lending market can potentially alleviate this discrepancy.  The bitasset creator can generate bitassets and lend them instead of selling them and earn a risk-free rate of return.  This will put the bitasset creator in their true role as a lender, not a borrower (which they have been forced into).  Any bts holder could target markets with the highest loan demand and highest interest and create bitassets to loan in those markets to earn a risk-free return on their bts. 

Also, reducing forced settlement to 99% of spot universally would help.  Combining this with the lending market could potentially bring trading to near parity.

IMO, this will bring the dex into a more typical leveraged derivatives market where incentives are aligned between all parties - lenders, speculators, and investors.

Exactly... and I think this has been brought up before, but not put as eloquently.  There are lots of things that need to be done to make this a great exchange, but most are low hanging fruit.  But unfortunately our lead developer, CNX, wants to focus on MAS and other features.

Offline abit

  • Committee member
  • Hero Member
  • *
  • Posts: 4562
    • View Profile
    • Abit's Hive Blog
  • BitShares: abit
  • GitHub: abitmore
Re: Why a lending market is crucial
« Reply #2 on: January 12, 2016, 12:25:47 am »
Good analysis.
I remember BM ever said there are some technical challenges to be resolved before it can be implemented.

Another issue by now: we need developers, we need fund to support developers.
BTS account: abit
BTS committee member: abit
BTS witness: in.abit

Offline puppies

  • Hero Member
  • *****
  • Posts: 1659
    • View Profile
  • BitShares: puppies
Re: Why a lending market is crucial
« Reply #3 on: January 12, 2016, 12:26:08 am »
Very well stated post.  I agree that there is not currently a very good balance between shorts and longs.  A lending market would help.
https://metaexchange.info | Bitcoin<->Altcoin exchange | Instant | Safe | Low spreads

Offline BunkerChainLabs-DataSecurityNode

Re: Why a lending market is crucial
« Reply #4 on: January 12, 2016, 06:37:52 am »
How would a lending market work exactly?

Great analysis... and I agree that the proper incentives are not aligned for the very reasons you stated.  +5%
+-+-+-+-+-+-+-+-+-+-+
www.Peerplays.com | Decentralized Gaming Built with Graphene - Now with BookiePro and Sweeps!
+-+-+-+-+-+-+-+-+-+-+

Offline morpheus

  • Full Member
  • ***
  • Posts: 81
    • View Profile
Re: Why a lending market is crucial
« Reply #5 on: January 12, 2016, 02:16:36 pm »
How would a lending market work exactly?

Others have suggested to emulate the poloniex lending market, which is pretty straightforward if you have ever used it.  Basically, each trade would be a separate contract between lender and borrower where the borrower borrows an asset and sells it for another asset and pays the lender a daily interest rate over the course of the loan.  I don't have the technical knowledge to understand how the logistics would work on a blockchain, but I'm sure it won't be trivial.  The biggest problem I could foresee is margin calls in thinly traded markets.  It may be that the lender has to assume some of the risk to begin with.


Offline BunkerChainLabs-DataSecurityNode

Re: Why a lending market is crucial
« Reply #6 on: January 12, 2016, 02:23:42 pm »
How would a lending market work exactly?

Others have suggested to emulate the poloniex lending market, which is pretty straightforward if you have ever used it.  Basically, each trade would be a separate contract between lender and borrower where the borrower borrows an asset and sells it for another asset and pays the lender a daily interest rate over the course of the loan.  I don't have the technical knowledge to understand how the logistics would work on a blockchain, but I'm sure it won't be trivial.  The biggest problem I could foresee is margin calls in thinly traded markets.  It may be that the lender has to assume some of the risk to begin with.

Sounds like it could use some work.. what are others take on that feature? Would we want to do the exact same thing or make it better in some ways?
+-+-+-+-+-+-+-+-+-+-+
www.Peerplays.com | Decentralized Gaming Built with Graphene - Now with BookiePro and Sweeps!
+-+-+-+-+-+-+-+-+-+-+

Offline testz

Re: Why a lending market is crucial
« Reply #7 on: January 12, 2016, 03:33:35 pm »
But unfortunately our lead developer, CNX, wants to focus on MAS and other features.

Please don't spread the FUD, "lead developer, CNX" will focus at STEALTH first, it's was clearly explained at latest hangout, if anybody still have questions or complains he welcome to join Friday mumble session with Bytemaster and get answers for all questions.

My recorded session of last hangout you can find here:
https://soundcloud.com/testzcrypto/e127-2016-01-08-developer-hangout-with-bytemaster#t=16:02