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General Discussion / Re: Liquidity, Liquidity, Liquidity
« on: February 03, 2017, 01:00:32 pm »
In my previous post on this thread, I mentioned the liquidity rewards idea that I've been talking about in Telegram. And Telegram user @LogikGeek asked me a question about it in the chat so I wanted to answer here since it's relevant to this thread. The question and answer are below.
Logik Geek asked:
It's not so much the timeframe. It's the fact that they play both sides at all times, buying at the bid and selling at the ask, enabling them to earn the spread. That's what market makers (like @bitcrab) do. And if the market trends too much in one direction (creating an imbalance in their inventory) they know how to hedge it. We need more sophisticated market participants like this and should incentivize them by rewarding anyone who ADDS liquidity to the order book.
This is NOT to say that the other types of participants are not important. In fact, attracting market makers would be *great* for the trader types (@JonnyBitcoin, @clayop, etc) who want to short BitAssets into existence, because their biggest fear is being unable to get out of their short position if BTS goes down. They would not have to worry about this if we had proper market makers who would be sitting on the ASK, giving the BitAsset shorters a way out whenever they need it. These BitAsset shorters would also benefit by earning some of the liquidity rewards, as long as they are ADDING liquidity (by selling BitAssets at the bid), not TAKING liquidity (by selling BitAsets at the ask).
Logik Geek asked:
Quote
@tbone you have said in the past that bitshares needs to become attractive to traders who short bitusd instead of long term investors because long term bitshares investors creating bitusd depend on the price of bts to rise. By traders did you mean traders who make trades on a time horizon that is so small (next hours to days) that bts is as likely to to up as down during that time, effectively eliminating the effect of long term price trends of bts?
It's not so much the timeframe. It's the fact that they play both sides at all times, buying at the bid and selling at the ask, enabling them to earn the spread. That's what market makers (like @bitcrab) do. And if the market trends too much in one direction (creating an imbalance in their inventory) they know how to hedge it. We need more sophisticated market participants like this and should incentivize them by rewarding anyone who ADDS liquidity to the order book.
This is NOT to say that the other types of participants are not important. In fact, attracting market makers would be *great* for the trader types (@JonnyBitcoin, @clayop, etc) who want to short BitAssets into existence, because their biggest fear is being unable to get out of their short position if BTS goes down. They would not have to worry about this if we had proper market makers who would be sitting on the ASK, giving the BitAsset shorters a way out whenever they need it. These BitAsset shorters would also benefit by earning some of the liquidity rewards, as long as they are ADDING liquidity (by selling BitAssets at the bid), not TAKING liquidity (by selling BitAsets at the ask).