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BobWay

Answer: About the patent, Let's talk

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7 minutes ago, Odiseo said:

if Ripple decided to implement this kind of algorithm, would they do it inside crypto exchanges?, would it need a partnership with them to implement it? or could it be done as an external product, which Ripple could control, or even speculating further, could it be a decentralised product, let's call it XPool as an example, designed in Codius, where anybody could participate, exchanges, market makers...

It turns out it is trivial to implement on the XRP Ledger directly. The same math works with external crypto exchanges as well. However, you have to take great pains to make sure you are capturing clean (non-gamed) data to feed into the algorithm. But all of the required data should be available to any xRapid implementation by default.

Also understand that exchanges have their own business model. If they work with xRapid to support payments, that gives them a second revenue stream. Both of these are unrelated to incentivizing the actually market makers (traders) that provide the liquidity and pricing supporting payments.

It only makes sense to me if the system is open to all traders without bias. But also keep in mind that there is a particular goal being incentivized, supporting XRP as a bridge currency for payments originated by people actually "doing business". So if there are no business transactions along a corridor, there is no point in incentivizing speculators trading against other speculators, no matter how clever they think they're being.I think all payment vs trade data should be captured and published. Then the algorithm's math can be double checked by anyone to see that it is being applied:

  1. fairly
  2. honestly
  3. effectively, in support of the stated goal and metrics

I doubt it will be applied by a "hands off" irrevocable smart contract, since measuring, monitoring, and reassessing its effectiveness and new corridors appear and grow is going to be key to network building.

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Thanks so much for answering so many questions. I think your club is one of the best xrp reads on the internet today. 

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4 hours ago, Doctor said:

Thanks so much for answering so many questions.

My pleasure! I like being helpful. 

Just know there is a lot still to come!

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For those interested in learning more about "market making" or (Dealing) here is a classic reference worthy of your attention. You'll find the original paper linked there as well. (Here is a freely available version online, along with some other promising links.)

I'm by no means an expert on this, but you might want to become one. For the purposes of discussion, it is good to understand what Treynor calls the "inside spread" vs the "outside spread" in a given market. The first is the narrow spread a market maker is willing to show for a limited amount of funds. The second is the wider spread "value based investors" naturally show based on their expectations of price changes.

 

 

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5 hours ago, BobWay said:

For those interested in learning more about "market making" or (Dealing) here is a classic reference worthy of your attention. You'll find the original paper linked there as well. (Here is a freely available version online, along with some other promising links.)

Thanks for all the info!

I found this nice story on Ripple's site (back from 2015), how a musician became a market maker: https://ripple.com/insights/the-life-of-a-ripple-market-maker/

In the simplest model, do you see the need for a market maker to plugin to any of the exchanges or would a good starting point be to only use the XRP Ledger's DEX using OfferCreate transactions https://developers.ripple.com/offers.html and its auto-bridging functionality https://ripple.com/dev-blog/introducing-offer-autobridging/ ?

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Posted (edited)
On 3/30/2019 at 12:46 PM, 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? 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.

This made it click for me.  It's so devious! :) I think a good analogy is to a siphon: there is a pathway for these trades to happen, but if it's in an "inactive" state, nothing is flowing.  Nobody has an incentive to start the flow, because they'd have to pump their water up over the bend.. why not just use a siphon that's already running?  Your algorithm decides when to suck on the hose to start the siphon.  If your path is massively inefficient, you're going to have to suck pretty darn hard to get the flow going.  You might pass out before it gets started ;)  But if it's just a little less efficient than the current path, it only takes a little effort to get it going and then it sustains itself.  But it seems like the real key is not so much in getting your siphon going, but in breaking the other guy's siphon so that you're the only game in town.  Of course, if your pathway can't actually handle the trading volume (i.e. if you were propping up gold as a bridge currency?) you'd never succeed in breaking the other siphon, and it would all collapse soon after you stopped incentivizing the MMs.  But if you can handle the volume, it seems like the outcome is assured.

It seems Ripple would stand a great chance of succeeding against fiat/fiat pathways because those pathways have no natural advocate: who is going to spend USD to try to pull MMs back to the dollar?  Maybe the US government, but that seems pretty unlikely.  However, I think you could have some interesting game-theoretic scenarios where Ripple and "Zipple" compete for bridge currency dominance, each trying to wrest flows as cheaply as possible from the other.

 

Edited by AlkalineHume

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On 3/30/2019 at 8:46 PM, BobWay said:

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.

Please help me understand in which scenario one day Ripple will eventually stop paying incentives to Market Makers while xRapid is still widely used and cheaper than other paths?

 

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6 hours ago, Dario_o said:

Please help me understand in which scenario one day Ripple will eventually stop paying incentives to Market Makers while xRapid is still widely used and cheaper than other paths?

 

The profit MMs make is their spread times the volume.  As volume increases, they can reduce the spread they are willing to buy/sell at and maintain the same profits.  By using the method of the patent to increase the volume through xRapid, you are effectively reducing the spread, as MMs will compete with each other for the business.  If the spread is small enough that the fiat-XRP-fiat pathway is cheaper than the fiat-fiat pathway, the MMs will stay regardless of whether Ripple provides and incentive.

As I said in my post above, a major part of the method's effectiveness is if you can turn off the other siphon.  If Ripple's incentive succeeds in pulling MMs away from the fiat-fiat channel you'd know that because the fiat-fiat spread would get a lot worse and the volume would plummet.  The same fiat-fiat market they left to chase the incentive wouldn't exist anymore, at least not in nearly the same form, after the incentive succeeded.

It's vaguely like a company lowering their prices to put the competition out of business.  Once they succeed, they can raise their prices again.

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On 3/29/2019 at 1:04 AM, BehindtheLedger said:

It sounds like a system for providing just-in-time xrp liquidity to any corridor

 

I could be wrong but I think this could be a key to understanding it all. 

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On 4/1/2019 at 5:03 PM, BobWay said:

That is why I think of it as a "fair" algorithm. If you think of this algorithm as having logically similar goals to bitcoin's "mining", then it is distributing uncirculated XRP to those building XRP's utility value as a bridge currency. Your market making activity is analogous to bitcoin's "miner's" behavior. Specifically, the system needs "someone" to do it, but it doesn't matter who actually does it. So incentivizing "people" to make sure the task gets done starts to make perfect sense.

distribution by proof of utility! :D

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Posted (edited)
On 4/1/2019 at 5:03 PM, BobWay said:

The incentive algorithm rewards ANY trader whose market order was used to facilitate an XRP bridge currency payment. It can do so because there is a permanent, transparent record of all of these transactions on the XRPL. The algorithm doesn't even require traders to sign up to a special program in order to participate.

So if you want to move from "speculating" to "market making", just-do-it. You don't need permission from anyone. If Ripple chooses to implement this algorithm, you will be on an equal footing with everyone else who chooses to do so as well. If your market orders trade, (under this system) you would get incentivized. If your orders exist in the market, but never trade (too high a price) you don't get incentivized. It really is that straight forward.

so can someone just "accidentally" be subject to the incentives mechanism without knowing?!

i mean... there must be some process or rules first right, so that everyone's aware it's happening? if so, is that specified as part of the patent/method or is the actual implementation up to the exchange/service as to who participates (and how)?

Edited by zerpdigger

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On 4/5/2019 at 2:50 PM, zerpdigger said:

so can someone just "accidentally" be subject to the incentives mechanism without knowing?!

i mean... there must be some process or rules first right, so that everyone's aware it's happening? if so, is that specified as part of the patent/method or is the actual implementation up to the exchange/service as to who participates (and how)?

The algorithm allows that yes. Since all payments on the ledger are part of the permanent record, it is trivial to identify whose liquidity was used (by XRP Ledger address). The incentive reward could simply be automatically sent to that address without needing any formal sign up procedures. Of course, that is what is algorithmically possible. What is legally feasible and regulatory compliant is for Ripple's legal team to work out.

I don't expect Ripple to deploy this algorithm without telling people about it. The whole point is to encourage MM competition, so doing it secretly would be self-defeating. I really have no idea if they will have to use an opt-in sign up process or not. I personally think that actually makes the algorithm seem slightly less compelling. I prefer that everyone can participate even if they are pseudonymous. That has a nice ring of "fairness" to my ears.

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3 hours ago, HughJass said:

@BobWay main page of the dev portal.

https://developers.ripple.com/index.html

Thanks, I look forward to what they post there.

I hope they'll release some boilerplate code to simplify the MM process. It is not logically hard, but to do it well, you need to monitor lots of other exchanges for their current rates. That way you can adjust yours rates accordingly in order to minimize your chance of "adverse selection bias". Basically, that means selling low to arbitragers so they can sell it higher elsewhere at the same moment.

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