Improving Steem liquidity through using buying / selling pools

in steem •  2 years ago

The following outlines an proposal how we could increase steem / steem dollar liquidity and on the same time get rid of the need of the internal steem / steem dollar conversion with all its influence on the supply of steem.

Introduce buying and selling pools to stabilize prices and encourage liquidity providers
Instead of using the current manual steem / steemdollar conversation with all its drawbacks I would suggest to use so called ¨buying-¨ and ¨sellling-pools¨ to stabilize prices. This could look like the following:

First of all the inflated steem, that is payed out in steem dollars is put in a so called ¨buying pool¨.

Second: If the price of steem dollars is above the pegged price, new steem dollars are created and sold on the internal market for steem. These steem are also put into the ¨buying pool¨. The maximal amount of steem dollars created through this per month is limited to 10% of all the steem dollars in circulation. This would also encourage to place buy orders in the internal market and therefore increase liquidity.

Distribution of steem in the buying pool:
If the price of steem dollars are below the peg, 10% per month of the steem from the buying pool is used to buy back steem dollars on the internal market. This would encourage to place sell orders in the internal market and therefore increase liquidity.

80% steem dollars would simply be destroyed. The other 20% of the steem dollars could be put in an so called ¨selling pool¨ to encourage placing buy orders. The selling pool could be handled similar to the buying pool, but the other way round.

Improve liquidity through giving priority to older orders:
To even more encourage providing liquidity older orders could have a higher priority. For example instead of simply buying on the lowest / highest price, the buy / sell pool could buy / sell on the highest priority:

PriorityOfSellOrder = DayesOnTheOrderBook / (SellPriceOfTheOrder – HighestBuyPrice)
PriorityOfBuyOrder = DayesOnTheOrderBook / (LowestSellPrice - BuyPriceOfTheOrder )

For example: an order that is 2 days old and 2% above the highest buy price would have the same priority as an order that is 1 day old and 1% above the highest buy price. The longer you wait the better the price you get, as long as you are below/above the pegged price. Therefore if you want to make double profit by trading, you need to wait in average double the time (not counting normal trades).

Summary:
In short if the steem dollar price is higher then the peg, new steem dollars are created and exchanged for steem which is put in a buying pool. If the steem dollar price is lower then the peg, the steem in the buying pool is used to buy back and destroy steem. Both would also help to provide a lot of liquidity in the internal market. Prioritizing older orders would on top of that encourage liquidity providers that provide liquidity for an longer time period. The selling pool concept would also make the manual conversion of steem dollars obsolete and therefore guarantee, that steem is not more inflated per year as promised by the inflation rate. Even if the steem price would drop 10 times we would have better rates then the current banking system which has round about 5% to 10% reserves. In case of a ¨bank¨ run people who are ready to wait longer for their steem would be encouraged this would therefore reduce the sell pressure. On top of that sell pools would encourage to provide liquidity on the buy site even in the case of an bank run.

I hope you enjoyed the outlined suggestion. As always, feel free to comment and please link similar articles /posts!

If you want read another suggestion how we could improve steem feel free to read this article:
https://steemit.com/steemit/@arcurus/tagging-and-flagging-hidden-by-a-whale-how-to-evolve-further

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Hello @arcurus, how are you? It's been a while. It's nice to hear again from you.

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thx im fine. Interesting times we live in :)
If you are interested here are an suggestion how we could include a basic income in steem, i will post it also the next days in my blog:
https://steemit.com/basicincome/@dantheman/hypothetical-price-stable-crypto-currency-with-basic-income#@arcurus/re-dantheman-hypothetical-price-stable-crypto-currency-with-basic-income-20161206t200653758z

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You have a point. Why create a new currency when we already have one. We can just utilize it for the benefit of the community, why noy make sbd or steem the basic income. Is it possible?

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of course its possible :) We could give basic income in both currencies.
For example we could give some part of the steem inflation as basic income. And we could also create new steem dollars if the steem dollar price is above the peg and distribute it as basic income.

Combining both would be a perfect solution.

If designed well a basic income could attract lot of users, and help to reduce the gap between new users and whales.

Soon I will write more about that in an new post :)

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Which could result in a massive adaption of steem or sbd? Interesting.

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yes, if we manage to be the first crypto currency, that is available for masses, we will mostly be the biggest in the long run. Also with giving 80% of the basic income to steem power holders up to an max from for example 1000 steem dollar worth of steem power, we would give lot of incentive to power up.
Economically it is also self balancing, the less the value of the steem, the more steem power you need to get your full part of the basic income which therefore increase steem price again.
Im also thinking about an proposal that would give incentives when you buy something with steem or steem dollars. For example lets take 10% of the steem inflation and give it to sellers voted by the steem power holders. The sellers are then required to either pay it back with interest, or reduce the prices if somebody buys with steem / steem dollar. This proposal would even be easier to realize, because verifying sellers is much easier then verifying identities.

I'm a big fan of brainstorming like this, but I tend to err on the side of simplicity. This idea ranks higher in complexity than I'd like to see as a first cut at a solution.

How big is this problem? I haven't yet traded in this market. I've traded in Bitshares markets extensively and have been part of those conversations about liquidity, so I imagine this might be similar.

Would this problem be expected to go away with larger adoption of Steemit, in general?

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Thanks @arcurus for writing.
Yes, I would say. Stabilizing the value of Steem will draw more attention of people seriously investing in a long term content alternative.

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I even hope that we evolve to something more then just a content alternative... or in away you can say I want extend the content until we include everything :)
Especially this proposal that gives incentives for liquidity providers would make steem also lot more attractive for traders and therefore as currency itself.

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I am new over here and I do not have a clear idea where SteemIt will land in the future.
Thanks for your correction, you are right, I should not have positioned as an alternative source of content any way.