DECENTRALIZED FINANCIAL SERVICES PT. 1 – MARKET MAKING

DECENTRALIZED MARKET MAKERS

So you’re ready to dive deeper into the New Economy being fueled by the decentralized revolution our technology and social discontent is brewing? You’re a crypto junkie and want to take the next step in building your independent financial wealth? In the cryptocurrency world you don’t need a seven figure sized bank account to participate or access tools previously restricted to the Wall Street crowd. Independence and personal action are rewarded here not restricted, so you’ve come to the right place.

Places like the Bitshares network and the various decentralized exchanges built on top of this unique blockchain were designed for people just like you and me. Permission-less to enter provided you have an internet connection and computer. Open sourced in nature and evolving to cut the rent seeking middlemen out of the Financial Services industry, the Bitshares powered community is one of the most underrated in the whole digital asset space. And with a current Top 50 market cap that is saying something.

The subject of this piece will focus on a way you can put your various cryptocurrency or tokenized assets to work on the Bitshares blockchain. There won’t be any grandiose promises of triple digit returns or abstract future value, this is a strategy well known and ubiquitously used in mainstream finance, although outsiders to the industry most likely have never heard of it. Slow and steady growth is the name of the game here, although the fact that we’re in the extremely volatile cryptocurrency space means even this normally conservative strategy can be a bit unpredictable.

Market Making is a service provided to various asset exchanges, be they stocks, bonds, fiat currencies, commodities, or cryptocurrencies. On every exchange and for every pair of assets available for trade (btc/ltc, eth/usd, gold/silver, etc.) there are people wishing to buy or sell at any given time. When these people can agree upon a price the trade is executed and the assets are exchanged. When a price isn’t agreed upon there ends up being an order inserted into the order book which remains open for sale until someone agrees to the price and takes it.

I am a much better visual learner, as I’m sure most people are in situations like this. To save you time and confusion I’ll recommend you watch the video linked below if this concept and it’s mechanics are new to you. The video goes over the logistics of the Crypto-Bridge digital asset exchange and explains how you can use a market making bot to fill the shoes of the Vampire Squid in our new decentralized economy.

Before deciding whether or not you should jump in this particular part of the New Economy ocean there are some things you should be aware of. No portion of the crypto currency world is without risk, knowing what these risks are is vital to making informed decisions and increasing your opportunity for capturing the reward that is also present.

THE RISKS

1 – ONLY MAKE MARKETS YOU UNDERSTAND:

From my perspective the biggest risk you’ll take when you participate as a market maker is unbalancing the positions your trading. My own personal rule is to only make markets in which I’d be comfortable exchanging the whole amount of one asset for the other. An example of this, the video I created shows me making the BTC/BTS market on Crypto-Bridge. I’m comfortable with both currencies and feel they both hold similar value. Ideally I’d want to keep a 50% position in each as my trades go through, but I would not be unsatisfied if the ratio went to 80%/20% or even 90%/10% in either direction. You can use a smaller percentage of your total position to stay closer to the 50/50 mark or you can use larger amounts if you want to be more aggressive, this is a personal decision you’ll need to analyze and address prior to starting.

2 – ONLY PUT ASSETS AT RISK WHICH YOU’RE PREPARED TO LOSE:

I began with around $100 of each coin and at these amounts I’m comfortable exchanging my full position of BTC into BTS and vis versa. In my own particular opinion BTC has better long term security as the main cryptocurrency while the BTS balances that out with a much larger long term growth potential. In both cases the $200 total amount was small enough that I could risk using it to experiment with this software without losing any sleep at night. I view this as the cost of educating myself with the software and how it functions on the platform. If I can end up making a profit concurrently with my education, all the better.

THE REWARDS

1 – WHAT’S THE GOAL OF MARKET MAKING:

The point of making markets is to capture the spread between the Bid/Ask orders. Most often these will be under 1%, which means it takes a high volume of trades to rake in any meaningful profits. The DEX’s operating on Bitshares blockchains have relatively low volume, this works in favor of the small fish like myself. Order sizes equivalent to $10-$30 are common so I don’t need to put any substantial amount of capital at risk to make this strategy work in these conditions.

2 – INCREASING LIQUIDITY IN THE DECENTRALIZED MARKETS

It’s not uncommon for large spreads to be present in the exchanges operating on the Bitshares network. By putting capital to work in this manner it closes the gaps between the buyers and sellers in the smaller markets, this provides liquidity to those using the exchange. This is why many exchanges offer special incentive to Market Makers. We are providing a service to the exchange by offering our assets for sale on both sides of the trade at better rates than would otherwise be available on their order books. In most financial markets this service is restricted to large banks or investment funds with connections to the exchange ownership. In the New Economy, anyone who takes some time to understand the mechanics and find the appropriate market for their assets can fill this position.

3 – FINANCIAL INCENTIVE

People back before our negative real interest rate environment would stash their excess earnings into a savings account which earned interest. Money they didn’t need in the present was put to work by the bank and distributed as loans. The bank would then give a portion of the interest they received for those loans back to the accounts that allowed the bank to use their money. For most of my adult life, the inflation rate of our currency has increased much faster than the interest rate offered by banks on savings accounts. Why would anyone keep their hard earned savings in a form which depreciated in value?

The New Economy doesn’t need banks, that’s not saying there isn’t a place for them in this new way of doing things, just that they aren’t necessary. Rather than trusting a centralized authority with your assets you now have options like this which never require you to hand over control of your account to another person. From your own computer you can put your digital currencies to work and generate profits without the middleman taking a cut. You can see this in the video I’ve inserted above, each trade is contained within my own account and executed by software I’m running locally on my own computer.

This isn’t a get rich quick scheme or any sort of fast money, it’s a slow and steady way of leveraging the mathematics of compounding earnings while also holding some highly deflationary assets. A win win when compared to today’s financial system generating trillions of $ in inflation yearly while offering negligible interest rates in return for your savings.

TOOLS AND EDUCATIONAL MATERIAL

DEXBOT Automated Market Making Software  – This is open sourced and community developed software funded and produced by the Bitshares community. The software is in early development and will undoubtedly have some glitches as it’s being tested and optimized. It does currently function and provides the basic tasks desired for this sort of activity as you can see in the video linked earlier in this article. The group developing and testing this software is friendly and helpful if you’re wanting to test it out yourself. Any questions or suggestions are welcomed in their Telegram channel, along with other discussion about the software and strategies to implement it. Official DEXBOT Telegram Channel

The following are three descriptions of the Market Making service and strategy approached from very different angles. For those new to these types of financial services these will help you get a better understanding of the space and what role this open sourced DexBot will be filling.

  • First we’ll look at a description from the mainstream financial world, Legacy Market Scenario’s gives a good overview of how this strategy is employed is nearly every large financial market. NYSE, NASDAQ, Bond Markets, Currency Markets, & Derivative Markets all have large scale providers as can be seen in the linked article.
  • Next we’ll view the role of Market Makers specific to the cryptocurrency markets. Market Making on Cryptocurrency Exchanges
  • Finally, we’ll look at an article by one of the DEXBOT members named Crypto Kong. Staggered Market Orders strategy will soon be available as a preset option on the DexBot, but you can manually implement this strategy if you prefer doing things the old fashioned way.

It’s important to understand the basics of what you’re trading. It bears repeating that the biggest risk you’ll face while using Market Maker software is unbalancing your positions in the digital asset pair you’re trading. Below is an example of the research I completed prior to reaching a point where I felt as comfortable holding ALQO or BTS coins as I do holding the original BTC. This can be a head start for your own self education, but you’ll need to take the time to understand each project you wish to participate in if you want to do this thing right. There is no substitute for having your own clear understanding of a subject you have financial interest in.

 ALQO

BITSHARES

The exchange I prefer using is Crypto-Bridge. There are several reasons for this, the first being I actively accumulate and stake the native BCO token which earns revenue from trading fees. This is paid out in a variety of different cryptocurrency which in effect diversifies your earnings, this is an improvement on the traditional Mutual Fund or Exchange Traded Fund commonly available with stock and bond investments. The video below goes over how this exchange and it’s earnings model operates. Crypto-Bridge also offers a special incentive to those performing Market Making services on their exchange which adds a nice bonus to the relatively small earnings normally generated.

 *Disclaimer: None of this information is intended to be financial advice. The above content is meant to be educational only, if you’re interested in using any of the linked software please do your own research and experimentation first and don’t risk assets you can’t afford losing.