Bitsquare DAO should incentivize liquidity providers


#1

I strongly believe that liquidity is what makes or breaks any exchange in its early days, and that this will be the case for Bitsquare, and I do have some data to back that up.

I have been using referral programs for localbitcoins and multisigna for quite a while, generating some over 100 sign ups per month for each one. In case you don’t know, multisigna is kind of a halfway point between a traditional exchange and what you guys have here - they use multi-sig so the exchange never holds user funds, but everything is done through their website.

Over the months I have been able to observe a drastic difference in conversion rates from site visitor > registered user > user who has made a trade for these two exchanges - localbitcoins is at least 15 times better from click to trade. Since the traffic is coming from the same pages, and since I have even played about with moving the positions and text etc to see the effect, I can be pretty confident that its not because of the traffic - this is a precise like-for-like comparison.

Multi-signa is a great service; it is not difficult to use and until Bitsquare launched it offered distinct advantages over the competition not available elsewhere. So I don’t think people couldn’t figure it out or just didn’t like it. A lot of them did register too, so it wasn’t the site design putting them off from the start.

Because of this I’m pretty confident in concluding that Multi-signa never really took off because they never built up had the liquidity enough to be useful for the casual user. The order-books were always sparse or empty - and this makes the vast majority of users simply take a look around, see the empty orderbooks or large spreads and simply leave never to return. They never reached that critical mass.

The main thing an exchange customer wants is to buy or sell for the best price and as quickly and hassle free as possible - everything else is a secondary concern for most people, so this seems to make sense to me.

I think for Bitsquare to succeed it needs to take action to build liquidity and pad out the orderbooks in the early days until that critical mass of users is achieved, and I think a DAO would be a perfect way to do it.

Perhaps there is some way that there could be an automatic distribution of tokens based on milestones for total transaction volume? Not sure how that would work as there doesn’t seem to be a user-profile, but perhaps an opt-in system which tracked your identity to be eligible for this reward could work? The great thing about this is it can be adjusted to provide higher rewards in sparse markets and can also be reduced or eliminated in time without losing the liquidity gained - because by then your high volume traders are also already your shareholders.


#2

What is Bitsquare’s POS?
Its preserving control, over your funds and privacy, your freedom. No single point of failure means for example no second Mt.Gox and no data leaking (through theft e.g. at Swiss Banks or ‘Panama Papers’ or ‘legally’ permitted to third parties like government agencies). No more randomly/politically intended business closure or frozen funds (Greece, Zyprus, Iran, Russia, Wikileaks, Bitcoin businesses, etc.). With the stability of a decentralized structure.

There are several side effects, much cheaper international transfers in the Fiat space and much smoother interaction between crypto and fiat space. One doesn’t need to surrender its privacy to open an account at an exchange, wait for KYC/AML approval/verification, pay an tremendous fee to send funds internationally or to the exchange to process it, a Dealer/Liquidity provider doesn’t need Licensing/Permission etc. to do its business (which often justifies rather juicy margins). You can be your own bank thanks to Bitcoin and Bitsquare. No more than local transfer fees. If you want to use BTC to store some purchasing power you can do it now easier, cheaper, hassle and harassment fee!!

Apart from that more liquidity has its advantages!!

“perhaps an opt-in system which tracked your identity” ?!


#3

Yes, it would be better to do it without having to track anybody’s identity (although really I meant pseudo-identity, which is a bit better at least).

I do think it has major advantages as you describe eloquently, I just most people even in bitcoin look for a good price and quick exchange first, then look at other issues only to compare exchanges that they have already confirmed meet those basic requirements.


#4

Certainly, it would be possible to track e.g. your onion address, if some dev is picking up the idea. But where is the central authority that grands the fee rebate when reaching a ‘milestone’? Also for this question one could find a ‘solution’.

There is no doubt about! But you asked about a fee rebate after transacting a certain volume, didn’t you? How much tighter would you make your spreads in case the ‘DAO network’ agrees? In fiat terms the placement fee is about Eur 0.4 now. Assuming the average spread now is 2% or Eur 8 resp. your one sided edge Eur 4. You would give up this Euro 4 to tighten the market to e.g. Eur 0.8 ? That seems odd to me. I guess you just would compete the actual to Eur 3.9 to be in ‘front’. If someone trades you ‘earn’ your edge (Eur 3.9) and be happy not to pay the same fee as your counter party. The liquidity providers main source of funds are the edges earned. Fee rebates seems like gaming the system. Liquidity provider taking advantages at someone else expense. Just like in the world we are living in.

Please provide liquidity. If you need e.g. other references prices (exchange sources or an bitcoin index) those are in the pipeline. Please consider the thought that when some/all of the exchanges you are active on now get hit by new regulation (kind of out of business regulated) Bitquare will be around. Spear with us and see what on the regulatory end happens you can earn your spread anyway. Best


#5

You may have a point about it being an unfair advantage for some people and that there is already profit in the spread.

Yes, each person would only tighten the spread slightly, but encouraging more people could create competition where each one keeps trying to beat the others and you get down to a tight spread. Hopefully this will happen anyway so this may not be necessary, but I think building that initial volume is difficult for exchanges now.

“Please provide liquidity” I hope people will, but not me - I do a little trading but I’m not rich. Hopefully I can help in other ways though - for example once I get a trade completed I will write a blog post about Bitsquare.


#6

Liquidity provider can do that already. They would make a huge edge. Even without a ‘fee rebate’. In any case they wont go tighter then edge/spread > min. profit + cost. “Encouraging more people” simply means spread the word about Bitsquare so ‘real’ clients know about it. If liquidity provider A makes a good edge others will join to get a share. All trades between liquidity providers are in the end zero sum games and at best a smoke screen.

There are additional technical differences to a centralized exchange. Order books are maintained at each node instead of a central server. Each message, order placement/update/cancelation, needs to be propagated through the network. Seen from this angle, fees reduce spam.

Looking forward to read about your experience trading through the Bitquare network. Best


#7

Hi guys,
thanks for the input and interesting conversation!

I agree that liquidity is very important and I actually had initially in mind to make the traders to DAO shareholders, but kept it out so far because of implementation complexities and also because the traders earn money by trading anyway (if they are good).

Technically it would not be so hard as each trade pays the fee which goes to the (atm only) arbitrator address. So I can collect those btc addresses and use them for issuing shares.
In the DAO you have no real life ID, a bitcoin address will be your ID.

Another reason why I don’t consider that model yet is as I think that would only be required for an initial phase and the technical effort will probably not be worth it.
Liquidity providers will be known to the team and probably are also active here so they will be candidates anyway to get some shares.
I cannot promise anything yet as the DAO is not in place yet and it needs a review from a legal expert before I implement it. I am pretty confident that all goes fine and I am absolutely convinced that it is the best way to go but as said there are uncertainties and I cannot promise.

So the situation is that people who contribute and provide liquidity should do that because they are convinced of the importance of the project and if all goes fine with the DAO they might get a good reward.


#9

However, the “Genesis DAO” is being created right now. Why not integrate a smart contract to work with the “Genesis DAO” this way you get paid somewhat for the work and effort and DAO shareholders will make sure the system will hit the critical mass. There are lots of mutual benefits here.


#10

I’m not 100% sure I agree with the liquidity model… As suggested previously. This platform is not designed for traders and speculators… Its really only about solving the fungibility and tracking… Once you into the digital space then yeah sure… go to a centralised market and start gambling, if that’s your thing… I think in the early days the idea of being… I think people are underestimating how important fungibility is… once your coins have touched any centralised services, they are dirty… once people realise this bitsquare is going to get a whole lot more popular… I think marketing that point like A Antonopoulos does. is more critical than liquidity…

I suggest that expanding avenues of trading commodities and goods on Bitsquare will be important for unbanked tooo… i.e. phone credit hours. water, food tokens, services, trade services ect will be even more critical…
If a particular currency had any value issues It will be important for those in that economy to have access to several ways to transfer into digital currency…
I think limiting the front end of Bisq to fiat could be the limiting factor…


#11

Agree. Luckily traders found themselves that they can make money with the spread to other exchanges (arbitrage). People are willing to pay a higher price if they get more privacy. So over time we got sufficient volume on the main markets. But of course we would love to see more volume still.
With the coming DAO model we will get some problems solved in that space as well…
To expand to a market place is on the long term road map but too much else to do before.


#12

Thanks Manfred. ill keep my thinking cap on… I think marketing on social is going to be critical… you may not have time to do the volume that is required…
Your brand at the moment is very genuine, sincere, compassionate and altruistic…

Ill do my best at local meetups and provide as much liquidity to market as possible (not much) . every bit should count though

Do you have a good understanding of competition and what kind of propaganda campaigns they will run against you??

Keep up the great work…


#13

Great thanks! Yes we need people ho spread out the word. We are not a company and not hiring PR agencies. We rely on people who support us and the DAO will represent the ownership and management of that social structure what Bitsquare will turn into. Run and owned by the people who build, promote and use it.


#14

I totally agree with you on fungibility, that’s why I’m long on Monero.


#15

Hello,

Liquidity providing is a natural role in any place where people exchange assets. It is the role adopted by someone who is willing to provide counterpart for a price (the spread). It is a role which can be totally decentralised. That is, anyone in the world can choose to adopt the liquidity provider role in a market. Nonetheless, some tools are needed so that people choose to adopt the liquidity providing role. The most important tool being the possibility to set bid / ask prices according to a formula. It must be possible to feed that formula with data from the market the liquidity provider chooses. If that is not available, no liquidity will ever develop, because no one wants to use his time to update bid / ask prices every 30 seconds. Many centralised markets allow for that by the usage of trading APIs, so that liquidity providing business becomes decentralised. Other markets, such as LocalBitcoins.com allow for entering a formula.

I hope that Bisq ever considers that option.


#16

Can the Ocean be implemented in Bisq to improve liquidity?


#17

Can Ocean be used in a decentralized app? If you can connect to it and use it as a user alone, then ok, but then you could just run another program to do it for you.


#18

APIs are in development. Changing existing offers is on the mid term road map.


#19

Interesting, thanks Manfred.