Author Topic: Liquidity Proposal  (Read 3393 times)

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Offline xeroc

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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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Offline Ander

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

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

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

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

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

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

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


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

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

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

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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