[Discussion] Liquidity operations - a paradigm shift

The peg is difficult to keep in hard times - granted. And @masterOfDisaster has done an awesome job coordinating and keeping the peg!

But I can’t see removing liquidity from exchanges as being good…

What if the peg destabilizes on one exchange but it is available on others? What if after the volatility the peg is re-established?

We never promised to enable day trading…


Yet the motion to permit what I already did (voting regarding dual side NuBots at Poloniex) is not exactly on its way to passing.
Oh wait, the motion is about passively operating a NuBot there - the shareholders already have something better.
It looks like the majority of shareholders doesn’t agree with what I did and do. I will need to draw the obvious conclusion soon.

It wouldn’t remove liquidity. It would remove buy side liquidity with an offset guaranteed by Nu, verified by Nu, ensured by Nu.
This step would remove a lot of pressure from Nu, making it easier to deal with liquidity.
At the moment Nu needs to keep the peg at a lot of exchanges. Luckily there’s so much centralization towards Poloniex that this is the only one keeping Nu busy. It had a reason why I imagined the need of gateways there…
Supporting the other exchanges with liquidity costs Nu approximately $7,000 each month ($10k - the compensation for nupool@poloniex).

I dare say, it’s not worth it and Nu would save money while still being present at exchanges: offering NBT for sale without guaranteeing they can always be bought at $1 there.
Plus it puts a lot of pressure on Nu. Imagine what happens, if somebody finds it funny to buy a load of NBT or BTC at an exchange with no gateway/dual side bot. How would you currently fix that, restore the peg?
On the other hand: is the peg broken if I sell you 1 NBT at $0.50 in private? The same would be true about trading Nu products at not officially supported dual side exchanges.
The funny thing is that CMC is ironing out “lost pegs” at small exchanges - they just haven’t enough trade volume to ruin the weighted average displayed by CMC. Just look at the [CCEDK NBT/PPC pair.]

The official fully supported exchanges would be a subset of the current ones. Maybe even only Poloniex and NuLagoon Tube. As strategic solution to keep connection to Chinese trading could be to keep Bter at full support.

After that paradigm change, Nu only had to care for “major exchanges”. Nu isn’t able to support each and every exchange that might appear from nowhere with liquidity to keep an exact peg.
And it’s already not sustainable to pay $7k monthly for $10k trading volume at average the last 90 days - taken from ALIX 90 (90 day EMA I think).
Oh wait, $1.5k is from NuLagoon Tube.
That makes $7k costs for $8.5k trade volume. We could just give the NBT away - it wouldn’t make much difference!

Providing liquidity there has shown to be good for one thing: filling the pockets of LPs, but not attracting users to those exchanges.
Poloniex has the volume. That’s why I worked my ass off to support the peg there. Poloniex is visible on CMC, etc. The rest isn’t’. I might not like it, but it’s a fact.
The cost of liquidity provision at Poloniex is at average around $3k. The last week has been much cheaper - almost no compensation had to be paid for the buy side; it was empty most of the time.
The $200k 24h trading volume we recently had there, was not mainly because of the ALP. But as what I did had no (explicit) costs (implicit costs: exchange default risk etc.), it might be perceived as worthless.

…yet this is our current de facto status quo.
Shifting a lot of exchange operations to sell NBT only (as long as they are available, regular refills of funds included - just don’t exceed the withdrawal limits of the operators by far!) and focussing on the major exchange limits at least the cost of that.

That’s why I called it a paradigm shift. What I propose is nothing short of a radical change in current liquidity policy. This needs to be aligned with marketing and information to reach traders/customers. The first step to enable thinking about it, is to be honest with the current situation.
It’s not sustainable. Think about it!

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Thoughts on the pools on CCEDK? I rather think it’s nice to advertise the ability to sell a reasonable quantity of NBT for $1 in USD or EUR. Where can you do that other than CCEDK?


Who exactly did that do so far?
I’m not in the mood to fight for this, for the whole idea. I wanted to propose it, because it’s the essence of my experience of the last months, weeks, days.
If the shareholders don’t like it, so be it.

That would be our most expensive marketing campaign (with next to no gain) so far.

I think we need to acknowledge the fact that our liquidity operations are putting Nu in the red not because they cost money but because liquidity operations do not generate enough nubits sales overall.
It seems that back in Nov, Nu sold at least 100k NBT which was way more than the expenses I believe. So we were in the black in Nov.
In Dec, I do not know.
In Jan, so far it seems that Nu sold 30k NBT but we have to take into account the fact that some of the proceeds are used as reserves and sometimes they are injected into liquidity operations to defend the peg. Maybe we will be in the red or black at the end of Jan.

In order for us to determine whether or not liquidity operations are justified is to compute the P&L each month but it is not easy and see if we are in the red or black.
If we are in the black, then they are justified.
If we are in the red, then they are not justified…well not that fast. Maybe we need to keep spending money for increasing awareness (customer acquisition) and that will pay off later but when?

Nevertheless, in any case, we can always shut down useless expenses.

I feel we should reduce the operations on exchanges different from Polo but not totally to preserve a risk hedge in case Polo is in trouble.

However, ultimately, assuming BCE is released, I predict that all the liquidity operations would be centralized by it and this would not be an issue since it runs on a blockchain which is by nature decentralized.

So in the ideal script, all current liquidity operations would get drastically reduced if not shut down by the end of this year, if not earlier assuming BCE is released soon, which I really hope for.


Another great post

Sounds pertinent

I used to think abusing our peg is a zero-sum game because it’s impossible to predict BTC price, but there is indeed a high correlation between large NBT dumps and BTC price drops, and vice versa. We don’t lose as much money as in the worst case but more often than not the traders are right - partly insider information, partly self-fulfilling prophecy. I think one way to solve this is to sell derivatives (options etc.) denominated in NBT, priced to adjust for the risks we take.

Either way NBT/BTC is a sticky business that we eventually want to move away from. For this reason I prefer to let LPs pull out when the risk is too high, and is probably inevitable in decentralization. If traders did that more often and accurately we can save money; the question here is whether we have measures to mitigate a quick disappearance of liquidity, and I believe we do, like fiat pairs, high spreads and further down the road fiat custodian deals such as NuSafe.

Finally, the profit a country earns from supporting a currency comes from taxing commerce that can’t happen without stable money. If Nu wants to be able to cover its costs by additional profit, we should plan to get cuts from subsidiaries that benefit specifically from a strong, decentralized pegged currency.

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Is supporting “NBT/fiat” pairs for traditional centralized exchanges a viable business proposition (to them)?

Just as any other trading pair is, if there’s volume. The drawback of (?-)NBT trading pairs is that they are most likely not being used to trade back and forth and rather to exit or entry fiat. That reduces the fee an exchange can collect with that.
If an exchange already has done all what’s required to be connected to the fiat system, a NBT/fiat trading pair is just extra profit.

I’m still struggling to understand why it isn’t obvious, how close Nu might have been to a disaster in the past week and why the proposal I made, isn’t perceived as the mitigation it might be.

Maybe I explained it the wrong way. Bear with me, I’m still recovering. What I write might not be as structured as it should be.
Please allow me to explain the concept of “major exchanges” with dual side NuBots combined with fixed cost ALP to reduce costs and improve reliability in greater detail.

Unfortunately the awesome new ALix feature to display nupool ALP funds over time has no data for the past 7 days to show how low the ALP funds were on Poloniex.

@willy, @woolly_sammoth: is it possible to have an anonymized overview of the rewards of nupool participants who provided liquidity over the last 7 days at Poloniex? A total (and not per anonymized participant) reward would be fine as well. It’s only about deriving the average volume at the sides from 2016-01-15 (00:00 UTC) to 2016-01-21 (00:00 UTC) - during the most recent Bitcoin roller-coaster time!
Having the payouts per minute put into a graph would be neat. If I have the raw data, I can try myself!

I hope this can be useful to prove two points:

  • fixed cost alp needs to come, because the current scheme failed (that seems to be non-controversial)
  • a combination of fixed cost ALP and Nu funded NuBots can be more efficient than the current setup (I still believe it was more or less the dual side NuBots that kept the peg in the last 6-7 days) with only ALP (or MLP) supporting the peg
  • fixed cost ALPs reduce the amount of money that needs to be kept at exchange (for the NuBots), because it improves the reliability of the first line of defence. The current NuBots rarely had a working first line of defence. Still it was sufficient to prevent the peg from failing totally. Total funds on exchange to achieve that: $40k - $50k.
  • NuBots in the second line of defence require no immense first line of defence (big ALP volume for which a big compensation needs to be paid).

I expect the fixed cost ALP to be a viable first line of defence (operating on T1.1; in the linked post referred to as T1))!
The NuBots will be a second line of defence (operating on T1.2 and T2; T1.1 in the linked post referred to as T1*) with a higher offset, that is sufficient to support the peg while making Nu money from the offset, if the first line fails (temporarily) and traders buy into the NuBot walls.
I’m leaning on those divergent definitions (“T1.1” and “T1.2” instead of “T1” and “T1*”), because they will likely find their way with that naming into NuBot.

I suppose a permanent funding of approximately $15k to $20k (compared to a total of $400k that was kept at exchanges in total during jmiller and kTm times!) can provide a sufficient second line to buy time to deposit funds, if the first line is permanently so low that the funds on the second line start to get drained/traded.

Fixed cost ALP can be run with lower (total) compensation than the current ALP, because you literally only use it as buffer and require not such a big target to have that buffer working.
Being in the front line still is worthwhile for ALP, because the fewer funds on order book, the higher the reward percentage.

As long as NuLagoon Tube and T3 custodians have funds, fixed cost participants will trade funds to grab a piece of the reward. ALP will keep funds ready that can be put on order fast (T2) and will likely keep funds on T3 to buffer demand on the order book. They will trade with T3 custodians (or NuLagoon Tube), after they have first filled the low side (time is money), relaxing the situation for the peg and the T3 custodians.
If T3 custodians aren’t requested for making trades to fill T1.1, they may decide to fill T1.2, if that defence layer starts to run dry. That buys time for FLOT to refill T3 custodian funds AND exchange accounts if need be.
This is speaking about drastic change of demand, which we already faced several times in the last weeks and especially grave in the past 7 days.

And with the reduced amount of funds Nu needs to hold on exchange (compared to now with a totally failed first line of defense) the risk is significantly reduced.

Overall the cost of liquidity provision is reduced while the peg is supported more reliably.
As a ball-park figure, I guess Poloniex can be sufficiently supported with $2k to $3k per month. Operating dual side NuBots (yes, we need more than just one: redundancy, multiple operators, increased combined withdrawal amount, etc.) is little work - if they are really just passively operated and the operator only needs to keep them running and withdrawing exceeds.
Refilling low sides will be done from ALP first (T1.1), if that fails or takes too long, T3 custodians can help directly (depositing into T2, that gets automatically promoted to T1.2) and if that isn’t sufficient, FLOT can be activated (T4).
Can you see the beauty of that? :wink:
This can finally put the work on more shoulders and increases the reliability doing that!

Maybe the numbers might convince you.

Current monthly cost/risk analysis for liquidity provision:


  • $10k

Funds at risk

  • Nu: $0
  • ALP (Poloniex only): up to $40k if targets are reached; other exchange come on top!

Future monthly cost/risk analysis for liquidity provision:


  • $4k ($2k - $3k for Poloniex + compensation for gateways)

Funds at risk:

  • Nu:
  • $15k-$20k (Poloniex)
  • $10k-$15k (gateways)
  • ALP: maybe $10k - $15k? (only at Poloniex required)

I left out costs for T3 custodians, NuLagoon Tube, etc. as they need to be paid anyway.
If Poloniex doesn’t default within 4 months after this scheme gets implemented, Nu is at positive ROI (a failing “gateway” exchange ha little impact)

And please don’t tell me a that defaulting Poloniex with both (current) ALP sides ($40k ALP funds in total) had no price that Nu needs to pay beyond the compensation that is already being paid.

I might explain the single side NuBot (aka gateway) scheme in a later post, although I think that one is quite clear.
Operating a single side NuBot is very little work if the operator doesn’t need to care about the funding.


Sorry let me say this - I think you write too much. :wink: There is an impedience mismatch between you and the rest of the readers so high through put communication is difficult to happen.

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Got it.

I will quit my job in order to have time to read MoD-bot’s posts :smiley:


Ok, let’s say i agree. Who would operate the dual side bot with shareholder funds? How would such a bot differ from the motion you already put forth? Can we simply scale back on other pools once we have a reliable mechanism in place?

Ideally more than just one person to have redundancy and an increased combined withdrawal limit.

Not very much. It’s just another iteration of the rapid development I went though in the past days (realizing the need for a permanent minimum funding until a lot of agile T3 custodians are available).
Even if it’s only one custodian, I recommend using more than one NuBot. Apart from the redundancy it makes config adjustments (that require NuBot restart, which takes some time) easier, because it doesn’t delete all orders on the exchange (obviously only the ones from the restarting NuBot).
In times of severe pressure, which might require adjustments (increase) of the offset, this is very useful (until automatic adjustment of offset is available in NuBot) - better lose the peg to some degree than totally.
Plus you can place walls more specifically.
Have a look here for an example:

If you just scale back and don’t switch to “sell side only”, it will be hard to spread the message, that a buy side peg is in no way guaranteed by Nu on that exchange any longer. And even for the sell side the peg shouldn’t be guaranteed there after the change.
If you continue dual side with little funds, the danger for the peg is bigger. It will be hard to advertise, that there’s still a Nu supported dual side operation, but now without peg guarantee - nothing changed in the eyes of customers.
Announcing that change (peg only guaranteed at specified exchanges) and switching to sell side only is a more obvious difference.

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I disagree. The CCEDK operation/LiquidBits was setup to support some unique fiat pairs with liquidity. The intention is to allow users and traders to exit and enter through USD and EUR pairs. There is also a small wall (that has been reduced significantly lately) for NBT/BTC to cater for new users entering the market without fiat.
The cost is 10% of all liquidity operations, about 1k/month out of the 10k/month which I think is a reasonable deal. Bear in mind that the compensation on the fiat pairs is about 20-33% lower than for NBT/BTC pairs.

Especially on the EUR/NBT pair I’m seeing almost daily trades lately, which are typically users entering or exiting through fiat. Those are our core customers imo, to me the traders are secondary. It is indeed a bit disappointing to see that there is virtually no trading on the USD/NBT pair. Therefore I’m thinking of reducing that wall to be on par with the EUR/NBT if that continues to be the case. That will save some cost.

I do wonder what we get for the other 6-7k on NBT/BTC pools. Just a few Ks of volume and a loss for the LPs when Bitcoin is highly volatile. To me that is of diminishing value and at least 5k/month can be better spend on e.g. development.

Agree, the higher spreads during high volatility have proven to be effective. So we can reduce the ALP NBT/BTC walls and the cost on the NBT/BTC pairs imo. The peg can be successfully defended by NuBots as MoD has proven.
It will be Interesting to see NuPool’s next proposal. I suggest to allow some time to discuss it.


For them, supporting NBT/fiat will increase revenue (much) more via the volume brought by a stable crypto fiat such as nbt, than direct fees taken from nbt/fiat trading, I suspect.

Important update

This is why I was arguing for transforming the the liquidity provision scheme.
The current isn’t sustainable. It’s not scalable. It’s too expensive. It puts the peg we want to guarantee at risk, by fighting on so many fronts

In a hopefully not so far future, BCE can be the exchange for which Nu guarantees a more or less tight peg - both buy and sell side. The operation there will blur the lines between T4, T3, T2 and T1. Nu owned funds can be put on order at little risk there.
We are not yet there.
Meanwhile and maybe even then, NuLagoon Tube can be one of the “official exchanges” with supported dual side operation.
We need to focus on a limited number of exchanges, otherwise we might lose that fight for the peg.

Wanna sustain a NuBot operation at every exchange to support the peg?
Too expensive!

Wanna rely solely on ALP for the most exchanges?
Too expensive - if it damages the so far flawless brand image!

Again, this is no centralization. We can do out business at any exchange. We focus to improve our products!

We arrive there better, cheaper, with less danger for the peg

  • if we stop supporting the buy side at so many exchanges
  • focus on buy side at the exchange(s) with the major trading volume
  • support these exchanges with ALP and dual side NuBots (Nu funded)
  • convert all other exchanges to sell side only operations (with no guarantee for a sell side peg!)
  • follow the customers, move the dual side operations where the customers move
  • in case the customers move the trade to a formerly sell side only exchange
  • convert the NuBot to dual side
  • increase the NuBot funds there
  • ramp up ALP there
  • limit the efforts to not burn out people, who are involved in liquidity operations

If I speak of NuBot, I mean NuBots, ideally with different operators.

Sell stamps anywhere - buy them only back at a guaranteed price at selected places!
Keep the peg at those places.
Care less for the other places.

That even brings Nu in the position to make deal with exchanges - as long as they have volume and stay dual side, the exchanges make a lot of money (the trade volume is the reason for Nu to support them; the CMC price is a weighted average!). Ask for a reduced fee for NuBot operator accounts!


IMO - NBT/USD isn’t used as much on CCEDK because it is more difficult, expensive and time consuming to withdraw to a USD bank account than it is a Euro/SEPA bank account.


Not so sure about that. We need some exposure. A trading pair without volume will be removed from the exchange. It is not that we are trading on 100s of exchanges, there are just a handful. I think we need to make sure people can find us across a number of exchanges, especially when on one of them e.g. defaults occur.

This can be reduced significantly but not to zero I believe. We need to move slowly as this can create some shocks on the sell side as LPs might sell their NBT when no longer being able to obtain rewards on ALPs.

I must admit that I liked the concept that basically everyone could anonymously provide liquidity by running a bot without bothering too much about market technicalities and sharing in the rewards for providing it. It is a pity that we are losing this model and moving back to a small group of core LPs or NuBot facilitators, but I do see the high cost of sustaining the current ALP model.