While I had made a final decision to propose this motion before the failures at Bter and Excoin, the recent events demonstrate the urgency of the matter. Honestly, the Bter failure makes me inclined to move the timelines in the motion so they occur more quickly. Our solution will still work with thin on exchange liquidity (although it increases the risk of momentary swings in the peg). However, loss of shareholder funds can be catastrophic if the amounts are great.
New LPCs may not be so excited about putting their own funds at risk in light of recent events. Its clear the best response is to do everything we can to provide liquidity without exposing the liquidity providers to exchange default risk. That means most LPC funds need to reside on tier 3, off exchange. Perhaps it is time to place tier 3 automation at the top of the NuBot roadmap. We could start with automating exchange deposits and visit the issue of automated exchange withdrawals afterwards. @desrever, @benjyz, @woolly_sammoth and @pennybreaker: what do you think of making tier 3 automation of exchange deposits the top development priority for NuBot?
Let’s examine what a 100,000 NBT Bter liquidity operation would look like by adding tier 3 automation (for exchange deposits): Perhaps 5,000 would be placed on each side (buy and sell) in tier 1. So 10,000 NBT total is on the order book and available for immediate exchange. Perhaps another 20,000 NBT is available in tier 2. As an order is filled and depletes tier 1 liquidity, it only takes several seconds to move liquidity funds from tier 2 to the order book and tier 1, as tier 2 is off order book and on exchange. As tier 2 amounts drop below 10,000 on each side, NuBot deposits funds on the exchange from connected Bitcoin and Nu daemons. In our scenario, only 30,000 NBT of value is exposed to exchange default risk, while 70,000 NBT would be safe. LPC proposals would specify how much liquidity would be provided in each tier. There is no reason an LPC proposal couldn’t be very conservative in managing exchange risk by placing 5% of funds in tier 1, 5% of funds in tier 2 and 90% of funds in the off exchange tier 3. That would still provide good liquidity. Tier 3 liquidity can be promoted to tier 2 in between 6 and 60 minutes, depending on the currency and exchange policy regarding confirmations. Occasionally losing tier 1 liquidity for a specific LPC or exchange for a matter of minutes is only a minor problem.
Most of this post may seem off topic, but it relates to the question of how we will transition to self funded LPCs. An important part of that is reducing exchange default risk.
Edit: I should clarify that while automated withdrawals can be addressed later, the initial tier 3 NuBot implementation must permit manual withdrawals. This way LPCs can manually move funds from tier 2 to tier 3 when tier 2 get too large on one side.