The success of bitcoin (so far) is due to a large degree to the fact that mining has been an economically profitable activity: miners secure the network and in exchange they get rewarded in bitcoins (that have a significant FIAT value because there is still a substantial demand for it), though it is not sustainable on the long run (this is what Sunny King foresaw, which gave birth to peercoin and then later on Nu…) but this is another story.
Likewise, I feel tat the success of nubits will be due to the fact that liquidity providing will be a profitable activity: liquidity providers secure the peg and in exchange they get rewards in nubits.
The issue is that liquidity providing is at this stage not predictably profitable.
Even if pools offer interest rates, the volatility of bitcoin is not predictable, making profits uncertain. This is another reason why, I believe, we have seen so few lpcs so far…
So the question I have: how are we going to make liquidity provision a predictably profitable business?
If it is not predictably profitable, the peg will not be kept and Nu will fail.
Some possible solutions:
- include into pools some tools to hedge but hedging looks complicated and costs.
- support only nbt/fiat but most exchanges do not have these pairs.
- increase the spread but it would make trading nubits expensive.
So are we stuck?
Well, decentralized exchanges could help us increase the spread while still keeping it low.
Decentralized exchanges would be able to offer very low trade fees compared to centralized exchanges.
That means, liquidity providers would be able to set a very low spread in order to compensate for that low trade fee.
So even if liquidity providers increase that spread, it would still be cheap compared to when they provide the same liquidity in a centralized exchange.
That increased spread could bring them the sufficient revenues to make liquidity provision a predictably profitable business.
What are your thoughts on that?