Author Topic: BitUSD Market Maker - Proposal for Discussion  (Read 17790 times)

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Offline maqifrnswa

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #105 on: August 31, 2014, 05:19:20 pm »
There are so many innovative concepts in bitsharesx, a built in market maker would be another one.

However, there are several points I want to make:

1) I like the idea of a built-in market maker as a way to improve liquidity, but I'm worried about the market getting too complex with too many "external" rules. External rules always add a "cost" and an inefficiency. There is a reason why the offset exists, and removing it might not be the best for the market. If the market maker exists within current rules (e.g., buying all shorts listed below spot), that would be ok.

2) I also don't like the market relying on people to feed data into it all the time, I'd like a more natural price discovery.

3a) We can learn from other similar BTC futures markets: If you played the futures BTC market on https://icbit.se/WebTrade/Trading.aspx, you'd know that BTC futures are almost always trading above spot. People are bullish on BTC, and believe that BTC should generally be in "contango." (they call it contango, but technically it's not really contango... but that's another story...). That offset is actually very similar to the current BitUSD market, and is due to perceived future strength of BTC relative to USD, the same way the discount of USD on bitsharesx is probably due to the perceived strength of BTSX to USD. When there is a crash, those shorts would be killed. Once that happened the first time, everyone learned their lesson and the market has been significantly closer to spot ever since. We may need a painful correction for everyone to learn to be careful.

3b) We can learn from other similar BTC futures markets: icbit.se uses variable fees as a way to make the market (adds liquidity to both asks and bids) https://icbit.se/discount. What if the fee to sell short  bitUSD is made much larger than sell/buy? People wouldn't be as willing to sell short far below spot and instead find other ways to buy bitUSD (exchanges), which brings me to...

4) we need more liquidity on https://bter.com/trade/btc_bitusd and https://bter.com/trade/bitusd_usd, that is the bottleneck to many arb bots at the moment. (disclosure: i've been working on a market making bot for that. I'm thinking of starting a "market making" delegate where all proceeds get feed into the bots to aid price discovery and peg)
« Last Edit: August 31, 2014, 05:25:43 pm by maqifrnswa »
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Offline tonyk

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #106 on: August 31, 2014, 05:30:35 pm »
4) we need more liquidity on https://bter.com/trade/btc_bitusd and https://bter.com/trade/bitusd_usd, that is the bottleneck to many arb bots at the moment. (disclosure: i've been working on a market making bot for that. I'm thinking of starting a "market making" delegate where all proceeds get feed into the bots to aid price discovery and peg)

Actually that is an idea that I really like, just the current delegate fees will make too small of a difference. But hey it is a start.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline Agent86

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #107 on: August 31, 2014, 07:30:49 pm »
I do not totally get what they think the price feeds will get them (positive thing that is) and personally prefer the average.
Average is the only way to go, price feed continuously is complicated, messy and will fail eventually
2) I also don't like the market relying on people to feed data into it all the time, I'd like a more natural price discovery.

I think you guys are thinking the price feed is a critical point of weakness when it isn't.  Everyone is responsible for placing their own orders at the price they want.  As long as everyone expects the feed to tend toward tracking the dollar in the long run, that's all that really matters.  If you had a market maker, than control over the feed could be a more critical problem but I oppose a market maker.

You can't use an average in place of the price feed because it just won't work and wishing it doesn't make it so.  The moving average basically just slows down market movement; it's a totally different thing.

Offline bytemaster

Re: BitUSD Market Maker - Proposal for Discussion
« Reply #108 on: August 31, 2014, 07:38:03 pm »
I am against the market maker concept on the principle that it exposes the network to risks if a BitAsset crashes (ie: dollar hyperinflation).   
I think the feeds are not an issue given 100 sources and a median.  I think that eventually the market will make the feeds less and less necessary.
Given price feeds, I think mandatory covering at $0.90 on the BitUSD for which ever short position is least collateralized adds liquidity and protects the network from under-collateralized shorts.

For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline starspirit

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #109 on: September 01, 2014, 12:11:36 pm »
The basic problem appears to be that without a mechanism for directly redeeming or exchanging BitUSD for real USD, I can't see how real arbitrage is possible, and there is no reason for tracking to occur in the absence of a crowd consensus that they should. Tell me if I'm wrong, but my understanding is that every bitAsset is essentially a replica, just with a different label on it. Change the label on BitUSD to just Bit, and whose to say why it should track realUSD, pretzels or anything at all? Yet the desire is to convince everyone that it should track its namesake, which relies on this idea of a specifically trained social consensus forming around each of these different labels. In light of this, its already a tremendous result that BitUSD tracks even as closely as it has. I think liquidity and usability is more critical at this stage than how well it tracks realUSD - just let it run for now without heavy handed intervention.



Offline yiminh

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #110 on: September 01, 2014, 02:34:50 pm »
Given price feeds, I think mandatory covering at $0.90 on the BitUSD for which ever short position is least collateralized adds liquidity and protects the network from under-collateralized shorts.

$0.9, why not 0.89, why not 0.99? when you pull a number out of thin air, you are bound to fail.

Offline bytemaster

Re: BitUSD Market Maker - Proposal for Discussion
« Reply #111 on: September 01, 2014, 02:41:43 pm »
Given price feeds, I think mandatory covering at $0.90 on the BitUSD for which ever short position is least collateralized adds liquidity and protects the network from under-collateralized shorts.

$0.9, why not 0.89, why not 0.99? when you pull a number out of thin air, you are bound to fail.

I agree all "fixed" numbers are a form of "price fixing" and the market has a way of bending elsewhere.
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Offline Empirical1.1

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #112 on: September 01, 2014, 05:01:01 pm »
So what where does this leave us?
New BitUSD should only be created when there is demand for it at prices at or above parity.
All USD should be guaranteed a buyer at 90% parity.  This limits the risk to the downside.

Potential Problem: There will be little demand for BitUSD at prices at or above parity in the short term < 3 months.

1. I feel there is at least a 1/2% utility difference that comes from the cost and effort of converting BitUSD.
2. The wallet just being released has bugs etc. this introduces a risk premium that must be accounted for.
3. The problem BM already identified 'BitUSD vs USD will not track well in an immature market because BitUSD-deniers will not buy BitUSD and neither will believers.'

A market determined mechanism that incentivises BitAsset creation is needed in my opinion.

Potential solution: Bring the options contracts into the BitUSD creation mechanism by having shorts compete at parity (or slightly above*) by the fee they are willing to pay to longs.

Of course the problem is if shorts competed via fees that were paid immediately obviously BitUSD would track at parity less fees.

The Twist- Fees are payable in BTSX and are only redeemable after you have held the BitAsset you bought for at least 3 months
(If you sell your BitUSD before 3 months the fee gets paid to the network or the insurance fund.)

-Because the fee is paid in BTSX, the better BTSX does, the more their fee is worth so now people are incentivised to hold their BitAsset even if they think BTSX will do well. (This is important because even with traders tightening the range the peg will fluctuate considerably based on the short term fortunes of BTSX, this dampens that considerably so adds more stability.) 

-People selling before 3 months will be adding to the security of the network and appeal of BitAssets because their fees will add to the insurance fund.

This system will find a level that encourages BitAsset creation whereas at the moment there will be very little BitAsset demand.
This delayed gratification also discourages selling and so limits supply of BitUSD with no incentive attached.  (Shorts looking to cover will find very little BitUSD for sale driving the price of BitUSD (with no BTSX fee attached) up very close to the peg.)

(* I would actually like shorts to compete at the $1.01 level for BitUSD creation vs. the $1 level so that BitUSD with no incentives is worth $0.99-$1 vs. $0.98-99)

As BitAsset demand increases the fee will eventually become negligible.

Offline starspirit

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #113 on: September 01, 2014, 09:18:43 pm »
The problem with an options market at this stage is that it is no more likely to correlate to the pegged value than BitUSD for the same reasons - lopsided supply/demand and it requires a developed social consensus. Secondly, an options market will not be divorced from the BitUSD market, as they are linked through arbitrage. A lot of option sellers for example will want to hedge their position by taking the offsetting delta position in the BitUSD market. So the price pressures between the two are inextricably linked. Thirdly the available liquidity will be spread between options and BitUSD, leading to less liquidity in BitUSD. All in all, I don't see how adding options at this stage adds anything but complexity.

Offline Empirical1.1

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #114 on: September 01, 2014, 09:24:44 pm »
The problem with an options market at this stage is that it is no more likely to correlate to the pegged value than BitUSD for the same reasons - lopsided supply/demand and it requires a developed social consensus. Secondly, an options market will not be divorced from the BitUSD market, as they are linked through arbitrage. A lot of option sellers for example will want to hedge their position by taking the offsetting delta position in the BitUSD market. So the price pressures between the two are inextricably linked. Thirdly the available liquidity will be spread between options and BitUSD, leading to less liquidity in BitUSD. All in all, I don't see how adding options at this stage adds anything but complexity.

The problem for me is that even though BTSX is a great investment on a risk/reward basis for BTSX holders it is probably the riskiest place in the world to store any derivative value in the form of BitAssets for the next 3 months.

If we don't recognise that there is a very big risk premium associated with owning BitAssets at this stage and let shorts compensate longs for that risk in some form then there will be very little demand for BitAssets imo.


Offline maqifrnswa

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #115 on: September 01, 2014, 09:33:38 pm »
The problem for me is that even though BTSX is a great investment on a risk/reward basis for BTSX holders it is probably the riskiest place in the world to store any derivative value in the form of BitAssets for the next 3 months.

If we don't recognise that there is a very big risk premium associated with owning BitAssets at this stage and let shorts compensate longs for that risk in some form then there will be very little demand for BitAssets imo.

honest academic question: why are bitassets more risky than BTSX? at first glance they should have identical risk, if one fails they both fail. If they have identical risks, then there is value in bitUSD only if 1 bitUSD today is reasonably worth 1 bitUSD tomorrow.
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Offline Empirical1.1

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #116 on: September 01, 2014, 09:42:40 pm »
The problem for me is that even though BTSX is a great investment on a risk/reward basis for BTSX holders it is probably the riskiest place in the world to store any derivative value in the form of BitAssets for the next 3 months.

If we don't recognise that there is a very big risk premium associated with owning BitAssets at this stage and let shorts compensate longs for that risk in some form then there will be very little demand for BitAssets imo.

honest academic question: why are bitassets more risky than BTSX? at first glance they should have identical risk, if one fails they both fail. If they have identical risks, then there is value in bitUSD only if 1 bitUSD today is reasonably worth 1 bitUSD tomorrow.

Simple example to demonstrate the risk profile -

Lets say there is a 50% chance BTSX succeeds and goes up 400% in 3 months and a 50% chance it fails sometime within 3 months.

If I own 1 BitUSD now, in 3 months I will either have circa $1 worth of value or no value. Ergo $1 worth of BitUSD is only worth $0.50 now using the above extreme example. 

If I own $1 BTSX now, in 3 months I will either have $4 of value or nothing. Ergo $1 worth of BTSX is worth $2 in the above example.

(However you equate the risk profile of BTSX in your own mind, BitAssets take a a lot of risk and none of the reward.)

Edit this is assuming a sudden failure.
« Last Edit: September 01, 2014, 09:47:27 pm by oasis »

Offline tonyk

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #117 on: September 01, 2014, 09:45:14 pm »
The problem for me is that even though BTSX is a great investment on a risk/reward basis for BTSX holders it is probably the riskiest place in the world to store any derivative value in the form of BitAssets for the next 3 months.

If we don't recognise that there is a very big risk premium associated with owning BitAssets at this stage and let shorts compensate longs for that risk in some form then there will be very little demand for BitAssets imo.

honest academic question: why are bitassets more risky than BTSX? at first glance they should have identical risk, if one fails they both fail. If they have identical risks, then there is value in bitUSD only if 1 bitUSD today is reasonably worth 1 bitUSD tomorrow.

Great question!

The answer is that if pegged/collectivized asset fail. BTSX is still the leading decentralized exchange where companies, with open eyes for the future, like Overstock, can list their assets.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline starspirit

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #118 on: September 01, 2014, 10:38:42 pm »
In their current form, BitAssets do not represent a claim on anything. BTSX represents a claim on the infrastructure that has and is being developed. So BitAssets are inherently more risky than BTSX. BitAssets holders therefore need higher compensation for this risk.

Offline Method-X

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Re: BitUSD Market Maker - Proposal for Discussion
« Reply #119 on: September 01, 2014, 11:59:39 pm »
In their current form, BitAssets do not represent a claim on anything. BTSX represents a claim on the infrastructure that has and is being developed. So BitAssets are inherently more risky than BTSX. BitAssets holders therefore need higher compensation for this risk.

Hmmm do you mean they are riskier in terms of risk / reward? If BTSX goes to zero, both BitAssets and BTSX are worthless while if BTSX quadruples in value, the holders of BitAssets get none of that gain? Thus, the BitAssets are riskier?