[Passed] 1% Maximum Spread for ALP/MLP, Above 1% Allowed for Nu Funded Liquidity Operations (e.g. Gateways)

[zoro]

Well, as we are now, neither of these motions will pass

[masterOfDisaster]

After careful consideration, I have decided I will add this motion to my date feeds.

Thank you for your consideration.

I think in the future, we want to reduce the ratio (reserve/outstanding nubits) while at the same time increase the ratio (reserve/nubits trade volume).

The reserve ratio needs to be increased, if the reliability of NBT shall be increased.
A low ratio of reserves/“NBT in circulation” had a part in bringing us where we are now.

ALP/MLP will continue to operate at spread <=1% in this motion.

Right. But this is not the last step in the evolution. It was just the most important step right now to provide an alternative for the errant versions of Jordan and Cybnate.

Then, ideally we will design better liquidity provision schemes that will make sure that the vast majority of liquidity is provided at a spread <= 1% with a large volume

tl;dr (will be the conclusion of this post as well):
The economically improved approach is market awareness, or more precisely: market aware offsets combined with parametric order books for all pairs, except NBT/USD.

I believe <1% spread is not the optimum for all situations.
The vast majority of liquidity needs to be provided at a reasonable spread, which is not necessarily 1%.
For NBT/USD it’s differnet and quite simple. That’s because NBT is pegged to USD.
But it isn’t pegged to BTC or USD quoted in BTC. This is a synthetic peg, that needs to be treated differently.
Parametric order books are as important as market awareness for the spread of trading pairs other than NBT/USD.
I hope that during most times we can offer a lot of liquidity at a spread below 1% for non NBT/USD.
We should only guarantee a tight spread for NBT/USD, though!

For other pairs, e.g. NBT/BTC, a tight spread with symmetric offsets is only good for non-volatile BTC times.
As soon as BTC starts to get volatile, the spread must increase.
If BTC is bullish, you need an increased buyside offset, while the sellside offset can stay low.
If BTC is bearish, you need an increased sellside offset, while the buyside offset can stay low.
You achieve that by making the offset a function of the size of one side.
This way it doesn’t matter, if funds get traded, or orders pulled.
The orders that remain, remain at an increased offset.

It’s wishful thinking that you can provide a tight spread at all times.
It’s too expensive to do that.
It’s not sustainable.
And even with 100% reserve it wouldn’t be reliable without a lot of efforts and schemes to allow it.

To make an extreme example:
let people buy 100,000 NBT at a BTC rate of $100. Keep the 1,000 BTC on reserve.
They keep the NBT until BTC drops at $50. Then they start buying BTC. After Nu received 50,000 NBT back, the BTC reserve is empty.
What do you do with the outstanding 50,000 NBT, that people want to trade for BTC?

This example is extreme, but it shows that schemes like NuSafe need to be an even more important part of the reserve scheme.
That way, Nu wouldn’t keep the 1,000 BTC, but keep them as $100,000.
Remember, “NuBits - always a Dollar!”?
This way it works to keep a full reserve, but costs money to operate NuSafe and alike. The reliability of the 100% reserve scheme is in danger again.

As yourself: would you as a (future) NBT holder rather always have the option to trade your NBT for, say BTC?
Even if that means paying an increased offset?
Or would you want to live with the risk of being too late and being stuck with NBT?
We shouldn’t overly focus on daytraders, who do high frequency trading. They might not create as much demand for NBT as we hope they do. They can do a lot of trades with a fistful of NBT.
We should focus on people who buy NBT now, knowing they are a reliable store of value (quoted in USD), while they can be handled like a crypto currency, and aren’t afraid to hold them. They can hedge long-term, keeping the demand for NBT high.
The daytraders require a tight spread to do their business. All other don’t.
A related discussion is dealing with inflation free currencies. I don’t want to mix it in here, although I perceive it as a very important sales pitch for long-term hodlers.
I want to focus on a sound, reliable, reasonable liquidity provision scheme here.

The economically improved approach is market awareness, or more precisely: market aware offsets combined with parametric order books for all pairs, except NBT/USD.
Here’s a start for creating formulas:

Current Liquidity

Maybe we should work toward a coherent market-aware spread strategy for all types of T1 walls. liquidity aware examples: spread increases as wall decreases follow a inverse propportion function: if the wall decreases to 1/3 of starting amount, the spread increases to 3 times of starting spread spread = constant / wall_height spread increases as wall decreases follow a exponential function: if the wall decreases to 1/2 of starting amount, the spread increases to 2 times the current value …

[masterOfDisaster]

Well, as we are now, neither of these motions will pass

Better than letting harmful ones pass
We learn a lot regarding liquidity provision at the moment.
There’s a lot of room for improvement.

[crypto_coiner]

This spread motion is currently now the ones that garners the most support, with 29% in the last 100blocks

[cryptog]

Very compelling explanation.

If BTC is bearish, you need an increased sellside offset, while the buyside offset can stay low.

by the way, don t we want here to sell as many nbts as possible?

[masterOfDisaster]

It seems attractive at first sight.
As long as we have no process to put proceeds without much friction into NuSafe or alike (to keep the funds in USD), selling big amounts of NBT can be dangerous as well - see my example a few posts above.

[masterOfDisaster]

I know that I’m in conflict with proposals from other community members.
I’m aware that people tend to follow people whose opinion they value, especially if they don’t understand certain topics to their full extent.
This is in general no bad idea.

But I urge all to dive deep into the matters of liquidity, before they follow someone, because liquidity is the backbone of Nu’s business!

I can claim for myself having some experience with liquidity provision.
That doesn’t mean I’m right.
But looking at how we treat the current situation should show, that I’m not completely wrong.

To allow others following my rationale or finding flaws in it, I often go into greater detail.
This sometimes means writing textwalls.
I’m sorry for that.
But I believe saying “I’m right, because I know” is not helpful.

I could claim that Nu needs more reserve (will be hard to get it, though), a big part of it in frictionless NuSafe style schemes, parametric order books for all but NBT/USD and market aware offsets in liquidity provision without upper limit, if Nu wants to survive.
I should explain all that in a comprehensive post. Most of it I already explained already, but spread across the forum.

I don’t feel like it at the moment.
I need to digest that the low reserve and the tight spread with a lot of efforts to keep it tight, accompanied by a motion that gained traction very fast with a huge SDD were not exactly useful to prevent or mitigate the current situation.

The low reserve was a strategical error.
The tight spread was a tactical error, made while having good reason to doubt that this is the right approach.
I might once follow the recommendation to back off. I’m on the fence of doing it. But not yet.

[crypto_coiner]

This spread motion is currently now the ones that garners the most support, with 29% in the last 100blocks

Very impressive – now with 47% of support

[crypto_coiner]

52% of the last 100 blocks
num votes: 3,822 (38.22%)

[cryptog]

This finally passed ironically.

[ConfusedObserver]

Why do you find this ironical?
This motion is of the motions that tried to regulate the spread the only one that had enough farsightedness to fit even in the current situation.

[cryptog]

Yes i know. I have been voting for it.
Ironically because mod is not here any more.