[Draft discussion] - A market-maker to end NSR illiquidity

[desrever]

I think Nu should fund and design an automated market-maker to bring liquidity into NSR markets. The ‘how exactly’ is still up in the air and there might be more than one implementation to test. Something similar has been proposed in this forum before, in various threads and I think it’s about time we move this proposal forward.

I have a specific proposal, i.e. bring liquidity to a NSR/NBT pair since we have control of both the buyside and the sellside.

I am also excited to open this discussion by making use of the alpha preview of a new service that will help DAOs like ours to bring forward the decisional process : Daology ( a round of applause for @Ben and @CoinGame that are getting out of stealth mode with this ) .

You can reach the updated text of this proposal at https://daology.org/u/desrever-nu/proposals/4a6a73c4d5f9d4a68752bbb1d41f823860888d26

This thread should be used to gather input and discuss the ideas, while the draft will stay on daology.org and being updated as we go.

I need inputs from the Nu community to modify and perfection this draft.
What do you think? How can we move it forward? What’s the first step? Other ways to fund buy and sell side liquidity than the ones I proposed? What are the risks?

I propose we start finding a couple of devs for the software, make a pilot grant of NBT and try using some future round NSR proceeds from buybacks (so that we don’t inflate supply).

This can be a win-win for Nu.

[Sentinelrv]

I’m a little confused. I remember @JordanLee saying previously that parametric order books would help bring liquidity to other pairs, such as NSR/NBT. It was supposed to be very important for providing lots of liquidity for different pairs on B&C Exchange. Is that still the case?

[desrever]

Is that still the case?

Yes, sure. What part of my proposal makes you think it’s not?

[Sentinelrv]

Yes, sure. What part of my proposal makes you think it’s not?

I’m just on my lunch break and didn’t get a chance to read the full thing yet. I thought NuBot itself would handle all this and there wouldn’t be a need to develop something else. I must be wrong though.

[desrever]

I thought NuBot itself would handle all this and there wouldn’t be a need to develop something else.

I see what you mean now and your doubts are legit.

In my proposal I did not specified much about the software part that must accomplish this to keep it open. However, in the back of my mind I assumed that we would be re-using many components of NuBot. (Parametric orderbooks can be re-used completely and will indeed, help to reach this new target)

However, NuBot needs to be adapted if we want it to do something else. Right now is designed to fix the price of NBT, and doing it efficiently while offering liquidity.

Please read this reply of mine to a recent post to understand the difference between price fixing and liquidity provision : Attract voluntary liquidity providers with NuBot

Bringing NSR/NBT liquidity would be (very) different from brining liquidity and fixing the price on BTC/NBT. The pricing strategy, volume strategy, timing, reporting, must be re-designed to accomplish NSR/NBT provision successfully.

[Nagalim]

All about that price feed. Hell, we could just make it easy to run nubot at a fixed price (chosen by the custodian) with a big spread. The price doesn’t move quick enough to really require a formal price feed. We could probably do a feedback loop using a ‘shift’ parameter too.

[desrever]

chosen by the custodian

A price feed, or an internal price computation is necessary. If we let custodian choose price directly, then it’s exactly price fixing. Custodian (or better, market-maker) should be able to configure its strategy and risks, but not set the price directly.

But yes, that’s the way to go more or less.

[Nagalim]

It’s only price fixing if we are compensating the custodian. No matter what, we are fixing to a price, the question is how to dynamically choose that price. If each custodian puts in their concept of a reasonable nsr price, then the bot responds to local market dynamics, I could suggest that is just as rigorous as an external price feed. For example, Charlie puts in 100 nbt and an estimated price of 9 microbtc with a 10% offset and a 5% dynamic shift based on his account. A buy order at 8.55 microbtc will be placed. Let’s say he gets half his order. Now, the buy wall will shift down to 8.1 microbtc and a sell order at 9.9 microbtc will be placed. With parametric order book, you can see how this could be profitable at such large spreads and if charlie updates his price semi-regularly (maybe once a week) he should do just fine. The nsr bot on bter (whoever owns it) has been using a similar strategy for a few months now and has been making out like gang busters.

[desrever]

I agree with you but

If each custodian puts in their concept of a reasonable nsr price

Do you envision people doing this manually multiple time per day? Market making should be automatic or we are going back to pre-digital age, there is a lot of literature on it.

Modern marketmakers look at price on other pair and exchanges, twitter feeds, real time orderbooks, news website, volume, velocity, historical records to adjust some parameters of probabilistic models and decide target price… I don’t think any custodian can do this reasonably well multiple time per day, manually.

[Nagalim]

if charlie updates his price semi-regularly (maybe once a week) he should do just fine

There are only two places to really get a concept of the price feed: bter and polo. Assuming the custodian is operating on one of those exchanges, a single pricefeed from a single market isnt going to help much.

End game, of course, is to use seeded auctions as the price feed.

[desrever]

Also true right now.

At this stage, beside the implementation (that can be discussed later), I am interested in what you think about the rationale, the source of funding for the walls, the choice of the pair, the benefits of it and the risks.

[Nagalim]

Nbt/nsr liquidity is our jam, for sure. My philosophy on the wall funding is ‘make it profitable and they will come’. Make a solid piece of software, get someone to start using it with small amounts and show how profitable it is and people will voluntarily start running the bot. Nu doesn’t pay anything but dev.

Ultimately, I’d love to see some T6 multisig action. In the event of a share dilution/nbt buyback, the signers need to get the nsr to market somehow. Find someone who will run the bot for say a month or two and eventually get more and more aggressive with their manual price points until they sold all their nsr, then they burn the nbt. In the meantime, they will be providing dual side support at a huge spread (like 10%) to motivate a liquid market.

[cryptog]

NSR market is illiquid because there is only a thin supply (most shareholders do not want to sell at a low price) and because Nu has not been providing real dividends for almost a year (from nbt sales proceeds), which does not create a high valuation?

Edit: typos

[desrever]

That could be one of the reasons which are included in draft

NuShare markets are very illiquid for multiple reasons.

Now, do you think that automatic liquidity provision can help making it more liquid, regardless of the root cause?

[desrever]

Oh, and some very similar reasoning can get for the BKS/NBT pair …

[dysconnect]

I don’t know how I could contribute to this discussion; most likely whatever non-evil motion you end up hashing I’ll vote for it. As you’re going to be looking for developers I guess I should spend some time studying the code, which also helps me knowing what would really be needed.

[cryptog]

I am wondering. What is the main idea behind this?
In other words, what makes it solve the problem on a theoretical level in the first place?
Sorry for the basic question.

[Nagalim]

We want people to market make NSR. If we develop opensource market making software we may be able to decentralize the whole whaling thing. We can also tie it in nicely with how we create and distribute NSR and NBT via custodial grants.

[crypto_coiner]

Nbt/nsr liquidity is our jam, for sure. My philosophy on the wall funding is ‘make it profitable and they will come’. Make a solid piece of software, get someone to start using it with small amounts and show how profitable it is and people will voluntarily start running the bot. Nu doesn’t pay anything but dev.

This is crucial indeed and of the highest priority

[desrever]

Bump!

NSR buybacks will not last forever, and we should start working now, before buybacks end, to start designing and lay down a liquidity strategy that makes NSR markets interesting.

Time is now…