[Passed] 1% Maximum Spread in Shareholder Funded Liquidity Operations

NuShares Motions
#31

The only way a trader can know whether the manipulation is from Nu or from some nefarious 3rd party is to know the intimate details. What if someone starts pegging NBT at $0.99 on HitBTC? The volume is so small there we wouldn’t respond for maybe weeks. So then a trader goes and just assumes that the price is correct because they don’t know our details, and they get manipulated. With the parametric order book, a takeover like that would require making a whole lot more waves that shareholders will respond to.

A trader doesn’t need to know anything to buy an altcoin. How are you going to take their NBT away from them?

If you mean to say every NBT user should know this, well if ‘shoulds’ were bitcoins we’d all be rich.

You say you want traders to use bots to arbitrage exchanges. Bots are not aware of what is pegged and what isn’t. If you want bots, we need to cater to bots. People aren’t going to redesign their entire bot just to take advantage of our measly little market. We need to bring them to us, not force them to accommodate our completely new economics.

A lot of bots react based on the order book. If our order book reacts to the LP balance, we can get bots to react to our LP balance. This would be a huuuuuge step forward for us.

#32

Bot operators do typically specify what pairs are to be traded, just like NuBot does. An arbitrageur would set up the BTC/NBT pair as though it were a BTC/USD pair. It is quite simple.

#33

Right, and their bot would proceed to not trade at all because the order book looks screwy. Making a bot that understands the fact that our orderbook looks different from other pairs would require much more than a simple modification.

#34

Arbitrage bots don’t examine the order book. They only care about the top of the book, the best price on each side.

#35

So you are 100% on not wanting any bots that look at the order book? Meaning you think a vast majority of the trading bots out there are undesirable for our network? In that case, it’s no wonder traders don’t use NBT.

#36

I have another view and submitted my draft motion here: [Withdrawn] 0.6% Maximum Spread for ALP/MLP, 1.2% for Nu Funded Liquidity Operations

Key differences are:

  • Lower spread (0.6%) for ALPs/MLPs to improve liquidity quality (with exemption when high fees are incurred) and with that likely the volumes
  • Medium spreads (0.7%-1.4%) for Nu-funded liquidity but limited to maximum of 30% of total liquidity when ALP and MLP fails e.g. in high periods of volatility as a first line of defence.
  • High spread (1.4%-2.5%) for Nu funded liquidity but limited to a maximum of 10% of total liquidity as a last line of defence
  • Adding a role for FLOT to respond when High Spread funds are being touched.

Here is the link to my motion:
https://daology.org/proposals/5f9ce9e6fabd149ce8c321cfd28491827602a955

Happy to have the discussion here though.

2 Likes
#37

minimum practical tolerance is 0.475%, or 0.95% spread.
https://daology.org/u/nagalim/proposals/a8bb5e317723403d8e84bdacb3279b3c2f877bb3

#38

I must admit I agree, in principle in everything that @JordanLee has said in that motion, thus in the provisions of that motion. Great proposal.
However, practice has indeed showed us the role played by gateways, as last lines of defence.

1 Like
#39

I don’t understand. When fee is 0.2% on both bid and ask side as spread of 0.4% is technically possible.
Are you referring to the risk of different bots trading into each other? Or strong volatility on the pair?
For fiat pairs this is less likely, for highly volatile Bitcoin this can be a problem. That’s why I took a 0.2% margin in my proposal.

#40

Allowing 1% spread on the order book means 1.25% tolerance, forcing 1% spread means 1% tolerance where LPs would sometimes only be compensated at 0.75% spread.

Asset liquidity should be defined by volume, where there is at least one easily accessible exchange with considerable volume. Litecoin doesn’t cut that nowadays.

#41

Technically possible and practically viable are different things. Yes, it is technically possible to have a 0.00001% spread. However, it is not practically viable because if two LPs have a devaitation in when they place their orders that amounts to a 0.00001% difference then they will collide and both LPs will needlessly waste money on fees.

If we assume two LPs can have a deviation in price of 0.25%, we get a smallest maximum spread of 0.5%, by the math i just showed. But that’s still a minimum of -0.4% SAF (and a maximum of 0.1% SAF) and so can be gamed. For 0% minimum SAF you need 0.9% spread with a maximum SAF of 0.5%.

I would never vote for less than 1% maximum spread because it’s just not practically viable. At least it isnt with pybot, nubot may have tricks (streamer service) to try to help this.

#42

@Nagalim’s proposal in this thread isn’t a competing motion because it deals with setting a minimum spread, so I will just note that our two motions are complimentary. His regulates minimum spread while mine regulates maximum spread. I can see the potential usefulness of defining a minimum spread, although there hasn’t been a need to regulate this so far. It is a very technical motion and those who are closer to liquidity operations are better qualified to comment on the appropriateness of Nagalim’s specific formulas and numbers.

The motions presented by @Cybnate and @masterOfDisaster are competing proposals. While these two motions differ significantly in the tightness of the spread they require, they share the notion that we should offer liquidity at different spreads simulaneously. Some liquidity providers are to offer liquidity at a low spread while other liquidity providers will offer at a higher spread. This approach is quite inefficient because the main cost of liquidity is due to the exchange default risk. Liquidity at a 0.5% spread and a 3% spread both have the same exchange default risk. However, NuBit customers will place much greater value on the 0.5% spread than the 3% spread. The 3% spread has most of the costs of the 0.5% spread but might only encourage NuBit adoption 10% or 20% as much (I admit that is a speculation based on little data) as the 0.5% spread.

When exchange default risk is involved, we will get our best value from paying for tight spreads. My motion in the OP is the only one that wouldn’t waste funds with wide spreads that are less cost efficient.

I am going to begin voting on my motion. Thanks to @masterOfDisaster for pointing out that illiquid trading pairs required an exemption from the 1% maximum.

2 Likes
#43

The motion in the OP has been hashed on Daology and voting has begun.

The motion hash is:

b71a585de0b5e552648036fbc8282e11fea4a1cc

#44

Except the current motion implies a 1-2% minimum and this motion states a 1% maximum, so they’re entirely contradictory. If the other motion is still valid then NuLaw will be contradictory at passagw of this motion and I will not feel compelled in any way to obey both, because that would be an impossibility.

#45

I marked bold what is a claim for which we don’t have evidence.
The exchange default risk and all assiciated risks (account hack, theft, etc.) and operator costs are indeed the same.

But we don’t know how the spread affects the costs of the NAV of the operation, which will in one way or another have an effect on the costs, which in the end allpies for both Nu funded operations like the gateways and decentralized liquidity like ALP and MLP.

The smaller the spread, the smaller chance of making revenue from the spread. If you operate at SAF=0 there is 0 chance to make revenue.
If the spread is too high, the chance for making revenue is small, too. People just won’t trade. No trades -> no revenue.

Between an insanely close spread and a too big spread might be a sweet spot, where
trading volume * revenue (in percent) per trade
has a maximum per time frame
If the quality of the peg is perceived as great at this sweet spot, we should focus on that spread or else find a place close to it, where the peg is good and the costs are minimized.

There might be effects on that other than the spred alone: the particular exchange, the BTC volatility, the total volume at the order book, etc.
Market aware trading might be necessary.

Just saying a smaller spread is better just doesn’t work in such a complex world!
It might be better for the brand image of Nu, but it possibly comes at costs, we currently don’t know.
If the value of Nu increases by $100k from a better brand image, but you need $300k to get there, it might be better to increase the brand image by $50k while spending $100k. These numbers are random and just an example to make clear what I mean.

We need data.

That’s why I drafted

I want to gather data!

1 Like
#46

That s true but I feel that Nu should not aim at trying to make revenues from the spread.
The reason being that it is not attractive from the user standpoint.
Instead it should make revenues from selling lots of NuBits at a tight peg while at the same decreasing the necessary reserve and liquidity to sustain confidence in the peg.
Large spreads gateways are useful to protect the peg while we are thinking about the next steps but we are not doing business with large spreads, I feel.

1 Like
#47

This spread debate reminds me the Laffer curve :stuck_out_tongue:


where tax = spread
we just need to find the (T*) point :wink:

#48

Not necessarily, but at least Nu should reduce costs.

One can argue whether that’s revenue or liability.
How is decreasing the reserve in favour of the peg perception?

I fully agree - based on theory and experience.

No one - not even me - is arguing for doing business solely with large spreads.
But maybe we need to define what “large” is in this context.

1 Like
#49

Well the idea is to decrease the ratios 1) reserve/outstanding_nubits and 2) total_liquidity/outstanding_nubits to increase profitability like central banks seem to be doing in regard to FIAT.
Right now we have 150k of total liquidity.
So 1) is around 15% as well as 2) .
One can argue that 1) and 2) are already low.
In fact compared to theter (100%) or bitusd (200%) they are very low and yet nubits is the only real decentralized crypto fiat and yet holders of nubits are not asking at the same time to redeem their nubits: there is a certain confidence in the peg despite the fractional reserve aspect.
But is 15% the min ratio?
I do not feel so.
I think we neef to take a risk and bet that reducing further would be ok, as a DAO startup.
But we need to increase the confidence in the peg at the same time.
In order to do so the idea is to increase liquidity and reserves while decreasing the ratios.

#50

It is good that the motion removes the 1% minimum barrier which is clearly not working and I have always been challenging for ALP use. However I think Jordan’s motion doesn’t take properly into account a layer of defence for the peg. Something which has been proven more than useful when ALP funds lay dry. That’s why I won’t vote for this motion.

I think the layered model I propose where 60% of the liquidity is provided by ALPs at the lowest realistic spread for the pair another, 30% at a medium spread and only 10% at a high spread would setup the Nu peg in a way that it can withstand the currently known threats while still being competitive.

Please consider my motion: [Withdrawn] 0.6% Maximum Spread for ALP/MLP, 1.2% for Nu Funded Liquidity Operations. Happy to tweak some sharp edges if that helps to get it over the line. Without further feedback I will put it up for voting after 24h.