[Discussion] Liquidity operations - a paradigm shift

Liquidity
#16

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:

Cost

  • $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:

Cost

  • $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.

2 Likes
#17

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.

1 Like
#18

Got it.

#19

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

2 Likes
#20

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?

#21

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.

1 Like
#22

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.

3 Likes
#23

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.

#24

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!

3 Likes
#25

@Cybnate
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.

2 Likes
#26

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.

2 Likes
#27

There are trading pairs with barely volume, which still haven’t been removed so far:

Pasted image1279×470 58 KB

Switching to NuBot sell side only will not remove all trading there. It can be used to limit Nu’ responsibility for the peg if properly advertized.
Arbitragers will operate the buy side - supposedly quite successful most of the time.
If people want to get their NBT traded for BTC, they need to go to a “certified” exchange.
This increases Nu’s ability of keeping the peg, because fewer exchanges need a lot of attention, while reducing the efforts (time, money) of it.

This will stay true - but not for all exchanges!
ALP with CRFB is very useful to provide funds on T1.1, while the NuBots will operate on T1.2 and T2.
So there’s still need for people who run bots anonymously, etc.

We aren’t going to lose that model. We are moving forward and make the best of both worlds the next iteration of the liquidity provision scheme.
This will likely not be final. BCE will offer the chance for the next iteration by vastly reducing the friction between T4, T3, T2 and T1(.1/.2).
I consider my proposal an immense improvement. Otherwise I wouldn’t have spent so much time trying to put the essence of my experience in words.

Again, this is just my vision.
I might be wrong, but I think I’ve provided an analysis why the current scheme needs improvement and made some points about how to improve it.

1 Like
#28

So to summarize because I’m slow…

  • Remove LPs from all exchanges except Polo…and maybe Bittrex?
  • Instead: Single sided NBT Sell NuBots with FLOT funds on all other supported exchanges.
2 Likes
#29

That sums it up.

Add to it:
advertize that change and make sure, customers know about the “limited warranty” for peg on all small exchanges. I wouldn’t even guarantee a sell price for NBT. If the NBT are sold and not refilled, the sell side might end up without peg as well.
The reason for this is simple: you don’t want to have a lot of Nu funds there.
Depositing and withdrawing funds should rather be scheduled actions (e.g. weekly) than on demand.

If you don’t have to care for a lot of exchanges, you can focus on the important ones (which might change over time). The important ones are those on which you act according to demand.
You can’t herd cats.

#30

There is also a very low chance that we loose the peg on those pairs. I’m not too worried about that.
Except for the NBT/PPC pair which is not supported all pairs are being traded on from time to time. I would just keep them on Alix so we can monitor any changes.

#31

Somebody who wants to make a point can do it easily.
“Breaking” the peg on not fully supported exchanges would be no issue, do no harm, if the message of Nu would be clear:

  • peg enforced at selected exchanges; buy and sell NBT there at close to $1
  • NBT sale at a lot more exchanges - without guarantee for peg; NBT will be refilled regularly, but may run dry in between

Do you really think sustaining liquidity operations at all exchanges, which list NBT, is possible?
We have to select/focus anyway.
Let’s draw consequences to the benefit of Nu and start focussing!
…it’s hardly possible to keep Poloniex under control…

2 Likes
#32

Double dare you. Give me your money, I beg of you.

But still, the point stands, it’s one thing to allow arbitrage channels to buy NBT for less than a dollar when it feels downward force while it’s entirely another to actively provide buy side support at exchanges.

The best point you can make is to simply empty one side of an ALP and notice that it takes near infinite time for it to rebalance.

#33

Maybe it’s necessary to explain explicitly at what danger the peg is due to the inefficient liquidity provision scheme.

An attack can be done like this:

  • look for an exchange listed on CMC that has little volume and a few orders (maybe some ALP funds, because it’s “supported” by Nu)
  • buy orders on both sides to the degree to which you want to move the peg
  • start trading with yourself
  • pay nothing but the exchange fee for that
  • create $100k volume for $200 fee
  • derail the peg

Applaud to yourself for having done what others couldn’t do.
In addition to the fees this costs nothing more but the removal of the buy and sell side orders, which stand in your way.
For that reason you choose an exchange with low trading volume and not too many volume on order.

Try that at an exchange with NuBots that have $30k funds available which can be put on T1.2 and T2, an exchange that is monitored, etc.
It’s possible, but way more expensive.
Find a balance between the risk of funds at the exchange and the risk of an attack.
Hope for a soon arrival of BCE and have a buffer of $100k or more to be put on parametric order book.

Aren’t you afraid of evil competitors, who don’t shy away from such an attack? Or fanboys of competitors?
Do we really have to get hit hard, before we understand it doesn’t work this way?

#34

How are you doing that? I can make a 10 cent transaction at $1 to make CMC read $1 again. Are you putting up sell orders at under $1? In that case, thanks for the free money, I have T3 funds I can leverage.

#35

You will bee too late and I will have made tens of thousands of USD volume.
Isn’t the display on CMC the weighted average?
Is it really only the last price?
Still the CMC chart would look ugly in between the attack and your “peg restoration”.
I’m not talking about a globally lost peg, just a local and limited (in time) event.
Still a lot of potential for bad publicity.
An attacker with malicious intents will avertize it afterwards…

Why do we want to keep that attack vector and pay a lot of money on top for it?
Does that make sense?