Liquidity on Blockchains

Transcript

thanks for attention thanks for the opportunity to speak delousing the market of parasitic rent-seeking agents dudes David Friedman that said market mechanisms are institutions that govern our economic interactions what I'm gonna argue today is that continuous auctions are evil don't use them instead use back to actions with single price clearing and furthermore the auctions are just the first step to having our economic interactions be mediated by intelligent agents working in our best interests not for the profit of somebody

else if there is anything original here it would be this breakdown just identification of four essential market mechanisms the first to the issuer in the clearing up the issuer and the Clearing House are concerned with settlement and clearing the next two are the ones that I'm concerned with in this talk the auctioneer in the market maker have to deal with trading in exchange you don't have time to get into market makers so I'm just going to focus on two done auctioneers but an interesting thing to know is that the evolution up till now the crypto currencies has been moving

these mechanisms from third-party agents to on chain mechanisms Bitcoin was the first to do this by having a non chain issuer the Bitcoin reward the block the block reward and the Clearing House is the public private key transfer protocol ripple had on chain order books directly in the protocol and then on chain marketing market makers done by truth coin auger gnosis two basic types of auctioneers continuous-time auctions these are matched with pay s bid pricing

and discrete time auctions also known as call auctions or batch auctions these by definition use single price clearing if anyone says it's a batch auction but double check that they're using uniform price clearing or single price clearing because by almost any definition it has to be single price clearing or it's not a bad judgment I'm concerned with this because if there's going to be a thousand crypto currencies I don't want to see them treated well I don't want to personally trade them like all coins in efficient markets then order books it's

just not much fun be and if you're planning to use the past bid order matching mechanism then you're just you're feeding your users to the wolves so don't do it why is it a problem because pays bid pricing is a primitive role it creates a primitive game because limit orders are free options you can go ahead and Google this put free options in quotes and you'll get a bunch of results it's not

incentive compatible you get front-running sniping market market orders are much better because you have to pay the spread and your users will suffer death by a thousand cuts and their wallets will eventually be empty and if you don't believe me then I mean this is a high frequency trading strategy so you just identify a limit orders placed by humans they're stale after five seconds so what's the better mechanism single price clearing what is single price clearing all these you just match the supply and demand curve and all the trades execute

at the same price it doesn't matter if you over bid you still get a fair price on your trade these are actually there already use they've been used for a long time they've just been taken for granted because probably because Bitcoin exchanges operate 24/7 so they don't have opening and closing sessions opening closing sessions uniform price clearing is used on the NYC and Nasdaq already it's and I would call it the near indicative clearing price so it gets kind of confusing because single price clearing the uniform price clearing second price auction there's so many different names for the same basic

idea but the Vickrey auction victory won the Nobel Prize of economics and variants have been used and rebranded over the years well isn't it better to batch order super pass no read this paper it is not better or just look at the slice it intuitively it seems like it's better because continuous-time markets are more efficient in time space but they're less efficient and volume space because all limit orders are stale and the fastest traders get to charge arbitrage rents batch auctions solve this problem they respect the reality of

computers and it's a excellent fit for blockchains you just think of the block times as the batch periods the spectrum of mechanism so continuous double auction is a simple sorting process there's no optimization it once you go to once you move to a uniform with a single price clearing batch auction you're doing a simple batch optimization and once you go further down the spectrum the spectrum you get more and more complex optimizations which are better for your users like having your own think of it like having your own trading BOTS directly in the mechanism working for you to get the best price on

your order these are Penix phases phase zero what I call pentek's phases phase zero is the times before computers phase one the computers just emulate exactly what humans did base 1.5 now that this is where we are now the agents on the periphery are doing more statistical optimizations for their own profit they're exploiting the core mechanisms and all you measly humans still using steal limit orders are getting exploited

by the high-frequency traders face 2.0 that's where we want to go these are the two basic types of intelligent agents this simple reflex agent is a good model for continuous double auction batch auctions or even more obviously automated market makers are model-based agents because they actually have States the inventory of the market maker is the state and so unless you're going to run your own trading bot then use a more advanced mechanism recent paper in

science did has a nice description of this for ad auctions the first designs were first price auction so that's your pay as bid clearing then that advanced to second price auctions that's again your uniform price clearing and then and combining those with proxy agents what so when we go back to phase 2.0 note that Google and Facebook are already using advanced mechanisms directly in the for the trade matching but the difference is that they are centralized and the that what they're

optimizing is the auctioneer revenue on a decentralized mechanism we can optimize instead trader welfare this some solidity code to efficiently verify the solution to a convex optimization ask me about this later Thanks