Decentralised liquidity is one of the most innovative and powerful features of our network. We have succeeded at creating it and we should all be proud of what we have accomplished together. I have long predicted that the compensation for liquidity provision would experience pronounced deflation, at least for a period time. When we first began establishing decentralised liquidity, there was more demand than supply. I had set a goal of 100,000 NBT in decentalised liquidity in tier 1 at the current level of NuBit adoption. Several months ago we didn’t have that supply. So we paid very high prices for liquidity. We needed to pay whatever the market demanded to reach adequate liquidity levels.
Now the situation has changed. We have adequate levels of liquidity. It is probably excessive on the sell side at this point. So, it is time to lower the compensation we offer for it. In order to make a well calculated decision on which pool or pools ought to have their rates reduced we need a short and concise summary of what each pool is offering us and what we are paying each of them. Then we cut where the value delivered is the least. I don’t have time to gather all those facts right now, so I am hoping someone familar with our liquidity operations will do it and post their findings in this thread so we can discuss them. The goal of this thread and discussion is to form one or more motions that reduce the cost of liquidity by reducing the rates and/or quantity of liquidity at specific pools and specific trading pairs.
Not all liquidity has the same value. Tier 1 is worth more than the other tiers because it is more available. Buy side is worth more than sell side, because the risk of losing the peg to downside needs the be managed more carefully than the risk of losing the peg to the upside. Liquidity that is used is worth much more than liquidity that is not. So, the value of liquidity on a specific exchange and trading pair is a function of the trading volume on that pair. So, in this way liquidity at Poloniex (our highest volume exchange right now) is worth more than an exchange that has little trading activity. Liquidity that can be guaranteed for a period of time is worth more than liquidity that can evaporate at any time. NuLagoon’s liquidity has limited persistence while the TLLP pools have none. I hope NuLagoon will continue to grow and enhance the persistence of the liquidity they provide.
While I will say again that a concise presentation of the relevant facts is needed to make an optimal decision about where to cut, with the limited information I have right now I suspect what we pay for sell side liquidity on NuLagoon is a good place to cut. Bittrex liquidity provided by NuPool is probably also over funded right now. It is possible that liquidity on some low volume exchanges is also over funded. There is the reasonable notion that we have to provide liquidity first and then it will slowly attract volume over time. So it sensible to accept low volume in new markets or markets that we have reason to expect can grow for us. Poloniex, on the other hand, is still under supported, so we ought to do what we can to increase liquidity there.
For liquidity pool operators, this is a time to make shareholders aware of the value you are providing to the network so your funding doesn’t get reduced.
So, where should we reduce liquidity compensation and why?