My 4 month experience as a liquidity provider

Liquidity Pools
#10

Both yes and no.

He went into Pool D expecting that if BTC grows he should earn more than the growth, having misconceptions on how Pool D operates (to be fair, NuLagoon doesn’t make this very clear to its users), which causes him to misinterpret the results. If Pool D is indeed 100% leveraged trading then accounting in terms of BTC actually makes the most sense.

On the other hand, he also tends to keep his books in BTC even for NuPool. I reflect that my comment was too harshly worded, but his evaluation just demonstrates a yet-too-common biased judgment of risk and return. People tend to complain when their BTC position shrinks during appreciation, but if that reduces losses during bad times they take it for granted. Not accounting in NBT or USD make them especially prone to this bias. To some extent, some liquidity providers want our high interest rates to be high enough to offset the perceived risk under this bias. That said I’ve incorrectly mixed my sentiment on this issue with his concerns regarding Pool D.

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#11

I appreciate @Dhume’s effort to come forward and tell shareholde concerns from his perspective, so the problem, certainly also perceived by many other liquidity providers, can be analysed, explained and, if necessary, corrected.

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#12

[quote=“willy, post:3, topic:2964, full:true”]
Yes, the costs for liquidity providing on BTC pairs are way higher than for USD pairs. I have a feeling that there is consensus about this in the community.
Moving from BTC to USD pairs should be our long term goal, but that road will be long and for the time being, very rocky.
B&C comes to mind here: We can only offer a BTC peg their, as USD cannot float in or out the market.
Poloniex and Bittrex don’t offer direct USD pairs either, as they would have to deal with a lot of regulation issues.[/quote]

I would like us when B&C is live to start moving away from supporting BTC/NBT pairs in favor of support BTC/NBT pair on B&C. I’ve been thinking of future business models for NSR and liquidity provision which I’ll post down below.
Also I feel we should think more about introducing small spreads to our BTC/NBT pairs, we’re pegging 1 USD = 1 NBT offering liquidity at the same price on the BTC/NBT pairs I would say is a premium service with a small premium fee. Not to make money off it but to better cover the actual costs of liquidity provision.

[quote=“Nagalim, post:45, topic:2585, full:true”]

Good parameters for LPs on these pools are:

Deviation = 0.0025
Offset = 0.0045
Resultant Spread After Fees (SAF) on Poloniex = 0.5%
Resultant SAF on Bittrex = 0.4%[/quote]

I completely agree with this, would be nice if we had some solid data. Maybe we can use some of our own funds say 10 BTC on a test account to see its net results after a few weeks of trading?

[quote=“JordanLee, post:4, topic:2964, full:true”]
There are quite a few people who understand liquidity operations better than I do, but it looks to me like the loss of 5.5% of your BTC is simply due to holding part of the value in NBT while BTC is rising. Say I have 1 BTC valued at $220. Next I put half of that in NBT. Then BTC rises to $330. Now I decide to convert back to all BTC. My 110 NBT only gets me 0.33 BTC, for a total of 0.83 BTC. I have lost 17% of my money as measured in BTC, but gained 24.5% as measured in NBT.

@Dhume is this what happened to you? If so, it has less to do with liquidity provision and more to do with BTC outperforming NBT combined with choosing to hold some funds as NBT. Also note that when BTC drops in price, the number of BTC you can convert to increases because in that case NBT outperforms BTC.

The bottom line is I would expect liquidity operations over the last month yielded a very large return when measured in NBT while simultaneously producing a large loss when measured in BTC.[/quote]

Well your half right, the problem with hedging is that as BTC is moving up people are selling us their NBT in favor of buying up our BTC, then as price moves down again they buy our NBT and we get stuck holding BTC that is losing value. The result is that you always lose funds no matter what direction BTC moves. From my experience the interest rates we pay do not cover this hedging problem hence why I would favor introducing small spreads to offset some of these losses.

I’ve actually experienced that our rates are profitable but only when BTC is hardly moving and volume on NBT is low (which means lower fee costs). The problem being that BTC is almost always moving and with recent developments we seem to be heading into even more volatile times for the next few months.

[quote=“woolly_sammoth, post:6, topic:2964, full:true”]

We do need to be supporting those pairs though as the main use of NuBits currently is as a hedge against that volatility.

The next evolution in Liquidity provision should lessen the risks a liquidity provider is subjected to even further. By switching to the new pool software which forces the use of NuBot as the liquidity client we can take advantage of the Parametric order book model [/quote]

I completely agree with you, currently Nubits are mainly used as a safe haven from BTC volatility, combined with a lot of exchanges not dealing with USD and also lots of traders disliking USD we have very few options but supporting the BTC/NBT pairs. Also I think a parametric order book is the next logical step in making liquidity provision sustainable in the long term. I’m very glad that from what I’ve heard so far a parametric order book will also be possible on B&C.

[quote=“dysconnect, post:7, topic:2964, full:true”]
And I need to call you out on this - the only way you should measure profit is by looking at the USD or NBT value of all your holdings. Perhaps you think you could have totally predicted the massive BTC rise and went all in, but don’t blame us if you turned out wrong and lose a large chunk of your money.[/quote]

I disagree, I think right now liquidity provision is looking profitable to a lot of liquidity providers and shareholders due to steep rises in BTC price however as a net result they are losing bitcoins. The reverse happens when BTC price plummets, people will sell into our buy walls leaving us with BTC who’s price is declining. In the end we always lose, on the way up we gain NBT but lose BTC on the way down we gain BTC but lose NBT.

[quote=“dysconnect, post:10, topic:2964, full:true”]
Both yes and no.

He went into Pool D expecting that if BTC grows he should earn more than the growth, having misconceptions on how Pool D operates (to be fair, NuLagoon doesn’t make this very clear to its users), which causes him to misinterpret the results. If Pool D is indeed 100% leveraged trading then accounting in terms of BTC actually makes the most sense.

On the other hand, he also tends to keep his books in BTC even for NuPool. I reflect that my comment was too harshly worded, but his evaluation just demonstrates a yet-too-common biased judgment of risk and return. People tend to complain when their BTC position shrinks during appreciation, but if that reduces losses during bad times they take it for granted. Not accounting in NBT or USD make them especially prone to this bias. To some extent, some liquidity providers want our high interest rates to be high enough to offset the perceived risk under this bias. That said I’ve incorrectly mixed my sentiment on this issue with his concerns regarding Pool D.[/quote]

My point was more that even in a pool that is optimized for profiting from a BTC rise liquidity providers still lose out due to the high cost of liquidity provision. Pool D is leveraged against pool C which always receives the same fixed rate payed for by the profits of pool C & D combined. So when BTC moves up significantly like it has done in the past few weeks the people in Pool D are essentially double profiting since they also get the additional profit of the funds belonging to participants in Pool C. So despite people in Pool D profiting from both interest (paid for by Nu) and the profits of BTC price increase (from both Pool C & D) they still lost BTC. Reason for this is that liquidity provision on the BTC/NBT pair is so expensive. A lot more expensive that we give it credit for.

Now my point of this post was not to complain about loss of personal funds but to create some more awareness about the risks and costs involved with BTC/NBT pegging and second to start a discussion on how we as a business want to deal with this. I’ve been thinking about what the best business model for Nu would be when B&C starts running. Basically right now we support BTC/NBT pairs since NBT main use to most users is using it a safe store of value and hedging instrument. When B&C arrives this will change, due to B&C not dealing with fiat we replace USD with NBT on our exchange. This should boost volume and also distribution by a factor unknown but if B&C is even remotely successful we should see a huge increase in demand to NBT.

Now assuming that B&C is successful and demand for NBT is high I think it would be in our best interest to slowly pull support for BTC/NBT pairs on exchanges other than B&C. If people want to trade BTC for NBT it’s in our interest to have them do this on B&C instead of other exchanges. If they want to trade NBT for USD they will still be able to do so on the exchanges that support the USD/NBT pair, pairs we should keep supporting since they are the main channel for our B&C costumers to trade their funds to fiat.

As a nice side effect from this we cut down some of the biggest monthly operational costs of Nu, namely the interest we pay to liquidity providers for supporting the BTC/NBT pairs. To make it even more interesting since the increase in demand should net us a lot of funds, I feel it would be best if we use part of these funds to support the peg instead of borrowing the funds at expensive interest rates from liquidity providers. If you have funds of your own that you do not directly need it would be unwise to borrow money every month to support the peg while we will have the funds our self to support the peg.

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#13

I’ll make it clearer: Pool D isn’t really a leveraged pool, only a fraction of Pool D consists of BTC. When BTC dropped from 270 to 220, the NAV dropped by a much lesser extent, precisely because of this. Pool D is only “leveraged” compared to Pool A.

#14

Yes. I agree with it. Compared with Pool A, Pool D has more volatility risk and expected return.

#15

I made a post that deals with experience regarding liquidity providing here:

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#16

Thank you for linking this, hadn’t seen your post yet.

I think we can all agree that BTC/NBT is very costly not just to Nu but also to the liquidity providers. So what is your opinion of moving away from BTC/NBT on other exchanges once B&C exchange starts picking up some volume?

Also I’m very interested to hear other shareholders ideas about using future revenue (which should be a lot of demand for NBT increases like we’re expecting it will due to B&C) to protect the peg instead of borrowing from liquidity providers?

#17

This has been discussed many times before. To summarize the main results

  • the nbt/btc peg is money-losing and not sustainable. It’s brings a high profile usecase and Nu is paying for it as a promotion operation.
  • B&C will bring down the exchange risk component of nbt/btc pegging cost but will be of little help in lowering the btc volatility risk.
  • nbt/usd has no btc volatility risk and is directly connected to the “$1” ideal. But as long as nbt/btc is well supported it won’t prevail.
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#18

Would you be in favor of building down volume (liquidity targets) on other exchanges in favor of supporting the BTC/NBT pair on B&C and when B&C volume is high enough moving away from the pair on other exchanges altogether?

#19

Two things: one is that B&C will only cut down the smaller exchange risk (~4% / mo) so its advantage in cutting dwn overall risk in nbt/btc is limited compared with other exchanges. Another one is that B&C is not operational and we don’t know what kind of cost it has. So let’s wait and decide when its “volume is high”.

#20

[quote=“mhps, post:19, topic:2964, full:true”]Two things: one is that B&C will only cut down the smaller exchange risk (~4% / mo) so its advantage in cutting dwn overall risk in nbt/btc is limited compared with other exchanges. Another one is that B&C is not operational and we don’t know what kind of cost it has. So let’s wait and decide when its “volume is high”.
[/quote]

It should also cut down on operating costs if BKS holders decide to give NBT liquidity operations reduced or no trade fees.

Of course my proposition is only valid if B&C starts picking up trade volume. I think it’s wise to discuss future business models based on several scenario’s. The main change I’m proposing is using future revenue to secure the peg instead of borrowing it and moving away of BTC/NBT pairs in favor of supporting one on B&C (all only in the scenario that B&C sees successful development and starts picking up volume.

#21

That is a way for Nu to generate income. We all agree that Nu should find more ways. many potential ones … setting higher spread, asking exchange to give a cut of trading fee, generating more on-chain tx fee by increasing fee rate or increasing transaction, lending, trading by payment processors …

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#22

Cutting down operational costs would also help, using our own funds instead of borrowing large sums of money every month should help reducing our costs.

#23

I think making it profitable to sell insurance is an effective way

#24

I think we can all agree that BTC/NBT is very costly not just to Nu but also to the liquidity providers. So what is your opinion of moving away from BTC/NBT on other exchanges once B&C exchange starts picking up some volume?

No I can’t agree it’s costly to liquidity providers. You might have a point when NuPool is buggy, but not for NuLagoon. Did you read my post again? And reconsidered the issue with accounting in BTC? For the 6 months where BTC when down and up and down and up in the 220 - 270 range, NuLagoon’s Pool A NAV has increased from 1 to about 1.2. Am I making it simple enough for you?

1 Like
#25

[quote=“dysconnect, post:24, topic:2964, full:true”]No I can’t agree it’s costly to liquidity providers. You might have a point when NuPool is buggy, but not for NuLagoon. Did you read my post again? And reconsidered the issue with accounting in BTC? For the 6 months where BTC when down and up and down and up in the 220 - 270 range, NuLagoon’s Pool A NAV has increased from 1 to about 1.2. Am I making it simple enough for you?
[/quote]

I’m not sure why you seem to have a personal vendetta going on against me here, I did not make this thread to blame or complain against anyone or anything. What I’ve merely stated is my experience as a liquidity provider and why I feel pegging BTC/NBT is more costly then we perceive it to be.

You might want to consider that people who put in BTC for liquidity provision party do so because they are in BTC anyway (for various reasons) and see liquidity provision as a way to earn some additional interest (which comes at a
considerable risk) over their BTC. When the net result is traders are losing BTC it means people will be less willing to put in BTC.

We are supposed to be paying interest to cover their costs, you feel that a net result of losing BTC is justified if its NBT value went up I disagree. Let alone the risk of exchange default which could lead to a complete loss of funds for the liquidity provider.

Now we can debate this all we want and we are probably not going to see eye to eye, so lets focus the discussion on the other reason why I started this thread. Namely a discussion about a possible future business model for NU and how we are going to deal with liquidity provision and defending the peg.

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#26

Why 6 months? The last 6 months is when BTC bottomed out and climbed from 220 to 400. Why not imagine what could have happened in the last 1 or 2 years? LPs would have had 50 - 70% losses.

#27

right, we need to attract more custodians that hold NBT rather than BTC. If those people don’t exist, how do we create them? Perhaps non-zero park rates?

#28

[quote=“Nagalim, post:27, topic:2964, full:true”]right, we need to attract more custodians that hold NBT rather than BTC. If those people don’t exist, how do we create them? Perhaps non-zero park rates?
[/quote]

One solution that I’m proposing (not for right now but in the foreseeable future) is to consider to start using our own funds rather than borrowing funds to defend the peg. If B&C leads to increased demand and starts seeing some decent volume we should have a huge stream of revenue coming in. Part of which we could use to reduce or remove our reliance on liquidity provisions and reduce our operational costs since we don’t have to pay interest to ourselves.

#29

So what happens when exchanges get hacked? Isn’t that exactly what we were doing 6 months ago when we decided to move to a trustless model? BTW, I assume by ‘our own funds’ you mean T4, cause we don’t have any other funds.