My 4 month experience as a liquidity provider

henry 2015-11-03 06:40:23 UTC #14

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

masterOfDisaster 2015-11-03 13:44:43 UTC #15

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

Dhume 2015-11-04 00:38:56 UTC #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?

mhps 2015-11-04 00:52:04 UTC #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.

Dhume 2015-11-04 00:54:42 UTC #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?

mhps 2015-11-04 01:09:58 UTC #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”.

Dhume 2015-11-04 01:18:35 UTC #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.

mhps 2015-11-04 01:33:46 UTC #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 …

Dhume 2015-11-04 01:35:39 UTC #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.

mhps 2015-11-04 01:42:32 UTC #23

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

dysconnect 2015-11-04 02:40:17 UTC #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?

Dhume 2015-11-04 02:55:42 UTC #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.

mhps 2015-11-04 03:00:01 UTC #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.

Nagalim 2015-11-04 03:01:27 UTC #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?

Dhume 2015-11-04 03:05:31 UTC #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.

Nagalim 2015-11-04 03:06:52 UTC #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.

Dhume 2015-11-04 03:09:55 UTC #30

[quote=“Nagalim, post:29, topic:2964, full:true”]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.
[/quote]

I’m talking about doing this on B&C which if everything works as intended can’t be hacked. Well T4 is relatively small now but say demand go’s up 300k suddenly we have 300k revenue of which a part we could use to defend the peg.

Nagalim 2015-11-04 03:15:39 UTC #31

I agree that we should increase T4 as the NBT marketcap increases. However, I disagree fundamentally that Nu should be using T4 constantly. If anything, I think the threshold by which we engage T4 should be decreased to 35% instead of 40%.

Who is going to run the bot that controls the funds? That person will likely want to be paid, and will constitute a centralized point of counterparty risk. The main argument I’m making here is that it shouldn’t matter whether we use T4 funds or T1-3 funds, either way the result is the same that the network will experience a certain loss from volatility. Using the decentralized T1-3 scheme instead of T4 for normal every day operations, however, greatly increases our flexibility by having many people involved instead of few. Given two choices equivalent in all other ways, I will choose the more decentralized one every time.

Dhume 2015-11-04 03:26:03 UTC #32

Nagalim:

I agree that we should increase T4 as the NBT marketcap increases. However, I disagree fundamentally that Nu should be using T4 constantly. If anything, I think the threshold by which we engage T4 should be decreased to 35% instead of 40%.[/quote]

Well we could have the tiers remain the same just that tier 1-3 would be filled with our own funds rather than borrowed money.

[quote]Who is going to run the bot that controls the funds? That person will likely want to be paid, and will constitute a centralized point of counterparty risk. The main argument I’m making here is that it shouldn’t matter whether we use T4 funds or T1-3 funds, either way the result is the same that the network will experience a certain loss from volatility. Using the decentralized T1-3 scheme instead of T4 for normal every day operations, however, greatly increases our flexibility by having many people involved instead of few. Given two choices equivalent in all other ways, I will choose the more decentralized one every time.

I envision a lot of different liquidity providers (or should I say custodians) holding small percentages of the funds, in order to protect us from theft they’d have to put in some collateral. Running a bot is not that difficult once its set up. I can’t imagine not finding a decent amount of shareholders willing to put in some collateral and run a bot for a fee much smaller then we pay to our LP’s currently. We’d still have decentralization, running it basically the same way only with reduced costs.

A nice bonus would be a more secure peg since shareholders running a bot have no reason to ever pull funds. This would make our peg a lot more secure.

Nagalim 2015-11-04 03:29:22 UTC #33

If you figure out the collateral question, you figure out how Nu can make a business loaning NBT. This is not a trivial concern. Banks enforce this with repossessers and the court system, Nu has no such mechanisms. Bitshares is based off this very concept, if we could duplicate or improve upon it in Nu it would mean a lot of profitability.