Interpretation of the liquidity tiers, a waterfall model, triggers, metrics and actions

NuShares
#2

nice summary. It’s still unclear how Tier 4 is injected to Tier 1-3, tiers that consist of a great number of LPs. That is the crux interface!

From reading your summay it seems that Tier 4 and Tier 5 can be the same thing only to react to Global Liquidity Imbalance (GLI; defined as global sell side liquidity minus the buy side; edit: then the difference is divided by the buy side ) changes at different frequency – Tier 4 reacts to fast spikes and dips of GLI, while Tier5 react to slow fluctuations of GLI. For a mathmatical example Tier 5 continuously reacts to the 7-day moving average of GLI, denoted as MA(GLI,7), Tier4 continuously reacts to GLI - MA(GLI,7).

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Park Rate Voting
[Passed] Motion to end LPC operations of KTm, Jamie and NSR sales of Jordan
Tier 4 Fund Management Discussion
#3

Thank you. Like I said, I didn’t intend to provide a complete solution. I rather wanted to get the ball rolling :wink:
It would very well be possible to let tier 4 fund managers conduct the seeded auctions once they are available.
With thresholds like “one side is double the other” different actions could be triggered;
it would be clear which side to seed depending on a condition of the liquidity situation.
Or what about this: in “seeded auctions” seed one side if the other (NSR would take the place of BTC) side is above 1.5 times the other, but less than 2 times.
Above a ratio of 2 times placing orders on exchanges (tier 1 injection) could be the triggered action for tier 4 managers.
…not saying that 1.5 or 2 would be the ideal ratios…

This is still a brainstorming. It needs to be shaped later :wink:

It might be easier to think about interfaces if we have an understanding of the kind of action that shall be triggered.

[Draft] FLOT and T4+6 - masterOfDisaster edition
#4

At last, i finished reading :stuck_out_tongue:
I will give you my point of view as an LP.

I consider T1 and T2 as a combined tier. Meaning that funds (of both tiers) reside in the same exchange
and are used automatically by the bot in a “constant reward” pool. In a “fixed cost” pool, T2 doesn’t exist,
unless the new nubot has functionality to play with T1 and T2 independently.
Anyway, for an LP operating only in one pool, T2 cannot be used to balance T1 of other pools, thus we cannot say
that T2 can be used to balance T1 in all cases (that is why i consider them combined).

About T3, i believe T3 has 2 roles.(2 sublayers)
T3.1 is the “personal” tier of an LP used as he/she likes to send funds to T1-T2 of any exchange he/she feel like.
NU cannot now about T3.1 unless the new nubot has functionality to play with, and it can actually report back T3.1 balances.
T3.2 is the sublayer closer to T4 that NU has full knowledge of it. It is the tier that interacts with T4 and T1+T2 to make
fund transfers faster with 24/7 availability.
It could be managed by an elected trusted T3 custodian with single signature addresses
or a small group of FLOT members with 2 out of 3 multisignature addresses, or both, why not?

Thus my vision of tier flow (from T1 to T4) is like below:

T1+T2 — T3.2 —T4 —…
… \ … /
…T3.1

That’s it, as an LP i don’t go beyond T4, sorry :smile:

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T3 custodians
#5

This depends on how you define or interpret T2.
T2 funds might be interpreted as fund being on the order book, but outside the spread for which compensation is paid.

Liquidity providers who do that forfeit compensation of those funds, but get them traded for a nice uplift if they can sell them in times in which the T1 funds (the ones inside the defined max. spread)are temporarily depleted.

NuBot supports a parametric order book.
The funds on T1 can be limited, the rest of the funds is put in orders at more expensive exchange rates.
This is the supported and intended operation model of NuBot, because it decreases the risk for LPs to fall victim to hedging with a lot of money, leading to decreased costs and cheaper liquidity operations.

If I understand the operation of NuBot correctly, funds on the closest spread (T1) don’t get replaced if consumed by matched orders, until the price moves and the oders get cancelled and placed anew.

If the BTC price swings in any direction, the amount of funds that can be traded in a short period of time for a close spread is limited. Hedgers might choose to pay a premium for trading beyond T1 or need to wait until the price moves to find T1 funds again.

I hear what you say. I fully agree to the function of T3.2. But I’d explain it in a slightly different way.
T3 sell side (T3 buy side has millions of BTC ready :wink: ) custodians hold NBT that are their property.
They verify that they hold the NBT and pledge to use them for T1 (and T2) operations.
They get compensated for having NBT “locked” (pledged to liquidity operations).
This compensation is lower than T1-2 compensation, because no exchange default risk applies, but needs to be big enough to make people hold the NBT.

I’ve thought some time about the accounting of the compensation.
I still believe that one of the easiest ways to do that is to make this via custodial grants by people who run NuBots.
The T1-2 funds get reported by NuBot.
T3 funds can be read on the block chain.
The total of T1-3 is more or less constant and only prone to BTC volatility when being traded hence and forth.

The incentive for the custodians to move funds from T3 to T1 is the increased compensation for a sell wall that has run low. This of course works even better with the fixed compensation scheme, because it amplifies the compensation effect of providing liquidity in low walls. With fixed rate it only provides an increased incentive, if the side drops below the compensation threshold.

FLOT is only doing business with these custodians, but not with random people.
That limits the involvement of the FLOT in liquidity operations and ties T4 to T3.
Plus it can allow (by NSR holder vote, depending on the terms of the custodial grants) to have the FLOT send NBT before they received BTC from the custodian. This speeds up the refilling of T3 in case the funds run really low there.
It might not play a big role, but can make the difference between the FLOT doing business with T3 and the FLOT beind required to use NBT entry gateways to directly inject NBT in T1 - which requires to have such a gateway at the exchange with the low sell side!

T3 custodians should trade with each other to balance sides on different exchanges as long as the overall T1(-3) sides are balanced.
The easiest way to do that is by transferring funds to another exchange and trade there.
If on one exchange there is demand for NBT, while another has sufficient NBT or NBT in excess, send BTC there, trade them for NBT and send the NBT back to where they are low.

T4/FLOT would only be involved if one side is overall low or in emergencies.

T3 custodians
#6

What’s the incentive for a custodian to report their T3 funds? What guarantee do we have that those funds will actually end up being used in a peg break scenario? If those funds have no way of being accessed directly, but only at the custodian’s whim, how can we even call them T3? I don’t think there is an ALP solution for T3, though NuLagoon is showing the MLP solution. I propose a different kind of T3 custodian, one that uses Nu’s funds so they have every incentive to report and follow through in peg breaks, over in the T3 custodian thread.

#7

To receive a compensation.

No guarantee, but the incentive for the T3 custodians to put funds in the shrinking walls to earn more reward (in percent) for their funds (only true for fixed compensation).
This makes a peg break scenario less likely. They have an incentive to fill T1 early.

The direct control over funds in the decentralized liquidity operations model ends at T4. T1-3 can only be steered by providing incentives.

That’s a viable solution, but leads away from the (completely) decentralized liquidity operations model.
At another place I’ve already written that some small steps away from the decentralized liquidity operations model might be good:

#8

If you’re compensating custodians for reporting T3 then you’re running some kind of ALP-type operation. So what prevents Satoshi from submitting his kajillion btc as buy side T3, with absolutely no intention of ever bringing them to market. Are we going to pay him for holding his own btc in his own wallet and having nothing to do with Nu?

#9

Without any compensation, you won’t find people doing it.

The terms of the grant limit the amount of BTC or NBT.
T3 sell side custodians would be limited anyway.

Nu pays elected T3 custodians based on terms. People who get elected are aware of the T1 compensation. They will happily move funds from T3 to T1 if the compensation is sufficient :wink:

#10

A contract that includes a profit mechanism that is dependent on reporting also works (like what I’m proposing, in which T3 custodians are paid based on how many funds they sell or buy). If we pay based on the risk, holding funds in a wallet off exchange has 0 risk, so we should be awarding nothing. If we pay based on the work done, reporting can be made automatic and simple, so a basic operator fee would be all that would be required. But then, what motivates anyone to lose their anonymity by actually putting any funds in the reported wallets? Clearly, the best thing I could do would be to report a ton of wallets that all have like $1 of funds in them and collect a ton of operator fees. So the shareholders will be responsible for holding the custodians accountable for not having enough money in their wallets. I just think that’s going to be exhausting for shareholders.

Maybe. Exchange risk is pretty big. Ignoring opportunity cost, I’d happily hold a large amount of NBT in a wallet somewhere if Nu is paying me LP rates, especially if I never have to risk bringing it to exchange. That’s like 100x better than parking because I can use the money whenever I want.

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#11

how about a T3 custodian must put the fund in a 2x2 multisig address which he/she and another party have to both sign and both pledge that will only transfer fund to a T1/2 address. T3 Liquidity is reported from the multisig address. The T3 custodian can’t spend the T3 fund on anything else. To make it pointless not to ever use T3 fund, compensation to T3 is only paid when it is transfered to a T1/2 address. The amount is proportional to how long the fund is in the T3 address and the transfered amount.

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#13

This is great, each T3 custodian gets a watchdog. Let me think about it some more, but this seems like a solution.

#14

@mhps It seems to me we don’t even need the watchdog. All we need is the T3 to blackball themselves as a recipient of the funds. As anyone can fake an account, that means the T3 custodian is given a list of addresses corresponding to other trusted community members such that the custodian and that community member are unlikely to collude. Then, all Nu has to do is look through the custodian’s Txn history (written on the blockchain) and make sure all receiving addresses are valid T1 custodians. Then they pay them based on the time the liquidity was provided for after the fact.

Others, please try to attack this. Pretend you are the T3 custodian with malicious intent, how would you fraud Nu?

#15

How can you ensure validity of T1 ALP custodians?

#16

Well, any MLPs are clearly good (MoD or henry). Then the shareholders can elect some others like you. The main idea is to just make sure the T3 custodian and the T1 custodian aren’t working together.

#17

So i cannot be T3 and T1 custodian at the same time?

#18

You can, but you cannot make Txns with yourself from T3 to T1. The reason for this is a little convoluted. Basically, the T3 custodian has incentive to favor themselves and blackball all others if we let them trade with themselves. If the T3 custodian is not allowed to transact with anyone they can collude with, they are forced to treat all valid T1 recipients as equals.

#19

I don’t see why this is a problem. If a T3 custodian gives himself T3 funds to put on his T1 bot and do all the reporting, and nu knows the fund is used to support the peg, everything is fine to me.

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#21

What if the T3 custodian deals with no one but themselves, they send the money to themselves and put it up on T1 just long enough to get Nu to pay for the weeks of T3 service, then they take the money off T1 and walk away, getting paid exorbitant rates for like a day of actual liquidity support.

We would need to contractualize the T1 service as well if we let them blackball everyone but themselves. The whole thing works way better and simpler if you force the T3 custodian to follow a white list that they are not on. It keeps them from colluding.

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#22

Then the question is how to fairly calculate T3’s reward period. What you said could happen to any T1 LPs. How/when do you think fund should flow back to T3 from T1-2? How about reward T3 for the pereiod when its fund is in T1-2? How about making T3 a loan from T3 owners to T1-3 LPs? Maybe they can settle on a price themselves?

#23

All your suggestions cause us to need to audit not only T3 but also T1 and T2. This greatly adds to the complexity.

This could not happen to just any T1 LP because no other T1 LP is motivated by the T3 reward other than the T3 custodian. If a T3 custodian sells to an independent T1 custodian, that T1 custodian has no reason at all not to put up the funds and get the T1 pool rewards. If the T3 custodian sells to a colluding T1 custodian, that T1 custodian has every incentive to fool the shareholders into thinking the T3 custodian did their job, then walking away and splitting the money with them.

We could also think of ways to fully audit T1 custodians, but it would require some heavy use of API keys on the part of the pool operator to try to identify their individual providers. I’d really rather just do the simple T3 audit (everything on the blockchain) and provide the custodian with a whitelist.

T3 Personal Custodian Discussion