Lack of commitment to liquidity is our biggest threat now


#1

Perhaps the biggest surprise for me in the course of our monetary experiment is that a growing chorus of voices in the community are advocating policies of intentionally reduced liquidity as a part of planned operations. This surprises me because I would expect the community to understand that NuShares will only have value to the extent the network is viewed as reliable in maintaining liquidity, the quality of which is simply measured by the depth and spread of the liquidity. These proposals represent suicidal tendencies that strangely seem to be growing in our forum at the present time.

Talk of keeping the peg during a time of declining demand by increasing the spread or increasing transaction fees are alarming to me to the extent that there is any acceptance of such techniques among shareholders. These are poorly disguised defaults. A NuShare is an asset that has its value based on giving the owner part ownership of a liquidity engine. It amazes me people involved in the project would propose to plan to dramatically reduce liquidity by choice. The network is supposed to defend liquidity with every fibre of its being. Its like there is some confusion about the identity of the network. This is a liquidity providing machine. Its value is determined by the quality and reliability of its liquidity. So, deliberate and official plans to reduce that liquidity would be deeply injurious to the value of NuShares. A perceived possibility that shareholders will support such reductions in liquidity is an existential threat to the network, and the most serious threat to the network at the present time in my opinion.

Consensus about the importance of reliable liquidity needs to be demonstrated.

When the network first began deploying decentralised liquidity, it cost us 9%-10% per month. Muchogusto’s significant liquidity providing operation is being paid a little more than 1% per month. Liquidity has plummeted in price, just as we needed it to and as I predicted it would. It’s a major success for the project. So, with dramatically reduced prices, we should be buying more liquidity, not less.

While it is not possible to definitively determine the cause of a change in the price of NuShares, it is probable the recent drop is due to reduced liquidity, particularly from NuPool on Poloniex. I’m surprised there hasn’t been a better understanding of this. Volume on Poloniex declined in March precisely because liquidity was reduced at that time. This resulted in a declining demand for NuBits, which brought the NuShare price down due to lack of share buybacks and the threat of NuShare dilution. The system is working exactly as it was designed to, but the community doesn’t seem to fully appreciate this. The system is designed to punish NuShare holders for poor liquidity. That is working. I would expect this result to motivate NuShare holders to renew their commitment to providing liquidity, but the problem is I haven’t seen that occur yet. So, I would like to explore some principles that I will refine into a motion that will hopefully demonstrate the network’s commitment to excellent liquidity:

  • Transaction fees serve two purposes: revenues for the network and spam protection. A notion that the peg can be protected by raising transaction fees during a period of reduced NuBit demand is incorrect and flawed. Merely having a plan to do so would endanger the network by reducing demand for NuBits. A plan to raise transaction fees to address reduced demand is clearly against the interests of NuShare holders.

  • There must be a strong commitment to tight spreads. Perhaps the community should aim to maintain a 1% spread on supported exchanges. Increasing the spread, which reduces the price the organization purchases NuBits at, is a form of soft default. If we normally buy NBT for 0.995 and that is reduced to 0.95, that is taking 4.5 cents from customers when we shouldn’t. Planning to do this would be disastrous to the NuShare price.

Can we all agree that any shareholder plan to reduce liquidity or the pegged price represents a suicidal tendency manifesting within the network?


NuBits (NBT) will be delisted from Poloniex on Jan 4th
(2nd Version - Expanded) My Interpretation of Jordan Lee's Liquidity Engine Model & Why its First Attempt at Pegging Failed
[Passed] 1% Maximum Spread in Shareholder Funded Liquidity Operations
Current state of affairs
Statement on Status of NuBits and Liquidity 2018–03
[Withdrawn] Make Firing and Replacing Incompetent Liquidity Providers Our Top Priority
Circulating NuBits $2,000,000! Never buy for more than $1.00
Timeline of events related to the peg break 2016
Timeline of events related to the peg break 2016
#2

Glad you are on the same page there. It left me puzzled for a while.

I think by pursuing a lower price for liquidity provision the spread naturally went up as LPs tried to recoup their lost profits. It is not easy to find a balance which is profitable for both parties. Muchogusto is running an experiment which tries to show that not much benefit can be made in the current climate. Decreasing the spreads without increasing the rewards would make it worse for LPs.

I agree that reducing the peg (larger spreads) creates friction on trading volumes which is not great. The question is where the balance lies between creating some friction with spreads and giving away too much money to traders at a loss for the network. After all volumes on exchanges don’t provide fees for Nu. B&C will bring some change to that.

Anyway I have always advocated for 1% maximum spreads after fees for ALPs and LiquidBits is again back within that after some stiff discussions I had to overcome in last few months. I think NuPool should also be there possibly even lower as far greater importance on Poloniex. With that the NuBots and Pybots being the second line of defence can also be set a bit tighter e.g. 1.4%.


#3

So, the plan is to offer a tight spread even during high BTC volatility periods risking NU’s profits,
and anticipate that NUshare value will increase in order to compensate for any possible loss?
Can this scheme works or something i am missing here?


#4

BTC is very stable recently. I recognise that there is a risk of high volatility due to the uncertainties of the block halving though. The ALPs should be more flexible with that. I believe we had that discussion before.


#5

I believe there are three possible reasons to justify the decrease in liquidity over the last months:

  • the provision of generous liquidity at a tight spread was perceived as not so much rewarding for nubits sales
  • the perhaps mistaken anticipation that b&c will decrease drastically the costs of liquidity which gave a psychological incentive to underestimate the importance of a tight spread
  • the fact that it seems that the peg was saved back in january by the trememdous efforts of mod via the gateways which demonstrated their value; then it seems that there has been a consensus that gateways are very cost effective

I agree that we should keep a tight spread with a large liquidity but at the same time it costs Nu a lot, it seems.

Perhaps even if we reduce drastically the rewards for liquidity provision we will attract a large participation from liquidity providers.

Anything that points to that phenomenon? To me it is not obvious at all.

PS: maybe @JordanLee wants us to take more risks. Maybe he wants us to basically increase liquidity at the cost of printing a lot of NSRs to maintain the peg. Maybe as a startup we should do that.
But then we need to know when we got to do some nbt sales. Recently we sold 30k on a single day. At the end of last year we sold 100k in 2 days. Maybe providing a generous liquidity as a tight spread will create a lots of nbt sales that would counterbalance the sales of nsr to keep the peg.


#6

Nu proved that it can do that and shows that it can handle daily volumes of above 3,000,000 NBT:

Providing a big amount of liquidity at a very tight spread increases the costs by far compared to using a parametric order book.
This is what the current liquidity provision - at least at Poloniex - looks like; even in an extended version.
There we have

  • ALP (NuPool) providing liquidity at a quite tight spead
  • MLP (NuLagoon) supporting liquidity on a tight spread while being independent from liquidity providers who might pull orders at the blink of an eye
  • NuBot/PyBot operations at an increased spread to provide a line of defence if the prior fail; the NuBots start with orders at an increased spread and have parametric order book enabled on top

With Nu funded operations this can be much lower - if the funds don’t get lost.
I come back at Poloniex where a mix of Nu funded operations (NuBot/PyBot) and Nu paid operations (NuPool, NuLagoon) tried to combine the best of both worlds.

Long term Nu funded operations are cheaper. But they have the ongoing risk of loss of funds.

If that stays true for the coming months, we should ramp down ALP and focus on Nu funded operations.
That’d save approx. ~8% monthly (cost of ALP: liquidity costs plus operator fees) while making 1% revenue.
9% monthly is an APR of close to 200% (including compound interest).
Break-even would be in a few months. Poloniex just musn’t go bust in that time :wink:

Reworking NuPool to use ALPv2 took time. It reduced the liquidity. But high liquidity at exchanges is a showcase and not more.
It earns Nu no money to have NBT traded at exchanges; on the conrary: it costs Nu money to support that.
It’s not the best of times to wish for an increased liquidity at exchanges (and not only because of the approaching Bitcoin coinbase reward halving and the expected effects on BTC volatility!).
The reserves are quite low.
The rule set how to replenish them is under construction (e.g. with “Core and Standard” motion).
The risk when providing liquidity with Nu funds due to echange default, theft, etc. is higher than it will be with B&C Exchange.
Buying liquidity through ALP is costly.

I’d like to see Nu operating in a conservative mode for some more months. Nu isn’t in the position to operate at full throttle.
Even if Nu would spend much more for ALP to attract liquidity, it couldn’t provide an appropriate backup, last line of defence for a big liquidity through Nu funded liquidity operations (NuBot/PyBot) for a big liquidity at the moment. There arene’t enough BTC for that!

My strong advice is to keep acting consevratively until B&C Exchange is working (or a surge of NBT demand fills the reserves).
Focus on the exchanges where the most liquidity is (at the moment Poloniex).
Keep a tight peg there with a few thousand USD on orders at T1.1 (ALP/MLP).
Have some more thousand USD on T1.2 (NuBot (including parametric order book)/PyBot)

I’ve never tried to fight that. I was a strong opponent of restricted network access and I’m completely on the side of having liquidity at a tight spread.
But I argue for limiting that amount at a tight spread at the same time.
Liquidity at a tight spread is expensive.
Nu can’t afford to have tens of thousands of USD value at a tight spread; not at the moment. And what for? To prove that it can do that? Nu already did.
If you want to do that again, ramp up ALP and/or fill accounts of NuBots with Nu funds. Both costs Nu money.
Let’s keep a low profile until B&C Exchange is ready and you can provide liquidity on T1.1 and T1.2 (with parametric order book!) with funds that currently sit on T4 while having no exchange default risk and only a very, very low risk of theft (which is, if B&C Exchange works as deisgne almost 0).

I agree with most of that.
There needs to be liquidity.
But having no sane limit for that liquidity is just as much suicide as having no liquidity is.
Nu needs a sufficient amount of liquidity at a tight spread.
Beyond that amount, higher spreads are justified.
Nu can’t support all exchanges with liquidity.
Focussing on the most important exchanges (NuLagoon Tube and Poloniex at the moment?) is crucial.


#7

my 2 satoshis as a non shareholder:

I used to play with nupool for a while, but the reward did not outweigh the risks, so I stopped doing that: providing liquidity.

If you want more liquidity nupool should pay out more for the providers, not less. It is simple economics 101.


#8

Thank you for providing feedback, which is very valuable!
It underlines the assessment that the tighter the spread is, the higher the resulting cost is.

The tightest liquidty (ALP) comes at the biggest costs. For that reason it needs to be limited to a reasonable amount.
Allowing an increased spread at the same compensation level would lead to the same result (more liquidity).
At the moment additional liquidity (additional to NuPool) is provided by alternative solutions (NuLagoon, Nu funded NuBots) and I think in total the liquidity is in good shape at Poloniex.

Liquidity network wide is a different matter, but obviously the liquidity provision is currently centered around Poloniex and NuLagoon Tube (ALix T1 volume sorted by 7 day average):


#9

I think this is an oversimplification. There are a lot of things going on, including several pretty serious technical issues with clients and services.

So you unilaterally reject all attempts at RNA?

We have a motion for this, but I agree there needs to be another. Basically, the statement is 2%, rather than 1%. Anyway, it’s what basically everyone is running on. ALix grabs within 1.5% offset, which is a 3% spread, but most pools are running with ~1% tolerance. That means we buy at $0.99 and sell at $1.01, which I think is fine for most purposes. The market and moving bots and many LPs and all that helps to close the spread. Further renditions of NuBot will also help.

However, to equate spread with our current biggest threat is not something I agree with. We’re doing fine on spread. Liquidity magnitude and consistency is what we need to work on. And fees? Why even bring that up in the context of current threats? Fees have never been different from the starting values for any substantial length of time.


[Withdrawn] Motion to create a new Tier 6 (Restricted Network Access) of liquidity
#10

Yes, a tight spread should be maintained regardless of the level of BTC volatility. I don’t accept the notion that speculators know which direction the price of BTC will go, which suggests liquidity providers will have their profits increase during times of BTC volatility, because there will be more volume from which to make the half percent profit that occurs each time NBT is sold at 1.005 or bought at 0.995.

A tight spread during times of BTC volatility will invite speculators and people hedging BTC to purchase NuBits. The proceeds of these sales will be used for NSR buybacks and increase the NSR price.

While we have a long term goal of providing a stable and liquid currency ideal for all kinds of business, right now we need to understand our market consists almost entirely of cryptoasset traders who will use NuBits as the cash portion of their portfolio and to hedge a decline in BTC or ETH. We have to win in this small market before we can expect to have the strength and size to win in other currency markets.


#11

I’m glad to hear this.


#12

minus exchange fees, deposit/withdraw fees to rebalance, NuLagoonTube spread, opportunity cost, etc. We can put the dev costs and FLOT costs and stuff on NBT increasing in supply, sure, but we have to account for an LP’s total perspective. We can’t just blind ourselves to what they actually have to experience to keep liquidity up for Nu.


#13

Neither I

I agree that BTC halving is actually a very good chance for us to promote NuBits


#14

Absolutely.

It is unnecessary to raise fees to support the peg, and planning to do so will certainly have a negative impact on NuBit adoption. It is exactly the sort of thing that I would characterize as a suicidal tendency.


[Withdrawn] Motion to create a new Tier 6 (Restricted Network Access) of liquidity
[Withdrawn] Motion to create a new Tier 6 (Restricted Network Access) of liquidity
#15

BTC price can’t be accurately predicted but

  • The latency in price updates can give brief but definite opportunities of arbitrage
  • Speculation is partly a self-fulfulling prophecy, in the sense there’s a non-trivial correlation between BTC price drop and collective belief of such occurence. Due to uncertainties this can’t be gamed easily by individual traders, but I believe Nu loses money to them as a whole. It is thus paradoxical to offer NBT primarily as a hedging instrument.

My opinion is that tight spreads can be a loss-leader if we have a proper platform to collect fees by offering loans and derivatives. Without that it’s a money losing business.


#16

It is an important question whether arbitrageurs are draining value from the liquidity providers. I doubt this is occurring. Muchogusto’s experiment is giving us interesting data on this. Unfortunately, the data set is too small to reach a conclusion, but I think it does indicate any losses that might exist are not very extreme. Muchogusto was all in NBT for the main upswing in BTC during the experiment, although the experiment has made smaller gains by being in NBT on smaller declines and in BTC on smaller gains.

But let’s consider the details of how arbitrage works. Prices at various exchanges don’t move synchronously. At a particular moment there may be whale wanting to buy BTC at Bitfinex immediately, with price being a secondary concern to that whale. He may push the price up at Bitfinex a percent. This prompts an arbitrageur to sell BTC at Bitfinex and buy BTC with NuBits at Poloniex, thereby buying low and selling high simultaneously in different markets. This action does not produce a loss for the NuBit liquidity provider. He makes a profit on the spread and the arbitraguer makes his spread as well. It is the whale on Bitfinex who is paying the cost to get what he wants right now. In a sense he is the loser, but in another sense he is not a loser either because he got what he wanted when he wanted it, he just paid an extra fee for the convenience. Arbitraguers are our friends and can make the network profitable in this way. They are in the business of giving impatient traders who pay a premium what they want right when they want it. It these impatient traders who take the loss, or pay an extra fee for their trade.


[Passed] Dual side gateway at hitBTC by masterOfDisaster
#17

yes, money come from moving :sunglasses:


#18

A worse scenario is that NuBot is too slow to update a price change and this is caught by an arbitrage bot.

Say BTC/USD is currently 450. A sudden drop occurs in many other exchanges to 440, but NuBot has to be stuck at buying BTC with 450 NBT for 30 seconds. I dump 1 BTC for approx 450 NBT (minus fees), and wait for NuBot to change its price, and repurchase 1 BTC with approx 440 NBT. The liquidity provider lost money.

I’ve been seeing that walls are consumed more quickly than I can react (the reversed price display on Polo definitely doesn’t help) during large price changes, prompting me to consider an actual risk that this is done by some people in the wild.

Now that I think of it, this isn’t called arbitrage, but is a problem buried within the messy details of ALP.


#19

NuLagoon are advocators of Best Liquidity. we will write a formal response in other thread.


#20

That indeed is a problem of NuBot, because it bets before speculators. However, that problem is overcomed by NuLagoon Tube due to the completely different design. In tube, the trading price is determined after the “Tube-in” transaction captured by NuLagoon in the blockchain. In other words, we let speculators bet first and give them a fair price.