Author Topic: Liquidity Proposal  (Read 6568 times)

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Offline Akado

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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 »
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Offline tonyk

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Good aim!

Wrong person getting the bill!

Let the gateways get their act together [and combine funds if need be] to foot the bill for what is a service they should provide in the first place.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

jakub

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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.

clout

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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.

Offline Empirical1.2

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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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*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 »