Author Topic: Liquidity Proposal  (Read 3395 times)

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clout

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Liquidity Proposal
« on: November 29, 2015, 01:01:37 pm »
*To any mods that would attempt to move this post, please refrain from doing so, as this is not a concrete proposal, but rather a prompt for discussion.

Introduction
There has been much discussion lately about the benefits and costs of the SQP and forced settlement features. Proponents of these features suggest that they protect bitasset holders in illiquid markets. The opposition sees the features as being a hinderance to generating liquidity and market activity. The best solution for protecting bitasset holders,however, is not through setting parameters, but rather by improving liquidity in the first place. It would be far easier for us to come to consensus on how to provide adequate liquidity than to come to consensus on what the appropriate SQP should be.

If we allocate a substantial amount of BTS to the provision of liquidity, through market making activities in gateway markets, we can ensure that bitassets can be acquired and exchanged for their corresponding gateway asset and subsequently their corresponding real equivalent. This is the goal that Bitshares attempts to achieve, and we can do so while reducing leverage in the system and tightening the spread between bitassets and their underlying.

The Neutral Market Maker
Assuming that SQP and forced settlement were not a consideration (i.e. collateral from margin called positions created buying support at the feed and bitasset holders could not force settlement), a neutral buyer and seller of a given bitasset could be formed. This market maker would maintain a long BTS position by solely purchasing and selling bitassets in their gateway market.

If the value of BTS were to fall, and the market maker’s short position was left under collateralized, the collateral would be sold at the feed price and provide a buy wall for the bitasset, allowing users to redeem their bitassets for their proportional value in BTS or for their respective amount in the real asset. The market makers short position would never have to be fully closed, and their neutral position would allow them to ensure that bitassets were collateralized 100% at all times by their underlying asset, held in the “vaults” of gateway operators.  The greater the market share of neutral participants like the proposed market maker, the more efficient these markets will work during both the booms and busts in the BTS price.

The market maker, whose capital would be supplied by BTS shareholders, would be subject to the risk that the gateway terminated operations without redeeming all outstanding IOUs. This risk can be mitigated through transparent accounting of gateway operations as well as a diligent selection of gateway markets by these neutral market makers.

Proposal for Neutral Market Maker
This is a preliminary proposal that will require much discussion to hammer out the necessary logistics. It will require widespread community support, but if implemented correctly can dramatically shape up the condition of our bitasset markets and enhance the trading experience on the Bitshares exchange. The following is a procedural guide to how this worker proposal would be implemented:

  • Submit a worker proposal for 135m BTS (to be divided evenly between market making in BitBTC, BitUSD and BitCNY gateway markets.
  • The market maker account would be controlled by 15 - 35 unique community member accounts that would have to unanimously sign off on all transaction from this account.
  • The market maker committee would have to  sign off on borrowing 15m BTS worth of each of the aforementioned bitassets.
  • The committee would then sign off on selling the bitassets in their corresponding gateway markets at a 1:1 conversion.
  • If the threshold of bitasset sales is reached. The committee would then sign off on buying back the bitasset at a 1:1 conversion.
  • Repeat steps 4 and 5 indefinitely


The Dynamics of the Multisig Market Maker Account

  • The market maker budget would simply be a capital endowment that could only be used for the purpose of providing liquidity to these gateway markets. So long as there is one honest member of the committee it can not be used for anything else. There would be no added sell pressure to BTS, since the funds would only be used in the internal markets.
  • In the case that the entire committee does not sign off on borrowing the bitasset then the allocated funds will essentially be burned
  • In the case that the entire committee does not sign off on selling the borrowed bitasset the position will ride until it is forced to close from margin call. Once again this would be tantamount to burning the allocated funds.
  • In the case that the entire committee does not sign off on repurchasing bitassets with their corresponding gateway asset, the gateway operator can redeem the market maker account's outstanding credit.

Using SQP and forced settlement is an inadequate way to protect against illiquid markets. We can instead provide the liquidity ourselves and leverage the tools for consensus that the Bitshares blockchain affords.

I would like for the community to discuss and delegate the following responsibilities to ultimately bring about this proposal:
  • Find a sufficient number of trustworthy community members to manage market maker account
  • Provide easy to use documentation on how to sign off on proposed transaction so all market maker committee members can fulfill their role
  • Reduce SQP to 100% and suspend forced settlement
  • Select the most trustworthy gateway operators to to provide market making for
  • Submit proposal if all criteria above are met

Please discuss the costs, benefits and feasibility of such a proposal. If we can execute this well, we will be able to more easily market our bitassets and steer Bitshares in the right direction.
« Last Edit: November 29, 2015, 01:37:02 pm by clout »

Offline Empirical1.2

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Re: Liquidity Proposal
« Reply #1 on: November 29, 2015, 02:25:26 pm »
At the present time, most demand for NuBits occurs when BTC is clearly falling. I expect demand for BitAssets to be similar.

Apparently creating a profitable/neutral market maker in these conditions is no easy task.

The problem with market making is its only profitable in mean reverting markets (sometimes referred to as ranging), as soon as you get a strong trend the market maker will lose money because it will end up with an unbalanced inventory of assets. That risk makes designing a good one very very complicated.


I believe NuShares holders have to substantially compensate their market makers in order to allow them to maintain a tight peg.

Quote
They provide liquidity to support Nubits pegging at $1 and get compensation from Nu Shareholders.

https://nulagoon.com/

Would this 'neutral market maker' not actually be fairly costly if we wanted to provide reasonable liquidity?
If you want to take the island burn the boats

clout

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Re: Liquidity Proposal
« Reply #2 on: November 29, 2015, 03:01:25 pm »
The market maker is  long BTS. Its inventory consist of assets that have the same market value. The market maker is more like a centralized counterparty that absorbs the risk of gateway default, allowing the users to directly deposit a given asset and receive its corresponding bitasset. I think the risk is managable. As long as gateway operators are held accountable, each bitasset acquired from the market maker will be redeemable for the real asset at par value.

This wouldn't cost us anything, unless I'm mistaken about something.

jakub

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Re: Liquidity Proposal
« Reply #3 on: November 29, 2015, 03:17:39 pm »
The market maker is  long BTS. Its inventory consist of assets that have the same market value. The market maker is more like a centralized counterparty that absorbs the risk of gateway default, allowing the users to directly deposit a given asset and receive its corresponding bitasset. I think the risk is managable. As long as gateway operators are held accountable, each bitasset acquired from the market maker will be redeemable for the real asset at par value.

This wouldn't cost us anything, unless I'm mistaken about something.
I think the idea looks good but I think it would help a lot if you made the description less abstract and explained it using an example, with a real bitasset and real price.
I took me some effort to understand that what you're proposing is not a standard liquidity bot (which is exposed to the price trend risk as Empirical1.2 noticed) but rather a very unique bot that only absorbs the risk of a gateway default.
This distinction is clear for me now but it was not the case when I initially read the OP.

Offline tonyk

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Re: Liquidity Proposal
« Reply #4 on: November 29, 2015, 03:32:21 pm »
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.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline Akado

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Re: Liquidity Proposal
« Reply #5 on: November 29, 2015, 03:54:10 pm »
Isn't this what metaexchange and openledger aim to achieve with their crowdsales? Or you're specifically talking about bitAssets and not UIA? That's something I would like to see.

The problem atm is the bitAsset system either seems flawed or simply lacks liquidity. And no I'm not technical enough to provide with a better system for bitAssets, I'm just mentioning this because of posts I've seen lately.

So we maybe have our priorities wrong and should just bet on fixing the bitAssets system before we continue with new features? That's something that I assume everyone would like - to have the base product of BitShares working at 100%.

It seems there's a lack of balance in the Force and shorts are not compensated enough. With no shorts, no bitAssets will be created. So maybe we should create something to compensate them? I think that's the Million Bitshares Question... If shorts had more incentives, they would provide more liquidity right? It's just a matter of brainstorming over that until someone comes up with a decent idea.
« Last Edit: November 29, 2015, 03:57:59 pm by Akado »
https://metaexchange.info | Bitcoin<->Altcoin exchange | Instant | Safe | Low spreads

clout

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Re: Liquidity Proposal
« Reply #6 on: November 29, 2015, 07:50:42 pm »
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.

The thing is that we can do this on a large scale and in a more coordinated fashion than gateways can on their own. I think this is a service that should be provided by Bitshares, itself, and not any other third parties. We can't rely on altruism from individuals or gateways to put up their own money and maintain a tight spread with large depth. We have to leverage the blockchains features such as multisig to get this done on a large scale, so that users can at all times convert large volumes of bitassets to their real equivalent at a one to one ratio.

Offline tonyk

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Re: Liquidity Proposal
« Reply #7 on: November 29, 2015, 08:03:19 pm »
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.

The thing is that we can do this on a large scale and in a more coordinated fashion than gateways can on their own. I think this is a service that should be provided by Bitshares, itself, and not any other third parties. We can't rely on altruism from individuals or gateways to put up their own money and maintain a tight spread with large depth. We have to leverage the blockchains features such as multisig to get this done on a large scale, so that users can at all times convert large volumes of bitassets to their real equivalent at a one to one ratio.

As I said it is a "Nope" from me personally, others might have their own views, which is more than fine.
In my view gateways should charge whatever fee they like and deposit customers' funds directly to bitAssets.
As for the committees and or multi-sig accounts - it is not really a true blockchain level - if you do not trust me read other threads from today and yesterday regarding the level of wrong such bodies are capable of.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

clout

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Re: Liquidity Proposal
« Reply #8 on: November 29, 2015, 08:10:31 pm »
Isn't this what metaexchange and openledger aim to achieve with their crowdsales? Or you're specifically talking about bitAssets and not UIA? That's something I would like to see.


This is not the same. The point of this operation is not generate a profit, but to supply 1:1 conversion of bitassets and their gateway counterpart, so that there is a 1:1 conversion of bitassets and their underlying asset.

Quote
The problem atm is the bitAsset system either seems flawed or simply lacks liquidity. And no I'm not technical enough to provide with a better system for bitAssets, I'm just mentioning this because of posts I've seen lately.

So we maybe have our priorities wrong and should just bet on fixing the bitAssets system before we continue with new features? That's something that I assume everyone would like - to have the base product of BitShares working at 100%.

The point of this post was to say that the bitasset market can work without the need for SQP greater than 100% and without forced settlement. When liquidity is provided these features are irrelevant. This proposal would fix the issue of liquidity, which is what we need to do in order to make bitassets work. There's nothing wrong with the current bitasset scheme from a technical perspective. We don't need to do anything to alter the market dynamics.

Additionally, this is not a new feature. This is a proposal for a budget of BTS to be allocated for the purpose of neutral market making, which would require an appointed committee to sign off on all transactions. I don't know how fully dynamic account permissions has been implemented, but that is all that is required from a features standpoint. The rest depends upon coordination of the market maker committee to reach unanimous decisions on how it should operate as well as the consent of the general committee to allocate a budget for this endeavor.

Quote
It seems there's a lack of balance in the Force and shorts are not compensated enough. With no shorts, no bitAssets will be created. So maybe we should create something to compensate them? I think that's the Million Bitshares Question... If shorts had more incentives, they would provide more liquidity right? It's just a matter of brainstorming over that until someone comes up with a decent idea.

You didn't understand what I wrote. You don't need shorts and longs for the market to work. In fact the more market participants that have exclusively short, and exclusively long positions the less efficient the market will be because these participants are sensitive to the price movement of BTS and respond accordingly. The neutral market maker is always long BTS, but creates bitassets that can be exchanged for their gateway counterpart at a 1:1 conversion. The market maker is never subject to the risk that BTS price will move dramatically against the price of the underlying asset for a given bitasset market, instead the neutral market maker is only subject to the default of the gateways IOUs it holds.

clout

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Re: Liquidity Proposal
« Reply #9 on: November 29, 2015, 08:11:59 pm »
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.

The thing is that we can do this on a large scale and in a more coordinated fashion than gateways can on their own. I think this is a service that should be provided by Bitshares, itself, and not any other third parties. We can't rely on altruism from individuals or gateways to put up their own money and maintain a tight spread with large depth. We have to leverage the blockchains features such as multisig to get this done on a large scale, so that users can at all times convert large volumes of bitassets to their real equivalent at a one to one ratio.

As I said it is a "Nope" from me personally, others might have their own views, which is more than fine.
In my view gateways should charge whatever fee they like and deposit customers' funds directly to bitAssets.
As for the committees and or multi-sig accounts - it is not really a true blockchain level - if you do not trust me read other threads from today and yesterday regarding the level of wrong such bodies are capable of.

Because there is no liquidity (this is the essential problem this proposal solves) the fee that gateways charge will always be prohibitively costly such that we will not encourage new membership as it would be far more convenient to use centralized exchanges.

Offline tonyk

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Re: Liquidity Proposal
« Reply #10 on: November 29, 2015, 08:55:45 pm »
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.

The thing is that we can do this on a large scale and in a more coordinated fashion than gateways can on their own. I think this is a service that should be provided by Bitshares, itself, and not any other third parties. We can't rely on altruism from individuals or gateways to put up their own money and maintain a tight spread with large depth. We have to leverage the blockchains features such as multisig to get this done on a large scale, so that users can at all times convert large volumes of bitassets to their real equivalent at a one to one ratio.

As I said it is a "Nope" from me personally, others might have their own views, which is more than fine.
In my view gateways should charge whatever fee they like and deposit customers' funds directly to bitAssets.
As for the committees and or multi-sig accounts - it is not really a true blockchain level - if you do not trust me read other threads from today and yesterday regarding the level of wrong such bodies are capable of.

Because there is no liquidity (this is the essential problem this proposal solves) the fee that gateways charge will always be prohibitively costly such that we will not encourage new membership as it would be far more convenient to use centralized exchanges.

The positives from this proposal are not lost on me!

 And I am not against it as even close to  as strongly, as the other stuff I happened to object today. But on this particular point I disagree - Openledger will have enough funds, from the 1 mil or so from the ICO, to use to provide more than enough liquidity to start the ball rolling.

Still, as BM would say - I just do not like sub-optimal solutions.

PS
At the end of the day those 135 or so mil BTS,  will be used to pay the difference between the premium on any bitAsset and the perfect 1:1 peg. I believe either the gateways will have to pay it if they believe the system can have 1:1 peg or simply present their customers with the reality that 1 bitUSD is one or (hopefully slightly) more USDs.
« Last Edit: November 29, 2015, 09:10:21 pm by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

clout

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Re: Liquidity Proposal
« Reply #11 on: November 29, 2015, 10:39:30 pm »
The OP takes a more abstract perspective, because the specifics of the market do not matter so long as the gateways do not default on their IOUs and the market maker does not have to account for an SQP higher than 1 or forced settlement. The market maker will always be long BTS. The neutral market maker will only sell a bitasset if it receives an IOU from a gateway. Assuming that the gateways created these IOUs upon receiving deposits, there is then a 100% reserve backing the bitassets that are distributed by this market maker. The market maker essentially holds our customers deposits through various gateways. It is a custodian for customer deposits, while simultaneously mitigating the cost of an individual gateway going down or being unable to redeem its outstanding IOUs.

The benefits are simple:
  • provide direct conversion from real assets to bitassets (i.e. BTC to BitBTC at 1:1 conversion rate) in large volumes
  • provide user protection against individual default of gateways
  • increase supply and usage of bitassets so that trading between bitassets can occur

Here are the risks:
  • One or more gateways defaults on their IOUs: If all gateways are operational then there is 100% reserve for each bitasset distributed by this market maker. In this case the BTS collateral held on the Bitshares blockchain does not matter since 100% reserve ratio is already met. If all gateways were to cease operation the BTS collateral from the market makers short position would absorb the costs of these defaults.
  • The market maker committee colludes to use the allocated BTS for something other than the stated proposal: we then lose the BTS, which can be sold and thereby drive down the BTS price. This is the most severe risk. However, if transactions require unanimous approval by all market maker committee members, only one honest committee member is needed to prevent the theft of of these funds
  • The market maker committee is unable to come to a (unanimous) consensus to sign off on transactions: the funds are then not accessible and there is no net change to BTS supply
  • *Note: Being margin called is not a risk. If the collateral is sold at the feed price then market makers net position is still long BTS

jakub

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Re: Liquidity Proposal
« Reply #12 on: November 29, 2015, 10:55:42 pm »
The market maker will always be long BTS. The neutral market maker will only sell a bitasset if it receives an IOU from a gateway. Assuming that the gateways created these IOUs upon receiving deposits, there is then a 100% reserve backing the bitassets that are distributed by this market maker. The market maker essentially holds our customers deposits through various gateways. It is a custodian for customer deposits, while simultaneously mitigating the cost of an individual gateway going down or being unable to redeem its outstanding IOUs.

Going from GatewayUSD to bitUSD is easy for the market maker bot - if the bot does not have enough bitUSD to sell me, it can always create them by shorting its BTS.
And what about the opposite direction, i.e. from bitUSD to GatewayUSD? What happens if the bot doesn't have enough GatewayUSD to sell me? How can it create GatewayUSD?

EDIT: I guess it will sell some of its BTS to buy GatewayUSD, then complete the trade with me and then sell the bitUSD it received from me to purchase back its BTS.
So if the bot is meant to always stay long BTS, wouldn't that mean the bot will be constantly losing out on the bid/ask spread on the [BTS:GatewayUSD] market?
« Last Edit: November 29, 2015, 11:13:56 pm by jakub »

clout

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Re: Liquidity Proposal
« Reply #13 on: November 30, 2015, 12:13:29 am »
Going from GatewayUSD to bitUSD is easy for the market maker bot - if the bot does not have enough bitUSD to sell me, it can always create them by shorting its BTS.
The market maker starts off by shorting BitUSD with its endowment of BTS. The created BitUSD is then used to purchase GATEWAY.USD at par value. If the market maker runs out of BitUSD it will simply not sell anymore BitUSD and instead only sell its inventory of GATEWAY.USD.

Quote
And what about the opposite direction, i.e. from bitUSD to GatewayUSD? What happens if the bot doesn't have enough GatewayUSD to sell me? How can it create GatewayUSD?
GATEWAY.USD is issueed upon the deposit USD with a given gateway operator. If you deposit your USD at a GATEWAY you will want to exchange them for BitUSD, because you want to mitigate the risk that that particular gateway defaults on its IOU. Your deposit is thus held by the market maker until you claim it by exchanging your BitUSD for the GATEWAY.USD of the gateway where you originally deposited your funds.

Quote
EDIT: I guess it will sell some of its BTS to buy GatewayUSD, then complete the trade with me and then sell the bitUSD it received from me to purchase back its BTS.
The market maker never trades outside of the BitUSD / GATEWAYUSD market.

Quote
So if the bot is meant to always stay long BTS, wouldn't that mean the bot will be constantly losing out on the bid/ask spread on the [BTS:GatewayUSD] market?

To maintain a neutral position the market maker will not trade in any BTS markets. It misses out on the spread of these markets but the point of the market maker is not profit from the spread, but reduce the spread to zero in the markets that are most stable and important in maintaining the bitasset peg. The market maker is also not subject to the loss that result from price quickly moving in one direction or another, which is common in volatile cryptocurrency markets.

jakub

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Re: Liquidity Proposal
« Reply #14 on: November 30, 2015, 07:01:10 am »
The market maker starts off by shorting BitUSD with its endowment of BTS. The created BitUSD is then used to purchase GATEWAY.USD at par value. If the market maker runs out of BitUSD it will simply not sell anymore BitUSD and instead only sell its inventory of GATEWAY.USD.
As the market maker is supposed to be long BTS at all times, I guess when you say "If the market maker runs out of BitUSD" you actually mean "If the market maker reaches the limit of the amount of BitUSD it is allowed to create". Is it correct?

GATEWAY.USD is issueed upon the deposit USD with a given gateway operator. If you deposit your USD at a GATEWAY you will want to exchange them for BitUSD, because you want to mitigate the risk that that particular gateway defaults on its IOU. Your deposit is thus held by the market maker until you claim it by exchanging your BitUSD for the GATEWAY.USD of the gateway where you originally deposited your funds.
When you say "Your deposit is thus held by the market maker until you claim it [back]" this contradicts the assumption that the market maker is BTS long at all times.
And what happens when I decide not to claim back my GATEWAY.USD via the bot and instead choose some other way to get rid of the bitUSD I got from the bot? Won't the bot be stuck with the GATEWAY.USD it originally bought from me?