How to provide liquidity in bridge markets
- Borrow BitBTC with BTS
- Sell BitBTC at 1.005
- Buy BitBTC back at 0.995
- Repay loan
- Net 1% profit
Executing this simple algorithm allows individuals that are long BTS to generate a profit of 1% while still remaining long BTS. I would like to encourage anyone, who would like to help Bitshares liquidity problem, to Borrow BTC and begin selling it at less than a 1% spread on one of these bridge markets.
I don't think this is a good idea, people who do this will get ripped off by creating an arbitrage opportunity for other traders. The good thing is that it should help peg the internal markets; the bad thing is that these market makers will be the ones paying the expense. Here's the arbitrage:
I start with 1 real BTC. I use openledger and trade for 1 openbtc (minus small fee). I trade my 1 openbtc for .99 bitBTC (because of the proposed openbtc:BTC market makers). 1 bitBTC is sold for 1.10 times the value of 1 BTC in the BTS:bitBTC market. I sell my .99 bitBTC for 1.089 bitBTC worth of BTS on the DEX. I then take my 1.089 bitBTC worth of BTS to openledger and trade it to BTC.
I start with 1 BTC, I end with 1.089 BTC.
The BTC:BTS market moved closer to peg.
The market maker is now short .99 BTC (and the value of BTC dropped).
No one will sell me openbtc when they can go to openledger and get a better deal, so the market maker will go short forever until the market makers run out of funds or until the spread between settlement and bitBTC < 1%.
I posted recently, maybe bitshares UIAs should be the main mechanism for trading... In that case, market making the trade.btc:openbtc markets is more important.
An alternative idea would be to mirror the bts:btc market in the openbtc:btc market with some profit. That requires bots (and to properly map bts to openbtc), but why would someone trade that way when they could directly go openbtc:bts:btc on their own without paying a premium?