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Offline bytemaster

Proposal - Significant Enhancement to Market Engine
« on: September 17, 2014, 03:54:59 PM »

It has been discussed many times before that we should prioritize shorts based upon collateral rather than fee.   Agent86 has been visiting me this week in Virginia and we have had some serious debates and have identified a refinement that should drive the peg *AND* liquidity much tighter than we have today.

Lets start with some fundamental principles:
1) the more collateral there is behind BitUSD the less leverage there is in the system (and less profit to the short)
2) price fixing the collateral at 2x is bad because 2x may not be what the market needs
3) charging the shorts a "fee" means they start out under 2x collateral and requires us to place an artificial limit on valid short prices.
4) charging the shorts a "fee" means that market makers cannot operate while maintaining a BTSX bullish stance.  To be a market maker today requires that you sell BTSX and hold BitUSD which means that few players are willing to provide much liquidity due to the USD exposure.

Suppose we were to change things up as follows:

1) When you "short" you specify the following:  Number of dollars you want to sell,  BTSX per dollar you are willing to put in collateral, and the Maximum price ($ per BTSX) you are willing to short.
2) When the market executes, if there is a buyer of BitUSD at the feed price, then the short with the highest collateral per USD is chosen provided the feed is less than the maximum price ($ per BTSX) set by the short.
3) Delegates publish their feeds once per hour on average (but slightly randomized to get even distribution / steady updates)

What this would allow market makers to do is this:
1) Short USD with high collateral at the price feed.
2) Buy USD at .99 or more to cover their position.
3) Cover their shorts with lower-collateral speculators when the price falls (minimizing their downside risk)

Under this market the BTSX BULLS could safely play market maker and the market makers would be competing to offer the narrowest spread *AND* most collateral and thus increasing the backing/value of BitUSD.  We need the BULLS to play market maker because BTSX is risky and the bears (those who would rather hold dollars than BTSX) are not likely to see BitUSD as a dollar equivalent.  The result is that asking the BEARS to play market maker results is much wider spreads. 

Lastly as a result of people competing to be the "market makers" so they could have both "leverage" and "buy/sell spread" BitUSD will end up with far more than 2x collateral on average.

There are two primary states the market can be in:
1) Real Price > Price Feed
2) Real Price < Price Feed

And in each of these cases the market makers / shorts have to make a decision on what to do:

1) Real Price > Price Feed
When this is the case then those with BitUSD will be willing to pay more for BTSX than the price feed will allow the SHORTS to execute, thus the market sets the price without restriction.

2) Real Price < Price Feed
   - high collateral shorts and market makers will cancel/move their orders while covering (supporting the peg)
   - market markers that are "short" will be looking to cover (buy USD) to minimize losses from their leveraged position supporting the peg.
   - speculators who want to short "long-term" with higher leverage get an opportunity to be the most collateralized short.  They start out at a "small loss" like they do today, but they help sell to the market makers looking to cover.  Thus the speculators support the peg by providing market makers liquidity allowing market makers to operate with narrower spreads.

The result of this whole process is this:
1) market makers who want BTSX exposure with leverage risk and to earn money from the spread are able to operate safely with narrow spreads because speculators who want long-term leverage on BTSX price movements are there to provide market makers liquidity. 
2) If market makers can be liquid and earn a profit with narrow spreads then BitUSD will be liquid and there will be high confidence.

The downside of this process:
1) A slightly higher reliance on the price feed.  The more accurate/responsive the feed is at all times the better the market will function.
2) High reliance on the feed means that delegates will need to have many safe guards in place against feed manipulation by centralized exchanges and that delegates should not source their data from the same places:
      a) price movements more than a certain percent should be *manually confirmed* by the delegates.
      b) some delegates should operate at slower rates than other delegates
      c) some delegates should be "completely manual" and set the price based upon the "buy walls" or "sell walls" on various exchanges rather than "last feed".
      d) it is generally better for the price feed to be "low" than "high" because that will result in the BitUSD longs setting the price rather than the feed.
      e) based upon this the feed should be "slow to rise" and "quick to fall"
      f) with lagging price feed there will exist arbitrage opportunities for USD longs to maintain the peg by selling at a profit until the shorts (following the feed) can catch up.
      g) all of these guidelines need not be coded into the blockchain, but delegates can compete, debate, and publish feeds that produce the most effective price peg.
      h) shorts can minimize harm from feed manipulation by having tight limits on their order range.
3) Yield on BitUSD will be slightly lower because overlap from short orders will no longer go into the yield funds, but they still get overlap on Long/Long orders.

All things considered I think this will dramatically help the peg because all of us BULLS can make the market with minimal risk and thus make it a safe place for the bears (BitUSD holders).

Thoughts?
« Last Edit: September 17, 2014, 03:57:18 PM by bytemaster »
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Offline xeroc

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #1 on: September 17, 2014, 04:24:53 PM »
aha .. that's the reason why we are holding of GLD :)

//edit: I see a lot of work coming my way to modify my feed script :\
« Last Edit: September 17, 2014, 04:31:12 PM by xeroc »
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Offline oldman

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #2 on: September 17, 2014, 04:30:50 PM »
If training wheels are required is does not matter whether they are touching the ground (proposed) or raised up (existing).

Given that there is no way to eliminate feeds completely the platform may as well utilize them to fullest extent possible.

But caution is required - we don't want to end up with a 10 year-old that needs training wheels.  ;)




Offline gulu

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #3 on: September 17, 2014, 05:23:03 PM »
I do not think this proposal would achieve the goal of 1:1 peg.

The reason why there lacks liquidity is because the peg does not work well. The reason why the peg does not work well is because there are imbalanced demands from two sides of the market. Right now, there is not much incentive to hold BitCNY or BitUSD. Sometime in the future, there might be too much incentive to hold BTAs, if much forced coverage occurs, which makes the interest of holding BTAs high enough. That is to say, the demands from two sides of the market will fluctuate, and we need a self-adjustable tool to compensate the demand difference. There will be ALWAYS uneven demands from the two sides.

Under this proposal, even if the collateral multiple is raised, as a BTSX bull, I personally do not have the incentive to hold BitUSD/BitCNY and be a market maker. I don't care as much for the collateral as for how much interest I would receive for holding BTAs. Take BitCNY for example, why would I want to hold BitCNY while I can earn higher interest holding real CNY outside?

What is our goal? 1:1 peg for BTAs, right? Only when this occurs, will there be exchange agents that honors 1:1 exchange. Then merchants are willing to take BitUSD/BitCNY as payment, because they know they can exchange for real USD/CNY anytime.

Market makers want to earn the spread. This is their only goal. Simple as that. In a one-sided market, no one dares to be the market makers, because they would end up holding most of the BitUSD/BitCNY while no one else wants to hold. Higher/adjustable collateral would not solve the problem of one-sided market.

Open to discussion, and ready to be persuaded.
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Offline bytemaster

Re: Proposal - Significant Enhancement to Market Engine
« Reply #4 on: September 17, 2014, 05:30:13 PM »
I do not think this proposal would achieve the goal of 1:1 peg.

The reason why there lacks liquidity is because the peg does not work well. The reason why the peg does not work well is because there are imbalanced demands from two sides of the market. Right now, there is not much incentive to hold BitCNY or BitUSD. Sometime in the future, there might be too much incentive to hold BTAs, if much forced coverage occurs, which makes the interest of holding BTAs high enough. That is to say, the demands from two sides of the market will fluctuate, and we need a self-adjustable tool to compensate the demand difference. There will be ALWAYS uneven demands from the two sides.

Under this proposal, even if the collateral multiple is raised, as a BTSX bull, I personally do not have the incentive to hold BitUSD/BitCNY and be a market maker. I don't care as much for the collateral as for how much interest I would receive for holding BTAs. Take BitCNY for example, why would I want to hold BitCNY while I can earn higher interest holding real CNY outside?

What is our goal? 1:1 peg for BTAs, right? Only when this occurs, will there be exchange agents that honors 1:1 exchange. Then merchants are willing to take BitUSD/BitCNY as payment, because they know they can exchange for real USD/CNY anytime.

Market makers want to earn the spread. This is their only goal. Simple as that. In a one-sided market, no one dares to be the market makers, because they would end up holding most of the BitUSD/BitCNY while no one else wants to hold. Higher/adjustable collateral would not solve the problem of one-sided market.

Open to discussion, and ready to be persuaded.

The purpose of this proposal is to address exactly what you said:  market makers shouldn't have to hold BitUSD *EVER* because who wants BitUSD in an experimental system unless they really believe in the peg *and* believe BTSX is currently overvalued *or* they are using BitUSD as a merchant who doesn't want volatility.

The early adopters, the bulls, are the ones who want the peg to work and they should be able to provide a peg and "make the market" without being stuck holding BitUSD.

So as a market maker if you "short" 100% of the BitUSD you sell... then you you buy BitUSD you go from being "leveraged BTSX" to just "BTSX".   You make the spread without exposure to USD.

There is demand for checking accounts that don't pay interest or "trading accounts" which don't pay interest as high as available elsewhere.  If there is a dollar crisis and banks start paying 50% interest then no one will want to hold USD for long (due to hyper-inflation) but that is an issue with the USD and not BTSX. 

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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline CLains

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #5 on: September 17, 2014, 05:33:16 PM »
Agent86 has entered the building!  8)

I just want to say, keep the eagle eye view firmly in mind: In the end nobody is going to care how much work the price feed does if they get 30% on bitUSD and it is regarded as safe enough and close enough pegged to USD. Whoever does this will destroy everyone else.
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Offline gulu

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #6 on: September 17, 2014, 05:38:12 PM »
This is an earlier proposal.
https://bitsharestalk.org/index.php?topic=7865.0

The main point is to add an market-adjusted interest rate. The interest is from the collateral, serving as a fee from the shorts paid to the longs. This adds cost for shorting BTAs. Of course, the interest rate can be negative, if the demand ever reverses. In the traditional stock market, you do pay fees to your broker for borrowing stocks.

The adjustable interest rate can be determined from parameters in the market. For example, if BitUSD is consistently trading under feed price, then the interest rate rises, adding incentive for people to buy and hold BitUSD.
« Last Edit: September 17, 2014, 07:11:35 PM by gulu »
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Offline gulu

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #7 on: September 17, 2014, 05:49:45 PM »
I do not think this proposal would achieve the goal of 1:1 peg.

The reason why there lacks liquidity is because the peg does not work well. The reason why the peg does not work well is because there are imbalanced demands from two sides of the market. Right now, there is not much incentive to hold BitCNY or BitUSD. Sometime in the future, there might be too much incentive to hold BTAs, if much forced coverage occurs, which makes the interest of holding BTAs high enough. That is to say, the demands from two sides of the market will fluctuate, and we need a self-adjustable tool to compensate the demand difference. There will be ALWAYS uneven demands from the two sides.

Under this proposal, even if the collateral multiple is raised, as a BTSX bull, I personally do not have the incentive to hold BitUSD/BitCNY and be a market maker. I don't care as much for the collateral as for how much interest I would receive for holding BTAs. Take BitCNY for example, why would I want to hold BitCNY while I can earn higher interest holding real CNY outside?

What is our goal? 1:1 peg for BTAs, right? Only when this occurs, will there be exchange agents that honors 1:1 exchange. Then merchants are willing to take BitUSD/BitCNY as payment, because they know they can exchange for real USD/CNY anytime.

Market makers want to earn the spread. This is their only goal. Simple as that. In a one-sided market, no one dares to be the market makers, because they would end up holding most of the BitUSD/BitCNY while no one else wants to hold. Higher/adjustable collateral would not solve the problem of one-sided market.

Open to discussion, and ready to be persuaded.

The purpose of this proposal is to address exactly what you said:  market makers shouldn't have to hold BitUSD *EVER* because who wants BitUSD in an experimental system unless they really believe in the peg *and* believe BTSX is currently overvalued *or* they are using BitUSD as a merchant who doesn't want volatility.

The early adopters, the bulls, are the ones who want the peg to work and they should be able to provide a peg and "make the market" without being stuck holding BitUSD.

So as a market maker if you "short" 100% of the BitUSD you sell... then you you buy BitUSD you go from being "leveraged BTSX" to just "BTSX".   You make the spread without exposure to USD.

There is demand for checking accounts that don't pay interest or "trading accounts" which don't pay interest as high as available elsewhere.  If there is a dollar crisis and banks start paying 50% interest then no one will want to hold USD for long (due to hyper-inflation) but that is an issue with the USD and not BTSX.

A little confused. Are you saying someone can short with less than X1 collateral? Could you give an example, please?
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Offline tonyk

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #8 on: September 17, 2014, 05:53:20 PM »
Sorry that I could not post faster... just had to buy some bitAssets to be ready to cover my extensive short positions and even to be  a bit long now....

Now, buying bitAssets instead of outright selling means that I ultimately believe in the system (as always). Not so happy with the month and a halve we (read you) are going to work hard to implement this market 'non-improvements', instead of concentrating on having a stable (non-buggy product) and start marketing to the world, increasing the demand for bitUSD. Utility of bitUSD is the ONLY thing that will ultimately strengthen the peg.


PS
 Quick question -Which order will go first?
short 1 bitUSD at 0.99999, with 2x collateral, or
short 1 bitUSD at 1.00000 BTSX/bitUSD, with 17x collateral?

PSS
It will not be the first time I state this - but I do believe your final decisions  are in the extremely good to genius range.
Just the periods when you decide to think with the right side of your brain (also called A86) often drive me crazy.

« Last Edit: September 17, 2014, 06:00:34 PM by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline jsidhu

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #9 on: September 17, 2014, 05:56:38 PM »
This is an earlier proposal:https://bitsharestalk.org/index.php?topic=7865.0

The main point is to add an market-adjusted interest rate. The interest is from the collateral, serving as a fee from the shorts paid to the longs. This adds cost for shorting BTAs. Of course, the interest rate can be negative, if the demand ever reverses. In the traditional stock market, you do pay fees to your broker for borrowing stocks.

The adjustable interest rate can be determined from parameters in the market. For example, if BitUSD is consistently trading under feed price, then the interest rate rises, adding incentive for people to buy and hold BitUSD.

As Vitalik Buterin argued here: https://bitcointalk.org/index.php?topic=324830.msg3581512#msg3581512

The peg will either tend towards 0 or 1 (0 under a black swan event when it breaks), 1 otherwise. What we need is a system such that the further away from 1 (up or down) the more incentive to bring it back to 1, above 1 shorts have an incentive, below 1 longs have an incentive and further away the more incentive. Thus you will not tend towards 0 under a black swan as incentive should be high enough to start bringing it back to 1. Ofcourse you argued that time should be considered and that may be a valid parameter, ie: the longer it is above 1 the more incentive, and people start to anticipate the event that it goes below 1 and the covers happen.
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Offline theoretical

Re: Proposal - Significant Enhancement to Market Engine
« Reply #10 on: September 17, 2014, 05:57:01 PM »
So under bytemaster's proposal, shorts would all execute at the feed price and compete on collateral.

I like the idea of letting high collateral positions absorb the short demand:  The more BTSX is tied up in collateral, the better the BTSX price.

I dislike the increased reliance on the feed.  And as gulu noted, forcing shorters to sell at the feed will risk a "demand crisis":  When BitUSD demand is high, it might blow through the "short wall" at the feed and get little resistance thereafter, since few BitUSD holders would want to place Ask orders when they think BitUSD is going up.

What if we allow two different types of shorts:  "feed shorts" which must sell at the feed and compete with each other by offering more collateral (but 2.20x is the minimum), and "fixed-price shorts" which sell for 2x collateral?  Feed shorts always get priority over normal shorts, but normal shorts are there to back up the system when nobody wants to feed short (i.e. in a bear market).

If we do see a bear market and nobody wants to feed short because everyone thinks BitUSD will go up in the short term, then normal shorts will still be able to sell at a premium to the feed, increase the supply, limit BitUSD rise, and prevent a BitUSD shortage or "demand crisis" where everyone wants BitUSD but there isn't enough to satisfy the demand, driving prices upward.

I would also like to propose adding an optional minimum price (as well as a maximum price) to a feed short.  Giving users more control is always good!
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Offline bytemaster

Re: Proposal - Significant Enhancement to Market Engine
« Reply #11 on: September 17, 2014, 06:00:01 PM »
We have fixed price shorts... they only sell when the "feed is below their price" and can set what ever collateral ratio they want (greater than 2x). 

Blowing through the sell wall won't be a problem because at a certain price BitUSD demand goes away to.  "high BitUSD" is much less of a problem than "low BitUSD".

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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline jsidhu

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #12 on: September 17, 2014, 06:01:29 PM »
We have fixed price shorts... they only sell when the "feed is below their price" and can set what ever collateral ratio they want (greater than 2x). 

Blowing through the sell wall won't be a problem because at a certain price BitUSD demand goes away to.  "high BitUSD" is much less of a problem than "low BitUSD".

But this reliance on feeds is becoming necessary whereas a properly designed incentive system can do away from a feed? (thinking long term) We need to try to keep dependence on feed down upon design reviews not increase them? I only say properly as I believe there is a solution out there without the feeds.

I've always that either you are a bull or a bear, you can't be both long term. Ofcourse it will increase liquidity but I think marketing the product will go a longer way to help with the spreads. I'm not so sure about the assumption that the bears would cause a higher spread if there simply just more bears around.
« Last Edit: September 17, 2014, 06:10:57 PM by jsidhu »
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Offline twitter

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Re: Proposal - Significant Enhancement to Market Engine
« Reply #13 on: September 17, 2014, 06:10:35 PM »
BM,  look like delegates need to spend more resource/time on you new proposal. 
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Offline theoretical

Re: Proposal - Significant Enhancement to Market Engine
« Reply #14 on: September 17, 2014, 06:10:53 PM »
We have fixed price shorts... they only sell when the "feed is below their price" and can set what ever collateral ratio they want (greater than 2x). 

Blowing through the sell wall won't be a problem because at a certain price BitUSD demand goes away to.  "high BitUSD" is much less of a problem than "low BitUSD".

So how exactly do the feeds compete on collateral then?  Under your system, if there's a short at 32.00 offering 2x collateral and another short at 32.01 offering 10x collateral, and the feed is at 31.80, what happens?

My understanding was that both shorts would be forced to execute at 31.80, since the number (32.00 or 32.01) is a maximum price.  And then the 10x collateral would win (take priority).  Am I misunderstanding?
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