Discussion: Funding liquidity providers for new NBT products

tomjoad 2016-01-13 05:57:39 UTC #1

Our new NBT products will eventually require liquidity provider custodians or liquidity pools before they can be launched. As shareholders, we ought to avoid using shareholder funds for liquidity. The February 2015 hackings proved that it was a flawed approach that led to tremendous network losses.

I’m especially enthusiastic about SDR NuBits, and I’ve seen a few other comments on this forum saying the same. X-NBT is an opportunity to introduce a product to the world that hasn’t been attempted before.

With that in mind, I’ve been playing around with an idea in my head the past few days to offer SDR NuBits liquidity on B&C Exchange, and it is as follows:

I would sell some quantity of NSR to the buyback pool at $0.0050 US per NSR, and then use the proceeds to offer future liquidity on a US-NBT / X-NBT trading pair for a period of one year. If I sold back 5,000,000 NSR it would be $25,000, or 10,000,000 NSR for $50,000.
If B&C Exchange shareholders offered me a BlockCredits grant to trade as a market-maker for free on B&C Exchange, I would request 0% compensation from NuShareholders for the one-year period.
At the end of the year, I would have the option to burn the $50,000 worth of US-NBT and X-NBT and receive a NSR custodial grant for the amount I originally sold.

I’m not sure shareholders realize this yet, but SDR is a unique and valuable case for us because the value is only set once per day. https://www.imf.org/external/np/fin/data/rms_sdrv.aspx

This is a benefit to our network because it would reduce the risk of shifting walls eroding liquidity funds. A new US-NBT / X-NBT price would be set once per day, and NuBot would trade around that price.

My knowledge of liquidity operations is significantly less than many members of our community, so I’d like feedback on this idea from those who are more knowledgeable. Is it fair? Is it a possible way of bootstrapping liquidity for SDR NuBits?

jooize 2016-01-13 06:29:29 UTC #2

Neat! Thanks for pointing that out. SDR NuBits seems promising.

Cybnate 2016-01-13 07:22:25 UTC #3

Interesting idea. My opinion would depend on the definition of market maker. Would that be some kind of T3 custodian across multiple currency pairs guaranteeing buy and sell side offers e.g. something like Nmei’s passed proposal?

Nagalim 2016-01-13 10:11:05 UTC #4

Seems to me that all we need to make a new product is an FLOT address with a good amount of the currency, a T3 custodian to distribute, and an ALP on a prominent exchange to get a peg going.

dysconnect 2016-01-13 11:10:21 UTC #5

Even if SDR itself is only officially priced once per day there’s no SDR used by laymen on the market. Day by day trading ultimately depends on the prices of the basket of currencies, which is also a basis to speculate on next-day SDR prices.

masterOfDisaster 2016-01-13 11:35:20 UTC #6

…which makes evaluating the price complex - you need a feed with the (weighted?) included currencies.

jooize 2016-01-13 13:37:01 UTC #7

I don’t understand what you mean. What does this matter to Nu? Why isn’t the price IMF sets all we have to care about (other than being prepared for volume)?

masterOfDisaster 2016-01-13 14:14:38 UTC #8

The thing is: even if the “official” price of SDR is only changed once per day, this doesn’t prevent the currencies in the baskets to change their value continuously.
If customers know that tomorrow’s price will be different, because the relative values of the currencies in the basket moved, they can buy/sell X-NBT today knowing that after the daily fixing of the IMF they will buy/sell with a gain.
I bet there are “unoffical” price feeds that take exactly that into account.
X-NBT price needs to be tracked by tracking the value of the currencies bundled as SDR; an adjustment once per day is insufficient.
Even if X-NBT/SDR (I wonder how that would work) were the only trading pair (and no X-NBT/US-NBT, etc.) this “forecast” should be possible.
Or do I understand it completely wrong how SDR work?

Nagalim 2016-01-13 14:46:27 UTC #9

How’s MakerDAO gonna handle this?

masterOfDisaster 2016-01-13 15:05:42 UTC #10

Maybe we should try learning from them?
Introducing additional products, before the issues with the flow and the interfaces between the tiers have been sorted out, wouldn’t be the best move anyway.
Nu can only grow (more (US-)NBT, additional products) with improvements in liquidity provision.

tomjoad 2016-01-14 01:53:59 UTC #11

Good point, so I went and did some research. If you download the SDR price history off the IMF webpage (and manipulate the data a bit) we can see the largest single day swings in SDR were a 2.597% gain and a -2.444% loss. It is remarkably stable. In 30+ years it has never varied by more than 2.597% in a single day. I can see why so many people are proponents for SDR as a stable instrument.

In theory, we could set the buy and sell walls each day at +/- 3% of the listed price and then be reasonably assured that we wouldn’t be exposed to arbitrage opportunities.

Of course, you’re correct that a better method would be if NuBot continuously calculated the worth of each currency from external data feeds, and then calculated the SDR basket value in real time. The currency allocations (the percentage of each currency in the basket) only appears to change once per year (beginning of January), and even then, not every year. With so many reliable real-time external price feeds for fiat currencies, we could be very certain in offering a tight SDR peg.