Liquidity Proposal

[monsterer]

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?

[clout]

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.

[clout]

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.

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.

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.

[merivercap]

*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.

 

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.

[maqifrnswa]

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.

[clout]

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.

[jakub]

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]

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.

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.

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.

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]

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?

[clout]

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

[tonyk]

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.

[clout]

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.

[clout]

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.

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.

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.

[tonyk]

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.

[clout]

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.