Yesterday I tried to give you a layman overview of what SMT (or Smart Media Tokens) are, how can you generate them and what you can and can't do with them on the Steem blockchain. Today I'm trying to understand the chapter related to "Automated Market Makers" for SMT, from the white paper.
But first, a short recap: SMT are tokens issued by a distribution mechanism (they are bought in a specific time window, with STEEM), they carry application-level features, like inclusion in voting, curation, the ability to vest and to transfer them. They can't be used for witnesses voting, and there are no price feeds published for them.
The last bit is interesting and I think it connects with this market maker stuff.
The Ignored Liquidity Reward
Now, when I first read in the SMT white paper about Market Makers, something in the back of my mind ticked.
I don't know how many of you are aware of this, but in the Steem blockchain there is a very specific (and probably quite ignored) type of reward, called "liquidity reward" (read the white paper if you don't believe me). It's not something you get as a witness, it's not something you get as an author for posting, nor it is something you get as a curator for your votes.
It's something you get when you put aside, or "block" as "collateral", a certain amount of STEEM. The internal market of Steemit.com is the place where this happens. If you ever wondered how the buying and selling are going on so smoothly (pun intended, you'll see in a bit why) on the internal market, well, it's because some deep pockets are putting in it some liquidity and are offsetting the public orders with their own stash.
By looking at the trades I did on the internal market, I saw that many of the buyers where some accounts with "smooth" in them. My hunch is that @smooth, a Steemit witness and veteran, is doing the market making on the internal market and it's getting that liquidity reward.
Market Legs From Day One
Why is this important for SMT? Well, as far as I understand, these automated market makers are functioning in a similar way. They are providing liquidity for the public orders, by "blocking" or making available, a certain amount of STEEM for your SMT.
Let's say you launch your own token, called TOKEN, and it gets subscribed 100%. Now you will have a lot of TOKEN out there but the price discovery and liquidity are still uncertain. It very much depends on user input and that is something you cannot predict. But by putting together a part of your STEEM and a part of your TOKEN in an account designated as a market maker, you offer some "legs" to the market, helping it walk from the day one, so to speak. You make sure that whatever orders are issued, they get filled. Not only they get filled, but they get filled fast and - most important - they may also get filled according to various scenarios that you build (see below).
I think the real power of these automated market makers is in their ability to play with the ratios. In the white paper there are a lot of formulae, parenthesis and greek letters, but I'm not gonna bother you with this. In my opinion, all those formulae and economical terms like "fractional reserve", "constant portfolio ratio" or "CRR invariant" are meaning one thing; you get a tool for managing your SMT supply, based on your own scenarios.
For instance, you may have a scenario in which you want your TOKEN to be always 1STEEM (to be "pegged" to STEEM). By using a market maker, you can constantly monitor the supply of TOKEN versus STEEM and buy or sell accordingly, to maintain the supplies at a certain level, which will enforce the "peg". All the buying and selling will be done automatically, by the market maker.
In Steemit, this is done - more or less, please tell me if I'm wrong here - with SBD, which is "pegged" to the dollar. The peg is mostly enforced by price feeds supplied by witnesses, so the mechanism is not quite automated and, as we all saw this fall, once outside the price feed ecosystem, in the wild supply and demand territory, SBD can break the peg up or down easily.
But in the case of SMT, market makers will only have to deal with one asset, STEEM, keeping the operations inside a "walled garden", which may make the task of creating "pegged" SMTs a bit easier.
That was for the automated market makers. Really looking forward for your opinions on that.
I'm a serial entrepreneur, blogger and ultrarunner. You can find me mainly on my blog at Dragos Roua where I write about productivity, business, relationships and running. Here on Steemit you may stay updated by following me @dragosroua.
https://steemit.com/~witnesses
If you're new to Steemit, you may find these articles relevant (that's also part of my witness activity to support new members of the platform):
Thanks @dragosroua - where does the liquidity reward come from though? Is it just from the spread on making the market or is there some actual reward amount set aside for market makers in block creation?
It is mentioned on page 26 of the Steem Whitepaper, but it's not clear where it comes form. I remember reading in previous versions that this liquidity rewards was awarded from inflation, but I can't find that paragraph anymore.
I am thinking to create one for India, something like IndSteem based on SMT
@smooth is the most frequent buyer or seller, then there's also @paco-steem and various alts of smooth like smooth-a to smooth-z and teamsmooth etc. That's a scary number of alts, but I've seen worse on steemit.
Yes, he's the liquidity provider.
May be he got lot of steems accumulated from beginning ? From his profile he looks like joined in March 2016.
He's a Steemit veteran, he's ok.
Yeah, @smooth is one of the best. He’s been around Bitcoin Forum (https://bitcointalk.org), like, forever. He was one of the first people outside the STEEM inner circle who mined early on and did quite well. He’s extremely knowledgeable, and extremely generous with that knowledge. He’s also exceptionally competent and one of the very few real experts who is also level headed and down to earth. I’ve never seen him condescend or personalize. He always responds to everyone, even those who directly insult and attack, with the utmost of respect. He’s a real example to follow, and an incredibly valuable member of our community.
This is the best piece of information about smt I have come across. Thanks for enlightening me about Steem's market maker. Would be interesting to analyse that data.
2nd translation here. https://steemit.com/spanish/@trans-juanmi/serie-el-white-paper-de-los-smts-episodio-2-el-papel-de-los-creadores-de-mercado-automatizados-automated-market-makers-para-los
Congratulations @dragosroua
MinnowsPower listed your post "The Role Of Automated Market Makers For Smart Media Tokens - The SMT White Paper Series, Ep. Two" as one of the top 5 upvoted and commented posts of the day...!!!
Exceptional article about SMT white paper...!!!
100% Upvoted by @MinnowsPower
MinnowsPower is not a bot, I am a Crowdfunding Hybrid
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Thank you again for your good information :)
Thanks for sharing steemit related posts
incredible - it is hard to understand
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STOP@dragosroua,
No such deep knowledge so far! So, I will read it few times and get an entire idea about SMT 1st!
Cheers~
I try to understand this, but it seems it's too technical for me...
will it have a pre defined limit of reward
smooooooth!
(I don't get it)