Author Topic: Liquidity Proposal  (Read 3422 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?

clout

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Re: Liquidity Proposal
« Reply #15 on: November 30, 2015, 04:08:32 pm »
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?

Yes, the marker simply has reached it limit of the amount of BitUSd it is allowed to create. BitUSD can be attained through other means, the market maker is not the only player in the BitUSD market. If a customer receives BitUSD from another neutral party then they receive the same benefit as if they had acquired the USD from the market maker. If the customer receives BitUSD from someone that does not maintain a neutral long BTS position, then their BitUSD is just back by the collateral from the BitUSD contract (the collateral provided by the short)

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?

The market maker is long BTS because it only trades the borrowed BitBUSD for GATEWAY.USD. At all times it holds the balance of the BitUSD loan held in BitUSD and USD (from one or more gateways).

If someone sells their BitUSD by other means,  the market maker's position doesn't change. Someone else that would like to redeem their BitUSD through one of the gateways, that the market makers holds IOUs from, can do so through this market maker. If the market maker believes that its inventory of a GATEWAY1.USD is unwarranted given the demand to redeem GATEWAY1.USD  then the market maker can either exchange GATEWAY1.USD for GATEWAY2.USD (assuming that there is more demand to redeem  GATEWAY2.USD  than to redeem GATEWAY1.USD) or it can redeem GATEWAY1.USD and deposit to GATEWAY2 and thereby receive GATEWAY2.USD.

if there were a perceived imbalance in the flow of capital from a particular gateway (i.e. people deposit to this gateway but make withdrawals elsewhere - this might be relevant if the gateway provides a remittance business) the market maker could either not purchase IOUs from that gateway or it could find a complementary gateway (one where the capital flows are opposite - more people withdrawing than depositing) and provide the aforementioned process of exchanges GATEWAY1.USD for GATEWAY2.USD or converting GATEWAY1.USD to GATEWAY2.USD (i.e. redeeming GATEWAY1.USD and depositing to GATEWAY2)

Additionally, the capital that the market maker is using for its operation is an endowment from Bitshares (the committee). It is meant to be used only for this service. Thus, the market makers orders can sit on the books indefinitely until they are executed. There's no consideration for better places to allocate funds. There is never a point that the market maker is 'stuck' with GATEWAY.USD, because it has no intention of settling its BitUSD loan, except through margin call liquidation at the feed price. The BitUSD loan can remain outstanding so long as the market maker continues operation.
« Last Edit: November 30, 2015, 04:11:50 pm by clout »

Offline maqifrnswa

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Re: Liquidity Proposal
« Reply #16 on: November 30, 2015, 07:12:59 pm »
wasn't this tried with bitshares 1.0? It failed and destroyed the market makers that didn't account for an asymmetry in risk between longs and shorts will always prevent a 1:1 peg. Not being 1:1 is fine -- and is why I get a discount at my hardware store if I use their credit card instead of cash.

LowesUSD > USD

Instead of forcing it, I'm all in favor of having the blockchain build in these same incentives. Forced settling on one side, and some "seller of last resort" on the other. Maybe accumulated fees/fee pool can be "force bought" at feed +25%.

This creates arbitrage on both sides: when undervalued, a long can force settle smartcoins for profit. When overvalued, a short can force force buy from the fee pool, close out their position, and go long BTS for a profit.

EDIT: I'm extremely against an 1:1 conversion. bitshares should not accept that liquidity risk. I'm extremely against removing forced settling. longs must have zero liquidity risk.
« Last Edit: November 30, 2015, 08:11:26 pm by maqifrnswa »
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Offline merivercap

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Re: Liquidity Proposal
« Reply #17 on: November 30, 2015, 07:48:47 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.

 +5% +5% +5%

I'm in agreement with your philosophy/analysis of trading markets in general based on this post, and think this project would be worthy for the community to pursue.  We should encourage & recruit other third parties to do the same on their own, but having a community-run liquidity provider exactly how you describe would be very beneficial.
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clout

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Re: Liquidity Proposal
« Reply #18 on: December 01, 2015, 01:55:16 am »
wasn't this tried with bitshares 1.0? It failed and destroyed the market makers that didn't account for an asymmetry in risk between longs and shorts will always prevent a 1:1 peg. Not being 1:1 is fine -- and is why I get a discount at my hardware store if I use their credit card instead of cash.

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

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.

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.

Quote
Instead of forcing it, I'm all in favor of having the blockchain build in these same incentives. Forced settling on one side, and some "seller of last resort" on the other. Maybe accumulated fees/fee pool can be "force bought" at feed +25%.

This creates arbitrage on both sides: when undervalued, a long can force settle smartcoins for profit. When overvalued, a short can force force buy from the fee pool, close out their position, and go long BTS for a profit.

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

Quote
EDIT: I'm extremely against an 1:1 conversion. bitshares should not accept that liquidity risk. I'm extremely against removing forced settling. longs must have zero liquidity risk.

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.
« Last Edit: December 01, 2015, 01:58:23 am by clout »

clout

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Re: Liquidity Proposal
« Reply #19 on: December 01, 2015, 07:28:32 am »
This proposal is primarily contingent upon the use dynamic account permissions. If this feature is available we can do a thorough test of this market maker using a test network.

Offline monsterer

Re: Liquidity Proposal
« Reply #20 on: December 01, 2015, 10:00:09 am »
Arbitrage opportunities present themselves in inefficient markets. We're not trying to create inefficient markets. There shouldn't be arbitrage opportunities.

Aren't all markets inefficient without arbitrage?
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Re: Liquidity Proposal
« Reply #21 on: December 01, 2015, 10:14:07 am »
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
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Re: Liquidity Proposal
« Reply #22 on: December 01, 2015, 02:40:18 pm »
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

Quote
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.

Quote
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.

Quote
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.

Quote
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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Offline monsterer

Re: Liquidity Proposal
« Reply #23 on: December 01, 2015, 02:50:39 pm »
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 well.attenuated

Re: Liquidity Proposal
« Reply #24 on: December 01, 2015, 03:20:46 pm »

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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Re: Liquidity Proposal
« Reply #25 on: December 01, 2015, 04:14:43 pm »
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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clout

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Re: Liquidity Proposal
« Reply #26 on: December 01, 2015, 05:06:01 pm »
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.

Quote
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 »

clout

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Re: Liquidity Proposal
« Reply #27 on: December 01, 2015, 05:46:20 pm »
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.


Quote
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.

Quote
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.


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Re: Liquidity Proposal
« Reply #28 on: December 01, 2015, 07:57:33 pm »
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.
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Offline well.attenuated

Re: Liquidity Proposal
« Reply #29 on: December 01, 2015, 08:49:12 pm »
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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Re: Liquidity Proposal
« Reply #30 on: December 01, 2015, 09:11:10 pm »
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
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Re: Liquidity Proposal
« Reply #31 on: December 01, 2015, 09:52:42 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.

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 maqifrnswa

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Re: Liquidity Proposal
« Reply #32 on: December 01, 2015, 09:53:24 pm »
Quote
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.


Quote
Quote
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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Re: Liquidity Proposal
« Reply #33 on: December 02, 2015, 12:03:46 am »
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.


Quote
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.

Quote
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.

clout

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Re: Liquidity Proposal
« Reply #34 on: December 02, 2015, 12:14:32 am »
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

  • Guest
Re: Liquidity Proposal
« Reply #35 on: December 02, 2015, 01:06:30 am »
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