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BobWay

Answer: About the patent, Let's talk

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9 hours ago, BobWay said:

Note, a MM's profit does not scale with their investment. It scales with increasing payment volume through their investment. So doubling payment volume can support twice as many MM at the same ROI. Of course this requires cumulatively doubling the MM's XRP stake as well.

Dear Bob - you're giving away the contents of the paper I started writing in 2017! Since I'm never going to finish writing it and nobody on xrpchat responded to my request for reviewers/coauthors - here's page 2 - where I outline the reverse process - taking the expected profit that market makers want and from that, predicting a reasonable price for xrp. (Please note that in the paper I started with a 20% figure, but this is only a toy number and I am only interested in the model rather than the actual numbers at this stage).

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55 minutes ago, jbjnr said:

where I outline the reverse process - taking the expected profit that market makers

In this example we can see the Market Maker makes a profit around 0.383142 % gain from that one buy and sell order.  

 

 

180483142_ScreenShot2019-03-30at09_23_47.thumb.png.b61a12a14e91a1d140b9c082f6868569.png

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27 minutes ago, stuartXRP said:

In this example we can see the Market Maker makes a profit around 0.383142 % gain from that one buy and sell order. 

Indeed. That is an example of a profit on an individual transaction as a percentage of the amount transferred. What's I'm more interested in is the ROI on a yearly basis - based on the total investment of the market maker. They might buy and sell the same XRP N times in any given time interval, so it's simler to look at the yearly income as a ROI. This is actually proportional to xRapid transaction volume.

What you are seeing is page 2 of a 7 page document. However, the other pages have bits deleted and too many unfinished edits to make it readable and that's why I'm not posting it all here. I would prefer to rewrite the whole thing. It hasn't been touched since March 2018 and was started back in nov 2017 before the bull run - after that I didn't care any more about the xrp price and lost interest in the model. Bob's comments on this forum recently have made me think that I should have finished it.

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Posted (edited)

sorry if this is a bit 'high level' and abstract but basically i think what the mechanism is trying to do is absorb USD (and other fiat) like a sponge into the xrp ecosystem in a way that bolsters price action continually, predictably and consistently, rather than by blindly hoping market makers acting solo (or hoping traders and hodlers) will "overall" push up prices on a promise of eventual gains/utility/etc, which is ultimately circular logic

what i mean by this is, if market makers are constantly buying-selling, then (aside from network fees) the liquidity through spreads gets eaten up, and that liquidity is probably retail/speculation/trading which shouldnt be discouraged because the xrp ecosystem needs it (even little fish like us!) ultimately to provide liquidity that market makers can actually absorb... so...

where does this fresh capital come from? it can't be just market makers changing one currency to another alone since there's a simulataneous buy AND sell; so it needs to come from NEW capital coming in for NON-speculative reasons and NOT exiting on the other side, but staying in xrp -- these one-way payments are the ones where businesses are most keen to just pay to "make it happen" because speed is everything as there are business costs behind it one doesnt see, i.e. the delay to an urgent payment can be far worse than just eating a bigger fee (aka TIME IS MONEY!)

the only mechanism I could think of right away was ONE-WAY payments, e.g. Business A needs to pay Business B in a foreign exchange; we are not "rebalancing" funds in this situation, so a market maker gets a cut of the fresh funds coming in from the "fiat world", and that fiat "stays inside" the xrp ecosystem as either capital/profit for market makers to use (e.g. to buy more xrp!) OR as xrp kept by market makers that was already bought on-market in fiat -- only the market makers are rebalancing their fiat/xrp positions

as fiat gets utilized within the ecosystem by market makers, we get a virtuous cycle of liquidity/spread/price, since MMs only take their scoop from the spreads as a "fee"

so one-way payments, which are also nicely aligned to "on-demand, real-time, just-in-time" are the mechanism by which FRESH capital is brought in and a portion of which is KEPT within the network as a net UPWARDS pressure on price, which can be thus calculated ahead of time; since we can theoretically calculate and predict the incoming fiat kept within the ecosystem, we can also calculate how much maximum "downwards pressure" we can exert at the same time with xrp sales

also, xrp bought OTC (off market) is subject to rules regarding its selling, and, if these OTC buyers are in fact market makers, this aligns perfectly with their utilization of the xrp ecosystem by needing to hold BOTH xrp AND fiat, thus they are never net overselling xrp vs fiat to rebalance their holdings; meanwhile, the FIAT capital ripple (or XRPII Inc or whomever gets to be "in charge" of the xrp pool(s)) can of course be re-injected into the ecosystem (but this time as fiat, causing potential upwards pressure once again -- however, i dont think this happens directly e.g. as xrp buybacks since that would trigger valid market manipulation concerns from ripple-related entities)

the key in my theorizing was that market makers indeed must and will hold xrp for operations and not sell below a given pre-agreed price threshold when they bought OTC, so that XRP only be used for the equivalent USD buy-side

[hope this top-of-my-head rant makes sense...]

Edited by zerpdigger

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8 hours ago, jbjnr said:

here's page 2 - where I outline the reverse process - taking the expected profit that market makers want and from that, predicting a reasonable price for xrp.

Why not finish the paper and let everyone review it.

I tend to be able to see the logic in the forward direction. Meaning, "Mark" puts in this much money, wants to make this much profit. There are this many transactions over time, of this much total volume. So his spread must be this."

But if you say, there is this much total volume, I have a hard time working backward. You still need to know number of payments and their average payment size. You also need some idea of how interleaved the incoming and outgoing payments are going to be. That has a huge impact on the required amount of capital needed to provide liquidity. Payment flow imbalances and additional alternate market funds rebalancing costs can have a huge impact as well.

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7 hours ago, stuartXRP said:

In this example we can see the Market Maker makes a profit around 0.383142 % gain from that one buy and sell order.  

To a speculator, that seems quite lame. But if you do that thousands of times a day, it starts to add up nicely.

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6 hours ago, jbjnr said:

What's I'm more interested in is the ROI on a yearly basis - based on the total investment of the market maker. They might buy and sell the same XRP N times in any given time interval, so it's simler to look at the yearly income as a ROI. This is actually proportional to xRapid transaction volume.

Indeed. It's always a profit deal!

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2 hours ago, zerpdigger said:

[hope this top-of-my-head rant makes sense...]

Yes, you are definitely seeing the keep processes.

One other thing to point out is that, if you are an XRP speculator who is holding a large position, you are perpetually calculating your net worth as XRP amount * current market prices.  However, this is not necessarily accurate for thin (illiquid) markets. If you attempted to sell your whole stack at once, you would force down the price of XRP in the process. This could result in you receiving a net price that is significantly below the "last traded price'.

So in reality, you need to discount your net worth calculations to account for the thin market. However, as market makers bring in additional liquidity to support growing payment volume, that same liquidity moderates the downward pressure on price your large sale would have. As such, your back of the envelope net worth calculations become more and more accurate.

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Thank you Bob for all this information.

I still haven’t clear what could be the role of Ripple, if they decide to implement your papent or something similar, would they use part of their XRP to incentivize the MMs, would they sell XRP below the spot price? so the market makers could buy cheaper and make more profitable the XRP case vs Fiat-fiat?, would that mean that they would be redistributing their XRP through market makers? 

Do you think Ripple plans to distribute most of their XRP holdings with the aim of setting XRP as the default asset for cross borders? or they will try to keep hold of much as possible to return value to their shareholders?

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Posted (edited)
1 hour ago, Odiseo said:

Do you think Ripple plans to distribute most of their XRP holdings with the aim of setting XRP as the default asset for cross borders? or they will try to keep hold of much as possible to return value to their shareholders?

Holding as much XRP as possible doesn't return value to the shareholders. That is because the value isn't liquid. If the shareholders wanted the value, they would have to sell the XRP which would crash the market and everyone would see that "the value" wasn't there to begin with.

Right now, (based on what I've been told by outside stock purchasers) the market thinks Ripple could sell off their XRP holdings at about 3 cents. Or 1/10 of the perceived market value. So if Ripple could magically give XRP away 80% in exchange for 100% market liquidity for the rest then that CREATES shareholder value. It does not squander it. But magically giving XRP away and crashing the price would destroy shareholder value. So that is why the problem becomes so tricky to solve.

1 hour ago, Odiseo said:

I still haven’t clear what could be the role of Ripple, if they decide to implement your papent or something similar, would they use part of their XRP to incentivize the MMs, would they sell XRP below the spot price? so the market makers could buy cheaper and make more profitable the XRP case vs Fiat-fiat?... 

 It isn't helpful to think about any MM incentive as "selling XRP".  You have to think of it as, if the market maker facilitated a $1,000 payment on the fiat/fiat path, they could make $1 profit on that transactions. But if they did the same on the fiat/xrp/fiat path, they would make less (say 96 cents) profit. So they'd rather do the more profitable path instead

But that doesn't help XRP because that path completely ignores XRP. So your stack of XRP and Ripple's reserve of XRP don't benefit at all.

So you if you think, "What happens if we give the Market Maker an additional 5 cents if they complete the above transaction via the XRP path? Now we have a $1,000 payment flowing through XRP that normally wouldn't have, and it only cost us a nickel to make that happen. The Market Maker nets $1.01 so he is happier as well. Note, 96 cents of Mark's profit comes from the payment sender. 5 cents from the incentive.

But now look at what happened to the MM'ers on the alternate fiat/fiat path. They made ZERO profit, because the payment bypassed them. If they keep making markets along the fiat/fiat path they are going to lose more and more business to the bridge path. So at some point, they need to buy their own XRP to get back into the game. That puts upward pressure on XRP's price.

1 hour ago, Odiseo said:

would that mean that they would be redistributing their XRP through market makers?

It is important to think of XRP as a cryptoCURRENCY in this regard. So yes, if an XRP market making incentive was implemented, then XRP currency in Ripple's holdings would make its way to and through market makers. But then you need to realize that makes perfect sense, because it is those Market Makers who are allowing the payment senders and receivers to actually use XRP as a CURRENCY.  And it is being used as a CURRENCY that will give XRP the majority of its future value.

Edited by BobWay

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47 minutes ago, BobWay said:

So you if you think, "What happens if we give the Market Maker an additional 5 cents if they complete the above transaction via the XRP path? 

Five cents of USD that Ripple got by an earlier selling of XRP?  Or five cents worth of XRP that the MM didn’t have to buy?  Both ways exert a tiny downward price pressure...  the first by the original sale of XRP, and the second by a reduced need to buy XRP..

Bob how do you think this tiny downward pressure compares in scale to the upward pressures you’ve mentioned above?

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3 hours ago, BobWay said:

Given the price of XRP didn't change over that trading period, then both of those represent the same 16.6% return on Mark's investment. ($33,333 profit on $200,000 investment)  If the price of XRP increased, then the first line represents more value than the second.

With returns like that I would not be surprised if "Forex traders" could become the new "market makers" The average Forex monthly return is between 1 to 10 per cent per month, becoming a market maker could offer more returns . Its also great to have Miguel Vias  head of XRP markets at Ripple. "In his new role, Vias will utilize his considerable expertise building liquidity for new financial products by working with market makers, traders, investors and exchanges to strengthen the XRP markets and set the stage for large-scale institutional adoption" .

 

Could you speculate (from ripple insights) why Miguel Vias  understanding of precious metals, especially when it comes to market structure, will be ever more helpful as we increase the access to, and liquidity of, XRP. Thanks @BobWay  :)

 

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4 hours ago, BobWay said:

Why not finish the paper and let everyone review it.

I will try to do so, unfortunately, my job is more interesting than the xrp price, so I've tended to work on that (although I did have some fun plotting ripple xrp sales etc a few months back - I should have got back to the model then).

4 hours ago, BobWay said:

I tend to be able to see the logic in the forward direction. Meaning, "Mark" puts in this much money, wants to make this much profit. There are this many transactions over time, of this much total volume. So his spread must be this."

But if you say, there is this much total volume, I have a hard time working backward. You still need to know number of payments and their average payment size. You also need some idea of how interleaved the incoming and outgoing payments are going to be. That has a huge impact on the required amount of capital needed to provide liquidity. Payment flow imbalances and additional alternate market funds rebalancing costs can have a huge impact as well.

You've answered it yourself in other posts. The essence of my model goes like this - Suppose there is only 1 XRP in existence and it needs to support $1million in payments every year, if the spread is 0.1% then the MM can expect to earn 1E6*1E-3. That's $1000 per year in earnings. How much are you willing to pay for that 1XRP in order to earn $1000 per year? Well, I guess I'd be happy to pay $10K for it and earn 10% per year on my investment. This puts a kind of lower bound on the price. MM's can compete to buy that XRP so that they can take your earnings. The limiting factors available are the size of the xrp pool available to the MMs and the spread they are charging, the ROI they need to remain profitable and the xRapid volume. As long as the spread is better than that available elsewhere ... then there's no need for it to drop to zero. (I'm ignoring here the obvious problem with trying to send a $1m payment using a 10K token - and yes of course your points about average transaction size/frequency/etc are important).

As xRapid volume increases, that MM profit increases and that drives up the lower bound in price. I presume my argument is flawed because ...

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