Author Topic: Liquidity Proposal  (Read 6570 times)

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clout

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Upon looking over the discussion in BM's thread concerning liquidity, I realize that there are many ways for us to provide liquidity and reinforce parity between bitassets and their underlying assets. In his proposal, he suggests that we should pay bitasset holders to put orders on the BTS/ bitasset market. I think this is a terrific idea as it would pay bitasset holders interests for "locking up" their bitassets on the orderbook and supplying liquidity. It would provide a valuable "feature" in lieu of the bond market.

The one problem I have with the proposal is that it concentrates this liquidity effort on the BTS / bitasset market. This is an issue for the following reasons:
  • If I hold a given bitasset and place it on the orderbook to collect the "interest" payment, I am thereby committed to relinquishing my bitasset and exposing myself to the BTS price. The risk associated with this activity would warrant a costly "interest" to payed
  • If the proposal to incentivize participation it will encourage more shorts to enter the market. Given that they are selling their borrowed bitasset for BTS, these shorts are subject to the risk of a falling BTS price. As we have seen in the past two years we cannot depend on these speculators to bolster the bitasset markets

As I have mentioned before, I believe that we should focus our efforts on the gateway markets. If we instead shift the proposal to targeting bitassets placed on the orderbooks of gateway markets then we reduce the risk for the individuals lending their bitassets for liquidity as well as the systemic risk of undercollateralized bitassets.

How does this shifted focus from BTS / Bitasset markets to gateway markets improve on the issues addressed?
  • If you lend your bitassets to provide liquidity on a gateway market, in the event the order is executed you are not left with more volatile asset, but instead one that bears a comparable volatility in price. Thus, the "interest" required for incentivizing lending in this case would be far less than the interest required to incentivizing the same activity within the BTS / bitasset market
  • This proposal would incentivize the creation of bitassets in a fashion that is commensurate with the demand for bitassets from gateway depositors. As previously mentioned, if the short positions that create bitassets are held by those with a neutral position that is long BTS there far less risk in the system. *Note: If the entire bitasset market were comprised of neutral market makers and gateway depositors the collateral for the bitassets would be 100% reserve held by gateways and 200% held in BTS by the blockchain

clout

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Good aim!

Wrong person getting the bill!

Let the gateways get their act together [and combine funds if need be] to foot the bill for what is a service they should provide in the first place.

I agree.

However, if no gateways are going to step up and pony up the funds, then I would support this worker proposal because:

1) We really need to supply liquidity from a centralized source to kickstart the bitasset markets.
and
2) The created BTS wouldnt be going to someone who could dump it on the markets and suppress the price, but would be held by a pool to provide liquidity.  Its possible that it could lose BTS and as a result let those BTS into hands of traers who could sell them, but it might also turn a profit by gaining the spread on trades, and as a result actually be able to burn BTS>


But I would rather have a gateway provide the funds as tony said.

The reason why it makes more sense for Bitshares to supply the capital is because we are not subject to the same opportunity costs as the gateway businesses that you would like to see provide liquidity. We are sitting on $8m in equity value that will erode over time as we do nothing with it.

The capital is not being used for anything else so there is not trade off to consider. Whereas, a gateway must consider the ROI from providing liquidity vs that of another business operation. Additionally, if the amount of capital that they put up to provide this service is not substantial then it might not generate the gains that would warrant its use in this way.

Also, as you mentioned, the probability of dilution is much smaller if this capital is used for internal market making than it would be if used for some other endeavor. Liquidity would generate more volume and greater revenue, so any associated cost from dilution could be offset.

clout

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If you don't like CC cards, think about "cash debit cards." I pay get 90 cents on the dollar to buy a prepaid cash card to obtain liquidity in markets that don't take cash. Same in bitshares, you'll pay a premium to gain liquidity.

BitUSD does not offer the same utility as a credit cards or cash debit cards. No one (that is not a short attempting to close their position) is going to pay a premium for BitUSD when there are better alternatives.


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You can't have both infinite liquidity (redeem 1 bitUSD for 1 USD) and 1:1 parity. My opinion is that infinite liquidity is more important, long term, than 1:1 parity.

I never said anything about infinite liquidity. We don't need infinite liquidity. We need sufficient liquidity to bring down the premium placed on BitUSD and other bitassets so shorts accessed a lower settlement cost. Also forced settlement guarantees "infinite" liquidity depending on the depth of the external BTS markets.

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In the assumption that liquidity is more important than parity, that is the price we must pay.  People may not like it, but nothing comes for free. If you want liquidity, you have to pay for it since someone is taking the risk for your liquidity.

Yes liquidity needs to be payed for, that is the point of this proposal and discussion. The proposal given a neutral market maker would provide liquidity while mitigating most of the risk that an individual buyer or seller would incur. I think it is a completely false assumption that the trade off is between liquidity and parity. They are complimentary. The point of infusing liquidity is to drive down the spread in a given market. Thus in the case of bitassets the spread would fall. If we bring SQP down to 1, the premium will also be reduced. If we do both, that is bring down the SQP and supply liquidity, well then we have liquidity at parity.

Offline maqifrnswa

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I don't know why it is not fine (I'm talking about a 1:1.03 or something like that). When I go to my hardware store and use their credit card, I get a discount. LowesUSD:USD is 0.95:1, and everyone is OK with that.

That's a credit card. They give you a discount because they believe they can make up the difference from interest payments. Is BofAUSD valued less than USD? For that matter is CoinbaseUSD valued at less than USD? BitsharesUSD (ie BitUSD) should be valued at a USD or it is not useful as a store of value or medium of exchange, primarily because it would not provide an accurate unit of account.

That is true, the business model allows for lowes to internally value a CC USD > cash USD. In the same way, BitShares business model allows for bitshares to internally value 1 bitUSD > cash USD.

If you don't like CC cards, think about "cash debit cards." I pay get 90 cents on the dollar to buy a prepaid cash card to obtain liquidity in markets that don't take cash. Same in bitshares, you'll pay a premium to gain liquidity.

As for bank money:
A BofAUSD can be exchanged for 1 physical USD.
A bitUSD can be exchanged for 1 physical USD as long as forced settlement is allowed.

If I want to get a BofAUSD, they will generate me one (via fractional reserve lending). If they generate one and give it to me, I have to pay a premium (interest) so that I can withdraw it immediately for 1 USD. I am paying for that liquidity, for being able to get the money now.

You can't have both infinite liquidity (redeem 1 bitUSD for 1 USD) and 1:1 parity. My opinion is that infinite liquidity is more important, long term, than 1:1 parity.


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Longs should pay the shorts a premium since shorts have more risk.  If you know of a a trust-less system such that longs and shorts have equal risks, please publish that -- that will be exactly what we should do. So far no one in the world has come up with such a system.

No they shouldn't. That's not a desirable contract. The risk has little to do with the contract and everything to do with the market, which is hampered by illiquidity. You need a large buyer and seller to coordinate the market.

In the assumption that liquidity is more important than parity, that is the price we must pay.  People may not like it, but nothing comes for free. If you want liquidity, you have to pay for it since someone is taking the risk for your liquidity.
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Offline Ander

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Good aim!

Wrong person getting the bill!

Let the gateways get their act together [and combine funds if need be] to foot the bill for what is a service they should provide in the first place.

I agree.

However, if no gateways are going to step up and pony up the funds, then I would support this worker proposal because:

1) We really need to supply liquidity from a centralized source to kickstart the bitasset markets.
and
2) The created BTS wouldnt be going to someone who could dump it on the markets and suppress the price, but would be held by a pool to provide liquidity.  Its possible that it could lose BTS and as a result let those BTS into hands of traers who could sell them, but it might also turn a profit by gaining the spread on trades, and as a result actually be able to burn BTS>


But I would rather have a gateway provide the funds as tony said.
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Offline xeroc

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Agreed .. this proposal does not necessarily inprove liquidity in needed markets .. but depending on the premium this approach may help exchanges and gateways to offer a bridge/gateway without(!!!) handing over IOUs

Offline well.attenuated

But the actual value of the assets referenced makes it more like:
Would something like this work?

1) Issue an IOU (like METAEX.BTC)
2) Sell IOU in the DEX for bitBTC at a -10x% premium (e.g. 1.1 METAEX.BTC = 1.00 bitBTC)
3) Offer bitBTC to buyers at a 2*x% premium (eg. 1 BTC = 0.98 bitBTC)

That way you can take 11% loss and hand over 1% to those buying an IOU backed by "real" BTC.
I really don't intend any offence but there are a lot of proposals for work flows like this floating around that don't take actual market price into account.  If a trading algorithm requires 2 non-fungible markets to exist at parity it doesn't really work.

ex:
1) take $1 to bank and exchange for 10 US dimes
2) trade each dime for 1oz gold eagle
3) sell gold coins to pawn shop for $1200 each
4) profit $1199

This doesn't provide liquidity to the dime:gold coin market, and if you artificially fund a "market maker" with a basket of gold coins and set them the task of providing liquidity you will end up very quickly with a pile of dimes.
(bonus: this is why gov. subsidies/interference in industries don't work)
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Offline xeroc

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Would something like this work?

1) Issue an IOU (like METAEX.BTC)
2) Sell IOU in the DEX for bitBTC at a x% premium (e.g. 0.99 METAEX.BTC = 1.00 bitBTC)
3) Offer bitBTC to buyers at a 2*x% premium (eg. 1 BTC = 0.98 bitBTC)

That way you can make 1% profit and hand over 1% to those buying an IOU backed by "real" BTC.

clout

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When the first bots came out, some thought they could make money by straggling the peg to enforce 1:1. It worked until shorters realized it was backwards for shorts to pay interest to longs, and then shorts realized they had more risk than longs and refused to short at or near the peg (and they were correct). As bitUSD demand grew, no shorters met the demand, so price increased relative to the peg (bitUSD> USD). The original market makers held it off for about a week before they went bankrupt or just turned off the bots and let the market reach an equilibrium of 1:1.1 bitUSD:USD until settling around 1:1.05

The first market maker bots were long on both bitUSD and USD, they didn't have to worry about margin calls.

As I have stated, the risks that shorts face are the margin call costs and the illiquidity of the market. Making the SQP = 1 and providing a neutral market maker to supply liquidity would reduce this premium placed on BitUSD.


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I don't know why it is not fine (I'm talking about a 1:1.03 or something like that). When I go to my hardware store and use their credit card, I get a discount. LowesUSD:USD is 0.95:1, and everyone is OK with that.

That's a credit card. They give you a discount because they believe they can make up the difference from interest payments. Is BofAUSD valued less than USD? For that matter is CoinbaseUSD valued at less than USD? BitsharesUSD (ie BitUSD) should be valued at a USD or it is not useful as a store of value or medium of exchange, primarily because it would not provide an accurate unit of account.

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Longs should pay the shorts a premium since shorts have more risk.  If you know of a a trust-less system such that longs and shorts have equal risks, please publish that -- that will be exactly what we should do. So far no one in the world has come up with such a system.

No they shouldn't. That's not a desirable contract. The risk has little to do with the contract and everything to do with the market, which is hampered by illiquidity. You need a large buyer and seller to coordinate the market.


clout

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This is absolutely correct, bitAssets will always be worth more than their gateway products due to the risk imbalance and this has been brought up in several threads.

I don't think we are appropriately identifying the cause of the market imbalance, which is the transactions costs associated with the bitasset contract. In theory the contract should maintain a price of 1 bitassets : 1 underlying asset, but theory does not account for transaction costs that manifest in practice.

The short must consider a variety of transaction costs that the long position does not. If the short is margin called it must consider the cost of its collateral being sold at a discount due to the SQP. The short must also pay the cost of acquiring the bitassets that it owes. This cost stems from the illiquidity of the market. Thus, the SQP and liquidity of the market are priced into the contract. We can easily change the SQP, making illiquidity the primary consideration that increases the price of bitasset contract. Liquidity isn't something that just naturally occurs in a market, it must be provided by market makers (which is why it is crucial for Bitshares to provide this service). Even the largest markets by volume require market makers to produce the necessary liquidity to make these markets efficient.

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Such a bot would borrow buckets of bitAssets (say bitBTC for example) and trade them exclusively in the bitBTC:GatewayBTC markets.  However, if this MM to was only permitted to trade at 1:1, it would exhaust its supply of bitBTC and be left with a large basket of various GatewayBTC's that users would not buy back at 1:1 but only at 1:[1+premium]
Of course gateways could pledge to buy back their own gateway assets but they would need to absorb all the bitBTC created by this committee as reserves and all that created bitBTC liquidity would be absorbed and we would be right back where we started.

First let's identify who the market maker is selling these bitassets (BitBTC) to. The buyer of the BitBTC in the gateway market is a customer that has deposited real BTC and would like to use BitBTC to mitigate the risk of default. If the market maker sells BitBTC for GATEWAY.BTC, it now holds the deposit of that customer.
The customer has the following considerations:
  • hold BitBTC because of its advantages over BTC
  • trade BitBTC for other assets
  • redeem BitBTC for its equivalent in BTS (i.e. through forced settlement or exchange at the BitBTC / BTS price
  • redeem BitBTC for its equivalent in BTC

In case 1, if the customer does not want to redeem their deposit than the GATEWAY.BTC(that represents the customers deposit) will sit on the order book to be claimed by someone who would like to redeem BiTBTC for real BTC.

in case 2, the customer exchanges BitBTC for another asset, meaning there is now someone else that holds BitBTC and has the same aforementioned considerations.

In case 3,  if the BitBTC is force settled, the customer would net less than if he had repurchased his deposit from the GATEWAY.BTC sell wall on the gateway market. The customer will only net a profit from exchanging BitBTC for BTS if the conversion rate from BiTBTC --> BTS --> BTC (BitBTC --> BTC) is greater than the 1:1 conversion supplied by the market maker. If the value the BTS acquired less the cost of conversion from BTS back to BTC is greater than the value of the BTC that could have been attained through the gateway market, the customer may take this route.

The factors that determine the cost of conversion are the spread of BTC / BTS markets, the transfer costs and the time it takes to transfer BTS from Bitshares to an external exchange, during which the BTC / BTS price could change. In general, this would be an inconvenient method of redemption by less advanced trader. It is far more convenient and easier for the customer to account for 1:1 conversion back to BTC instead of going from BitBTC --> BTS --> BTC.

Additionally, the premium placed on BitBTC in the BitBTC / BTS comes from shorts who as I acknowledged before are willing to pay a premium for bitassets because of the SQP and illiquidity of the market. Thus if SQP is reduced to 1 and the market maker provides liquidity in the gateway market, shorts can more easily acquire the bitassets that they owe and this premium would fall.

In case 4,  the customer may want to withdraw a deposit from a different gateway than they originally deposited to. He will only do this if the conversion rate is as good as the one supplied by the market maker in the initial gateway market, or the difference between the two conversion rates is made up by some benefit from withdrawing from the other gateway.
« Last Edit: December 01, 2015, 05:13:29 pm by clout »

Offline maqifrnswa

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Longs should pay the shorts a premium since shorts have more risk.  If you know of a a trust-less system such that longs and shorts have equal risks, please publish that -- that will be exactly what we should do. So far no one in the world has come up with such a system.

I would love to throw some ideas around in discussing such a system. I started a thread with the hopes we could get some ideas going a while ago: https://bitsharestalk.org/index.php/topic,20201.0.html

The really difficult part is the fungable longs; you can design a CFD long/short system with equal risk without (many) issues.

I just posted on there some comments. I think it is a mathematical inevitability that 1 smartcoin > 1 underyling asset if you require that bitshares be on the "Gold Standard." That is, if you require that a smartasset maintains some intrinsic value that is always redeemable.

https://bitsharestalk.org/index.php/topic,20201.msg262543.html#msg262543
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Offline well.attenuated


When the first bots came out, some thought they could make money by straggling the peg to enforce 1:1. It worked until shorters realized it was backwards for shorts to pay interest to longs, and then shorts realized they had more risk than longs and refused to short at or near the peg (and they were correct). As bitUSD demand grew, no shorters met the demand, so price increased relative to the peg (bitUSD> USD). The original market makers held it off for about a week before they went bankrupt or just turned off the bots and let the market reach an equilibrium of 1:1.1 bitUSD:USD until settling around 1:1.05


This is absolutely correct, bitAssets will always be worth more than their gateway products due to the risk imbalance and this has been brought up in several threads.  This is where the OP breaksdown.  Such a bot would borrow buckets of bitAssets (say bitBTC for example) and trade them exclusively in the bitBTC:GatewayBTC markets.  However, if this MM to was only permitted to trade at 1:1, it would exhaust its supply of bitBTC and be left with a large basket of various GatewayBTC's that users would not buy back at 1:1 but only at 1:[1+premium]
Of course gateways could pledge to buy back their own gateway assets but they would need to absorb all the bitBTC created by this committee as reserves and all that created bitBTC liquidity would be absorbed and we would be right back where we started.
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Offline monsterer

Longs should pay the shorts a premium since shorts have more risk.  If you know of a a trust-less system such that longs and shorts have equal risks, please publish that -- that will be exactly what we should do. So far no one in the world has come up with such a system.

I would love to throw some ideas around in discussing such a system. I started a thread with the hopes we could get some ideas going a while ago: https://bitsharestalk.org/index.php/topic,20201.0.html

The really difficult part is the fungable longs; you can design a CFD long/short system with equal risk without (many) issues.
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Offline maqifrnswa

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I don't remember this being tried with Bitshares 1.0. Could you provide any further information on that?

When the first bots came out, some thought they could make money by straggling the peg to enforce 1:1. It worked until shorters realized it was backwards for shorts to pay interest to longs, and then shorts realized they had more risk than longs and refused to short at or near the peg (and they were correct). As bitUSD demand grew, no shorters met the demand, so price increased relative to the peg (bitUSD> USD). The original market makers held it off for about a week before they went bankrupt or just turned off the bots and let the market reach an equilibrium of 1:1.1 bitUSD:USD until settling around 1:1.05

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A neutral market maker has not been possible for Bitshares because of the cost of getting margin called. In Bitshares 1.0 i believe there was a margin call fee which would mean that a neutral market maker, one whose position is long BTS, would still incur that fee given a bear market in BTS. Thus, the market maker would inevitably lose money and be forced to discontinue operation. If there is no cost associated with margin calls then the BTS collateral is sold at the feed price and there is no net loss of BTS.

The first market maker bots were long on both bitUSD and USD, they didn't have to worry about margin calls.

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Not having a one to one peg is a not fine. There's just no way around that one. Bitassets are useless if they are not pegged to their underlying.

I don't know why it is not fine (I'm talking about a 1:1.03 or something like that). When I go to my hardware store and use their credit card, I get a discount. LowesUSD:USD is 0.95:1, and everyone is OK with that.

Longs should pay the shorts a premium since shorts have more risk.  If you know of a a trust-less system such that longs and shorts have equal risks, please publish that -- that will be exactly what we should do. So far no one in the world has come up with such a system.

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Arbitrage opportunities present themselves in inefficient markets. We're not trying to create inefficient markets. There shouldn't be arbitrage opportunities.

you are correct, arbitrage opportunities do not exist in efficient markets. However, when there is an inefficiency, working markets present arbitrage opportunities to correct the inefficiency. We want working and efficient markets. Forced settlement is the arbitrage opportunity that is required for the market to work. Without it, bitCNY becomes fiat without a central bank -- it is just worth what it is worth because people say so, and there is no central bank (Federal Reserve) controlling supply to enforce reasonable value.

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I think this market maker proposal is still possible with forced settlement. The problem I have with forced settlement is that it complicates the bitasset contract. Greater specification in the contract details means that there is going to be a smaller population that demands it. I think that the forced settlement may discourage people from opening short positions because they value being able to determine the settlement of the contract more than the 1% premium from forced settlement.

This is a true point, it does make it more complicated. I see it as a necessary evil -- and if anyone can come up with a better system to control supply to meet demand in a trustless system, I think we should use that system instead.
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How about combining this idea with FeeShares/FeatureShares.
I imagine seeing several committees each being voted by their own FeatureShare and each providing a SERVICE for the blockchain with profits being paid to FeatureShare holders.
Now with that, everyone can buy into MarketMakerShare using BTS or other assets and fund the MarketMaker Committee accounts which is controlled by a set of 5+ people. The funds "raised" by committee can be used to fund a market making bot or whatever makes a profit from trading and profits are used to buy back MarketMaker Shares from the DEX.

Issues:
* we need proposed transactions be approved by committee membes quickly to react on market movements for trading
* MarketMaker shares could be interpreted as securities .. not sure
* Devs need to implement the possibility to have multiple committees each being votes using a different asset