Finalized evolution of liquidity operations

NuShares Motions
#46

There is a lot to digest, and I am far from arguing about visions with the very same person who had the vision of Nu. However I have been into (researching) startups for a while now to sense a pivot coming from miles away. Is a common pattern.

A pivot is “structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth.” link . On a more in depth comprehension, a piovot is a change of strategy without a change of vision ( in basketball terms, the vision is the foot on the ground, the strategy is the rotating foot) .

A pivot is often effective if done properly, and it normally takes several pivots before finding the right one that leads to growth. However, its a big step for any kind of organizations, so no wonder ben is surprised .

( watercooler video about pivots here )

Now the paragraph below deserves attention :

Now I invite you all to read (again) “The problems solved by Nu” extracted from the whitepaper.

Bitcoin was a phenomenal innovation. For the first time individuals could hold an asset without counterparty risk and transfer it to anyone else on the network quickly and privately, if desired. It had some flaws, which include a high cost of maintaining the network and the disassociation of control of the network (given to miners) and ownership of its assets (Bitcoin holders). Peercoin improved upon Bitcoin by dramatically reducing the cost of network maintenance and giving control of the network to the owners of network assets.

Both of these networks contain a critical flaw which Nu resolves. These networks permit the purchase of scarce units used in the networks which function much like shares. If the value of the network rises, the value of these “shares” rise. This dynamic has been critical to the success of these networks as it allows anyone to purchase a stake and benefit from promoting the network. These networks have simultaneously been promoted as currencies but have not functioned well as such. Currencies must have a stable value to be effective, while Peercoin and Bitcoin have exhibited exceptional volatility. Many argue volatility will end with the high liquidity that will accompany widespread adoption. While volatility will decrease with greater adoption, it is unlikely volatility will ever be less than occurs with large cap stocks such as Google or Microsoft. This is still an unacceptable level of volatility for a currency. Let us suppose I am wrong and that volatility will be eliminated in these networks. In that case they would serve well as currencies but poorly as shares, because they would not appreciate, nor give dividends. This would likely cause a selloff of these “shares”, thereby introducing volatility once again.

The critical flaw is that Peercoin and Bitcoin use the same fungible unit for share and currency functions. Shares must have the capacity to appreciate and reflect changes in the perceived value of the network while currency must remain stable regardless to be effective. It is impossible to accommodate these diverse pricing needs in a single unit.

Now, I would like to get it straight: do we still want to pursue the original vision, right?

What Jordan is proposing is to test “NuBits as a tool for traders to exit illiquid market” to reach the “NuBits as a digital currency for the internet” outlined in the whitepaper. Am I correct?

The first step, and we agree, is proving our capability to maintain the peg, and we are doing it right now.

Following steps may or may not be the one proposed here by Jordan. We have already seen other proposals: one is attacking the landing market, right?. And betting. And tipping. and wages. and spam control, and merchants and inflation and bankings and the moon.

Are we really sure we want to spend so much time and energy in pursuing this change of strategy? Is it worth, especially when compared with alternative? Do we have a clear sign of the market asking for it (because thats what generally triggers pivots) ? Did we consider all the alternatives in a in depth comparative analysis (not that I know of)?

I hope do you see my point here.

Egoistically I could just shut my mouth and execute : the proposed approach to liquidity brings technical challenges which are exciting and will guarantee I will be busy with innovative stuff for a long while.

I want to make sure it is done properly. Does that sounds reasonable?

7 Likes
#47

This one is solidly established and recognized amongst many already?

#48

@desrever

Very good summary of the situation…
Hum.
I feel that offering liquidity for traders that want to store money as intermediary in between their trades is a necessary step before offering a digital currency for the average Joe on the Internet because nbt is sold first and foremost on the exchanges that are accessed first and foremost by traders.
If NBT was sold primarily say at convenience stores via pre-charged cards mentioning a redeem code that people would input at “nubits.com” to access their nubits, offering liquidity for traders would not be appropriate or logical.
Or perhaps should we create now a “nubitpay” service similar to bitpay that merchants would use to accept nubits. But here again we would need to access exchanges to sell nubits for usds, which implies a sufficient liquidity at least on the buy side.
This is only my opinion though.

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#49

I wonder, in this scenario is NuBits unique and perfect for the job because its stable , or because its liquid-ish? I think stability is secondary in this scenario. The liquidity is what makes it possible, therefore we should also update our slogans.

EDIT: let me rephrase

In this scenario, Is the strength of NuBits its stability or its highly engineered (to use an euphemism) liquidity control system?

This is border line with the vision, imho.

#50

I might be missing something, but from what I can tell, this proposal will result in wider custodial spreads. Mirroring an order book replicates the natural spread from the mirrored exchange, which is often 0.5% or more.

#51

This is true. We are trying to provide the best liquidity we can without subsidizing trades. If we combine order books from a number of exchanges, our spread will be lower on average than any single exchange while our liquidity will be better. It isn’t perfect, but it is a major improvement over what exists now.

[Passed] Motion to regulate spread values for liquidity operations
#52

@desrever This is a very good point…

Right now it seems that the direction that JL wants to take is deep liquidity and stability at the same time…
As he pointed out

and

So 2 aspects.

But I would like to get his confirmation. Is it deep liquidity or stability or both that matters?
To me, stability is more important and I feel we do not need necessarily deep liquidity.

But if the currency is stable, we can anticipate that there would be a lot of demand for that, so that would imply high liquidity…

So my feeling is that we want stability first but liquidity is needed if we want NuBits to be widely used…

#53

For NBT/crypto pairs, what is the “actual” current price? The only data one can take from an exchange is the buy/sell history and order books. These all have spreads. So if we want to have a tighter spread than the natual one, how to calculate the “actual” price? In the middle of weighted average of all exchanges? how about taking price movement momentum in to account?

Anyways, suppose we decide we want to have an actual price, and we want the bots to set small spread around it. Then someone can bet against our calculation with their algorithms, similar to the way in high frequency tradings. We are effectively engaged in speculation when setting the actual price. We will be in the open and they are in the shadow.

So I think the logical solution is that we should use the natual spread. It is also possible that someone would try to game our calculation of the spread, I think the risk is much smaller.

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#54

I don’t see the need for high liquidity as a departure from the original vision of stability as long as it is just a high liquidity phase that the currency needs to pass through. My reading of the situation is:

  • We need to be providing the liquidity to cope with demand.
  • We need to do so in a way that minimises risk to Custodians
  • A by product of this is that NuBits becomes a better tool than it already is for exiting illiquid markets.
  • This situation remains only for as long as there is the need for centralised exchanges in the Nu ecosystem

My natural inclination is to think through solutions to problems that are raised, sometimes to my detriment as I forget to ask if the problem should be solved in the first place.
I have a few ideas around how to approach the implementation of other liquidity provision models but I do think it’s important in this case to first clear up the debate around the future direction for NuBits.

It seems to be the majority consensus amongst the posters if this thread that the stability of NuBits should remain the primary concern. Is my reading of this proposal correct, that this would be a deeply liquid phase of NuBits that would be revisited when the distribution method of NuBits evolves, or is it an additional aim along side the stability?

The great thing about the protocol voting of Nu is that both of these can be correct (just not at the same time).

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#55

Indeed, they both matter a great deal. Far from being in conflict with one another, they are complimentary.

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#56

@JordanLee Tks for confirming. So the more we have liquidity, the more buy/sell transactions will be made by traders, the more stability we will get since stability is the ability to maintain the peg and the peg is enabled by the ability of Nu to buy back NuBits primarily.

#57

@woolly_sammoth That is a good point. How can we do that?

#58

I think that is inherent in this proposal. The whole act of creating tiers of liquidity is reducing the risk of holding entire custodial grants on order.
I don’t think anyone is against that part, there’s just some discussion to be had around the methods of achieving that.

I’ve thought more around the potential of mirroring order books. My gut feeling is that it leaves us open to attacks that may not directly cause losses but would make the position unreliable. What is to stop a bad actor placing large and frequent orders near the true price thus causing the bot to reflect orders and initiate a movement of liquidity from higher tiers to lower tiers to back fill. Even if these ‘attacking’ orders are never intended to be filled, NuBot spends a large proportion of time mirroring orders and moving funds. It seems to reduce the stability of an already fairly wobbly situation. (Wobbly is referring to the standard communication between bot and exchange API and not the bot itself)

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#59

This gives me the idea for this attack:

  1. Place large buy order (1) on mirrored exchange.
  2. Wait for custodian to place corresponding mirrored order on NBT books.
  3. Sell into custodian’s order while simultaneously removing order (1).
  4. Custodian cannot fill against order (1), and is left out of balance.
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#60

The answer to avoid that situation appears to be making sure that it is reactive, rather than proactive. Trades must be confirmed on each market before NuBot proceeds in which case it will appropriately affect the other market.

#61

Sorry, I don’t understand which market is which, or how this affects the “attack” above. Could you please rephrase that?

#62

It’s not just the act of placing an order on the exchange, is it? Doesn’t the large buy order placed on BTC-e have to be actually purchased before NuBot would go ahead and replicate the order on NBT books? In that case there’s nothing for the attacker to remove (while simultaneously selling into the custodian’s order).

#63

The way I understand it, it’s a mirroring of the open BTC-e orders, not a mirroring of already-filled orders.

#64

Ah, Jordan already considered this attack.

Does this mean that custodial funds must now be held on the mirrored exchange(s)? For example, custodial funds would be held on BTC-e, increasing exchange default risk? Up to this point, this has not been a requirement.

#65

There are several technical obstacles that will make the mirror quite unstable and subject to attacks.

I submitted an idea for an alternative solution to Jordan for consideration.
In short :

Alternative : Instead of depending 1:1 to other order books, I would pre-prepare N models of orders/liquidity distribution , for example flat, balanced, deep, shallow, steep, bear, bullish. Then instruct nubot which model to use and change it when necessary according to market conditions.

This will make it much more solid and reliable (no need to read/cancel/place orders multiple times a minute!) and will solve the problem of offering huge walls around 1$, will give us control over the models, will eliminate third party failure and attacks scenarios, will allow for wall shifts to happen smoothly, and will also make our current multi-custodians approach feasible.

Or maybe not. Just an idea