Author Topic: Liquidity Proposal  (Read 3241 times)

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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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Offline maqifrnswa

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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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Offline maqifrnswa

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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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