Encouraging Greater Liquidity

Discussion in 'Marketplace' started by Bill Threewits, Mar 13, 2016.

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  1. Bill Threewits

    Jan 16, 2016
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    PoS is a great feature of Decred; however, it could cause liquidity to dry up. Is there a way to encourage, or jump start, professional trading in DCR? Could C0 start providing liquidity by making a market to tighten the real spread?

    C0, what about hiring a couple professional traders to do this? This could be a good use of some of the coins gradually being pulled from staking.
     
  2. shoshin

    shoshin Member

    Dec 28, 2015
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    You make some interesting points @Bill Threewits and I have thought about this issue quite a bit. My personal preference is to let the market work with limited intervention (this includes well intentioned market making which seeks to add liquidity or tighten bid/ask spreads) Here are some of my thoughts concerning liquidity which relate to your point on PoS:

    Imagine for a moment you had 100,000 DCR that you were holding for a third party and you knew you would not need to return it to those you were holding it on behalf of for some time. Staking it you could easily earn yourself 10,000-20,000 DCR inside of a month which you would be able to keep for yourself. As long as you were not asked to return all the coins over a short period of time you would likely feel safe PoS mining with a large percentage of those coins. This is the contentious position that all Decred exchanges will find themselves in. They will possess huge balances of DCR from which they generate trading fees that are infinitesimal relative to what they could garner from PoS rewards.

    Now to be clear I am not accusing any person or exchange of such impropriety, however we must acknowledge that the opportunity is there and that in such an event where the majority of coins are "locked" and there is a run on an exchange, there would be no choice but for the exchange to go into the market and bid for DCR so as to be able to meet redemption requests. This would cause the price of Decred to skyrocket. This may sound like a good thing for those of us who would benefit from price appreciation, however my fear is that people leaving large amounts of coins on exchanges will lead to moral hazard and a possible replication of the fractional reserve model that we have in the traditional banking sector. Much like the banking sector, a run on an exchange will threaten its solvency as it bids up DCR to meet withdrawal demands, potentially leaving depositors with huge losses.

    My only recommendation is that individuals keep their coins in their possession whenever possible, and avoid treating exchanges like banks, lest they become banks, and we all become their victims.
     
  3. drunkenmugsy

    drunkenmugsy Sr. Member
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    I think this problem will work itself out once you see decred being used for purchases. People with staked or locked PoS DCR cannot make purchases. People want to make purchases with money. As in real life not everyone is an investor type person.
    As I have said before we need to focus on making decred usable for purchases without having to run it through bitcoin exchanges.
     
  4. Bill Threewits

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    To your point, the other thing that will help is a much higher SStx price. 100DCR/SStx would make the opportunity cost of not staking much lower.

    Seems as if much higher prices will take awhile, especially as C0 begins to pull back on staking. I am not sure about this, but for the next couple months it seems that staking will be the only game in town. At these prices it is a pretty attractive, low-risk return.
     
  5. Bill Threewits

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    You cite a bit of a chicken/egg situation. Vendors will participate only when DCR liquidity exists as in the BTC market. Also, of course when the ultimate goal is reached: a world where holding crypto-currency is preferred over fiat. (IMO, this could happen sooner than many think)
     
  6. eshriek

    eshriek New Member

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    Decred is just over 1 month old. Let's give it time to breath! It's on a few markets. I don't think it needs more (i.e., polo) at this time, but when that time comes Decred will have as much liquidity to offer the market as the market has for it (yeah, I know, I'm not really saying anything with that last statement, but it's true:) So far Decred is far exceeding my expectations. Having a low SStx price means more people willing to put their credits to use. A high SStx price means there will be a solid base for Decred in a few months. Vendors will participate when the law of supply and demand dictate. One of the biggest demands is stable store of value. That is Decred's winning ticket. The reason that Decred will be a stable store of value is because of the PoS in Hybrid Pos/PoW.
     
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  7. Bill Threewits

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    While I do share your enthusiasm for Decred, at this point, I feel that there is little value in simply cheering it on. Criticism is crucial to a project such as this.That is where I am coming from.

    Failed CC projects are the norm. In order to survive, everything must be done perfectly. Along with one or two other things, liquidity is at the top of the list to facilitate widespread adoption.
     
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  8. drunkenmugsy

    drunkenmugsy Sr. Member
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    I agree. The sooner decred can stand on its own without bitcoin the better! How that is actually going to happen is the $64k question.
     
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  9. eshriek

    eshriek New Member

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    True, criticism is crucial. I would lean towards criticising PoS but I don't fully understand it as it is implemented here (or elsewhere for that matter). I don't think proof of stake in Decred is likely to cause liquidity problems. The reason, imo, is that if everyone is buying tickets in the stake, the price of a ticket will start to sky rocket. Tickets were 2 credits initially now they are about 15 credits (I recently learned this from the PoS FAQ link in @drunkenmugsy's signature (ty). It is all about supply and demand. I see this as a really good thing. Decreds are being used right now, not just traded and there are market pressures involved.

    Can you cite an example where a crypto (or similar type of financial company) paid professional traders? I think I would have some concerns if that happened. I would just assume that this would happen naturally as the coin evolved without the need to pay. I think I may be looking at it too much from the angle of crypto and not enough as a financial services company.
     
  10. Bill Threewits

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    It may be too early to worry about liquidity, to be sure. The PoS system has most coins locked up through the way the mechanism works. This limits coins which are for sale or being traded. Not sure they would need to be paid, just have access to the coins and keep trading profits. You are probably correct about the market eventually developing naturally, though.
     
  11. adam2312

    adam2312 Jr. Member

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    I think it's both reasonable and prudent to consider the implications of a dry pool, and it seems you may be well versed in that area, Bill.

    A skyrocketing stake ticket price seems nearly impossible and if occurs, would be short-lived; with 2,000,000 Decred in circulation and a ticket pool target of ~41,000, average ticket price may average 50 Decred. At 2 Decred subsidy, this equates to a 4% return, per MONTH.

    So, I see an entirely dry market very feasible, even expected, given the attractiveness of this return.

    Perhaps the result would be a Decred price increase and subsequent increase in liquidity, and reach a stable equilibrium? Perhaps there is a warranted concern about a dry pool we might act on to mitigate any undesired consequences?
     
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  12. eshriek

    eshriek New Member

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    Is a dry pool one that is too expensive to join with not enough payout? Or is it dry because it is too expensive for new comers to join?
    A skyrocketing ticket price would be short lived, but wouldn't a bottoming out of the price be short lived too? Decred is designed to keep things in the 'goldilocks zone,' -not too high and not too low.

    ~2,000,000 Decred
    ~41,000 tickets
    ~2 Decred subsidy (the return on ticket -rounded up)
    Why would tickets average 50 Decred? I don't/can't follow the math.

    I agree 100% that the return is really attractive. Wish I had started staking sooner. This could be a problem that results in centralisation.
     
  13. adam2312

    adam2312 Jr. Member

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    2,000,000 Decred divided by ~41,000 tickets = ~ 50 Decred per 1 ticket. This would be the average price per ticket if all available Decred were PoS mining.
     
  14. drunkenmugsy

    drunkenmugsy Sr. Member
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    I think a 'dry pool' is referring that there is no decred to buy because the annual return is so high from PoS that people do not want to sell at any price. For people who got in at 2DCR stake ticket price the return is over 90%. That ticket price will probably not happen in the near future if ever again but even at 20DCR the return is high.
    PoS by its nature drives liquidity lower. A dry pool could cause the dcr exchange market to have no liquidity(no dcr being sold) and either bottom out or skyrocket the price. I personally dont think the market will ever totally dry up. PoW miners have expenses for electric. They seem to sell small quantities of decred(less than 5dcr) fairly often.
     
  15. Shadowlance

    Shadowlance Full Member

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    Isn't there a limit on the rate of new tickets in the pool? Something like 20 tickets per block? The pool size has stayed relatively stable around 42000 for a few weeks now. I don't really believe that's supply and demand balancing out yet, especially since there's accounts on Bittrex with over 10K DCR and the amplitude of ticket price swings is quite large. Isn't there a limit on how many tickets can enter the pool at once? Or is it possible that someone could come along and dump a few thousand tickets in at any time?
     
  16. Bill Threewits

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    There is an algorithm that regulates demand through price. dcrstats.com by @Dyrk is a great place to see the stats and to understand the dynamics a bit better.
     
  17. Bill Threewits

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    #17 Bill Threewits, Mar 15, 2016
    Last edited: Mar 15, 2016
    Keep in mind, the Decred staked is always returned along with the reward. This makes the return nearly riskless. That would tend to support a very high ticket price. The resulting low return may encourage trading a bit. Riskless return is always very attractive, no matter how low the return. This alone helps to ensure a skyrocketing market price as there are so few DCR for sale. That then should encourage some NOT to stake some coins to take advantage from these "melt ups". It seems a bit of a virtuous circle for us DCR owners.
     
  18. Ayush

    Ayush Full Member
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    Moreover As far as I know the POS reward will reduce over time. Read somewhere.
     
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  19. Bill Threewits

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    #19 Bill Threewits, Mar 15, 2016
    Last edited: Mar 15, 2016
    To put a sharp point on this topic, no matter how high the price goes, real investors will pay no attention (including vendors) if the liquidity is not there with tight spreads and high volume bids/offers. This would be the point of hiring traders to make the market using the million, or so, Decred owned by C0. You would probably not need to pay these traders, C0 would simply split profits with them.
     
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  20. anvoice

    anvoice Member

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    Recall that C0 promised to not sell their Decred for a year.

    Also, liquidity that develops naturally rather through forceful injection will be a benefit to the project.
     

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