Liquidity and thoughts about balancing the ask and bid side

Liquidity Pools
#1

I found it was about time to start a new topic and stop derailing the motion draft for providing liquidity on hitBTC even further.
If this discussions lead to conclusions which are suited for the motion draft or the final motion, respectively, I’ll gladly include them.

Continuing the discussion from [Draft] Motion to provide liquidity using NuBot on hitBTC:

That is true for flash crashes or high volatile/high volume markets.
But I don’t think it’s true for bear markets.

In a bear market, the BTC price is falling, because the demand for BTC is low due to the expectation it would fall further - which makes the price fall even more.
At the beginning of the bear market LPs start receiving more and more (falling) BTC for (stable) NBT. If they could trade the BTC for NSR from the beginning and sell the NSR for NBT at Nu seeded auctions, they could keep stable NBT.
Nu would bring NBT to the market while receiving NSR. The NSR would be sold for PPC to distribute dividends, for development or share buy backs (it the limits of tier 4 ask liquidity would be exceeded by the seeded auctions).

Isn’t that what how the connection between NBT and NSR should be?

  • rising demand for NBT causes new NBT to be sold for NSR by Nu
  • falling demand for NBT causes new NSR to be sold for NBT by Nu

There are for sure the tiers 1 to 3 which offer buffer capabilities.
But ideally the total sum of all tier 1 to 3 ask and bid sides should be on an equal level as this is can be a guarantee for the peg to be kept in case of falling NBT demand (which is the more important side).
Slow changes of balance can be equilibrated by seeded auctions.

Quickly falling demand is no problem if walls aren’t torn down - as long as enough BTC remain in the ask side.
Keeping the walls (at least partly) up can be incentivized in fixed payout pools by paying a constant compensation per time frame - leaving LPs and missing volume means more compensation for those who stay.
NuLagoon can offer another pool which has less possibilities to withdraw than twice a week. The reward obviously needs to be bigger in this pool.
I intend to keep the walls up under all circumstances (at least if I start being LP at hitBTC and promise that in the motion), but for technical issues with my RaspberryPi, NuBot or the internet access.
So the Nu network should aim at a bigger ask side than 50% to have some buffer.
And in case the demand surges the FSRT can support the market quickly with new NBT.

A BTC bear market is nothing else but a market with demand for NBT!

The only big problems are low NSR/BTC volume and lacking ongoing seeded auction.
If LPs would get used to seeded auctions - because they are offered by Nu - two birds could be hit with one stone: participation in the seeded auctions would cause NSR/BTC volume to rise.
Nu would finally have a real market feedback loop between NBT and NSR.

I’d gladly trade BTC for NSR to receive new NBT instead of passing the ask wall (the volatile side!) around to other pools - if only I had a seeded auction to participate!
The same way could be used to get rid of a too big bid side: just sell NBT in a seeded auction and receive NSR which then can be traded for BTC.

I think it’s necessary to make a new assessment of the ratio between overall ask and bid side ratio that is considered safe for the peg.
Even now there might be enough demand for NBT to keep the peg safe even if lots of people were selling NBT.
There’s a big amount dedicated to liquidity providing and that amount is providing the LPs with good compensation.
That part of NBT can almost be deleted from the equation.
As NBT have more and more success, are kept in wallets to keep them at stable value and spend them as BTC, PPC, etc. just at the point of sale using shapeshift, the ratio between ask and bid can be lower and lower without endangering the peg.
But that is something for the future.
At the moment I think the ask and bid size should be in equilibrium, maybe the ask size even a bit bigger.

2 Likes
[Passed] Grant to provide liquidity using NuBot on hitBTC - the begin of modPuddle
#2

You are right. What I meant was What concerns me with forced rebalancing is possible aggrevated losses in a bear phase of a volatile market when BTC holdings are exchanged to NBT and won’t appreciate as the bear trend reverses.

But this might not be as bad, if this makes you feel better… as arbitrageurs will do the BTC->NBT for you by buying BTCs in the bull phase. That is the fate and doom of LPs on the NBT/BTC pair.

#3

Sorry for the rambling, skip to the end for real numbers.

Let’s start making stuff up! Suppose the bitcoin price everywhere as a function of time is x(t). We provide sell walls at x(t)+Cx(t) and buy walls at x(t)-Cx(t) where C is the offset. We want to model market volatility in some way and compare balancing to not balancing. In order to achieve this, I will make a pretty bold assumption I think: at a finite balancing time scale, only volatility at that time scale is pertinent when considering whether or not to balance.

This assumption basically says that only market trends that fluctuate on a time period on the order of a week or so matter. That greatly simplifies things so we can look at what happens. Let’s give it a go and try x(t) = P + A*sin(wt) where w is a frequency of 1/a week. To model the trend, we’re going to assume a price y(t) corresponding to the local bitcoin price and assume that it outpredicts the bitcoin market by an eighth of a period (45 degrees, pi/4). We also make the assumption that the local market has a velocity of W nbt/period. Fees are labeled with F, but I’m going to have to come back to those later.

So, the price difference:
y-x = A*[sin(wt+pi/4) - sin(wt)]
gives us a profit margin for the local market. We assume A is small compared with P such that second order terms like fees and spread are considered simple functions of P.

The following gives us the profit to be made at any given point in time:
(y-x)/P = W*( AbsoluteValue{ A/P*[sin(wt+pi/4) - sin(wt)] } - C - F )

We wish to take the integral with respect to time. Here, it would be instructive to split the integral into parts and recognize where there is no profit possible. The condition for zeros in this function are:

  • or - (C+F)*P/A = sin(wt)-sin(wt+pi/4)

The answer ends up being pretty complicated, so we need to try to simplify further. Let’s just use two linear slopes, one with a slope of M and the other with a slope of -M, and a flat line in between at price (P-A); assume local price starts selling continuously until the bottom where it stops making profit. In that case, the normalized profit at any given moment on the down slope is:
1 - A/P - M/Pt - C - F
with zero at t = (1-A/P-C-F)P/M. The bounded integral is then:
3/2P/M(1-A/P-C-F)^2
Let’s plug in and simplify. I’m putting in W for t because of bad notation. SAF is spread after fees and = 2(C+F). P/M is a speed at which the price falls and is only instructive when combined with the parameter W. 1-A/P is a volatility ratio that I will label Q. Note that 2Q is strictly greater than SAF or no profit can be made via arbitrage.

3/2*P/M * [ Q^2 - SAF * Q + 0.25 * SAF^2 ]

So, to take some real numbers to it, let’s take 10,000 NBT volume over the course of a 10% drop with 1% SAF. That gives us ~90 NBT loss. If we cement that loss by balancing the sides, we can presume to take another one on the way back up. This would be over the course of ~15 days and thus would amount to 3.2% of Nu’s operating budget.

Now, lots of assumptions and hand waving, I’ll give you that for sure. However, I do believe that this medium term volatility cost accounts for <10% of our budget. In contrast, a balanced peg on exchange at week long time scales is the very core of our business philosophy.

3 Likes
#4

I will need some time to digest this… :slight_smile:

#5

You and me both. I’m still echoing with thoughts and am not sure exactly what I said anyway.

#6

I haven’t checked it in details but it looks good.

#7

the balancing and liquidity issues wouldn’t be solved when B&C exchange is out?

#8

How could they be solved by BCE?
BCE mitigates one of the risks - the exchange default risk; not more, not less.
NBT liquidity balancing can only be done with Nu. LPs have some buffer in the different tier levels, but balancing requires NBT entering or leaving the market.
That can only be done with the Nu network.

1 Like
#9

i was thinking that perhaps B&C could cooperate somehow with NU and create or burn NBT more quickly, even automatically?

#10

Why would BCE do that?
And how?

The basic idea how that could be done is already here. A technical predecessor has already been developed and tested. But it’s by and large being ignored or not being followed.
If you are interested in it, have a look here:

1 Like
#11

sorry, i am too dump or lazy to understand it. also i don’t want to give my NSRs in order to get Nubits to use to ALPs. We must find a simple and fast way to create/burn nubits.
complexity is the thing that get me from bitshares to Nu. if a coin’s attributes are complex then people get away! :wink:

#12

Unseeded auctions are the simple solution. For those that don’t care, the basic end result is you send nsr or nbt to an address and after the predetermined auction closing block you receive the opposite of whatever you sent. That way, if you send nbt you get nsr and vice versa. Nu also participates in the auction to burn one token or the other. The end result is an elegant burn gateway that operates in a completely verifiable way using the blockchain.

4 Likes
#13

thanks! is there any active auction in order to try it?
since i want only NBT, i will sent only NSR? not a NBT/NSR pair?

#14

There’s no active auction at the moment.
@Nagalim is working on an improved version.
Sometimes it would help to read the linked topics - you would have found this :wink:

1 Like
#15

thanks, it seems i have a lot of reading to do :wink:
you are also the masterOf this forum, i need more practice to learn all of its aspects!