It's pretty obvious that Hive has a liquidity problem.
I know I've been beating this dead horse for a while, but there's still a lot more to be said regarding Hive and AMM. First off, I'll say that this is all just game-theory, because there are a lot of other projects on Hive that have a higher priority at the moment (RC pools, HAF, ETC). Still, liquidity is important, and we need more.
First off, it is not really possible to buy large or even medium quantities of HBD. The liquidity doesn't exist, and it's super annoying. The other day I tried to trade 300 HBD into Hive and it took me like five minutes and I still suffered slippage. That is fully unacceptable. AMM solves this.
Hive-Engine Testnet.
Creating an AMM on the base-layer is a commitment, but we actually don't have to start there. The crux of AMM is yield. The more yield we provide to the pool, the more liquidity we will get. This is why LPs like SWAP.HIVE/SWAP.HBD have very little liquidity: they aren't being allocated enough (if any) yield.
It would be very easy to allocate HBD from the @hive.fund to provide yield on Hive-Engine. This wouldn't be a great or even permanent solution, but it would create a great testcase for programming such a function on the main chain. If the SWAP.HIVE/SWAP.HBD pair had great success, we'd know creating an AMM on the layer 1 using native inflation instead of dev fund money would be more than worth it.
Hive also needs outside liquidity.
The obvious choices in this regard are either RUNE, BTC, or TETHER. Tether would be nice for stable value... but honestly Tether is a garbage asset that could collapse at any time so probably not the smartest idea. Rune is only a smart idea if we actually get listed and paired on the exchange itself, which is a lot of work. This leaves Bitcoin.
So again, as a test, we could allocate yield to the SWAP.HIVE/SWAP.BTC diesel pool on HE and increase Hive's liquidity to BTC by exponential margins. It's actually kind of ridiculous that we haven't done this yet if I'm being honest. The money we siphoned from the DHF to do this would pay for itself by multiple factors. It's free money on the table for the entire network and we are just letting these diesel pools sit there totally unused. This blows my mind. Allocate yield to the damn AMM already... it's right there!
That would be a good starting point.
Many people remind me that having massive liquidity between Hive/HBD isn't really that helpful for users trying to enter or exit the network. That may be true, but it also might also be total bullshit. On a game-theory level, the argument makes sense. If I'm trying to turn Hive into Bitcoin, how could massive liquidity between Hive and HBD help that situation?
Liquidity pools and economic velocity are complicated.
None of these things happen in a vacuum, even though the game-theory assumes that it does. For example, how do we even know how much Hive is worth? The simple answer is: we don't. Think about it.
Consider how many hoops you have to jump through to calculate the USD value of Hive. USD is our unit-of-account, so USD is what it needs to be measured in. However, Hive doesn't even have a USD pair (closest is USDT) so that makes things even weirder.
If we know we can trade 1 Hive for 3000 sats, we still have to know how much 3000 sats is worth, which means we have to estimate that from another market (BTC/USD). Already we have two degrees of separation and multiple guesses as to the value of Hive.
Now consider that the price of Hive is not only different across every exchange, but also different across every liquidity pool. Not only that, every liquidity pool has a different amount of depth, therefore depending on how much Hive we are dumping this will change how much crypto we get when executing a market order.
To Recap determining USD price:
- Price is slightly different on every exchange.
- Price is slightly different on every pair within exchange.
- Depth/volume is different on every exchange.
- Depth/volume is different on every pair within exchange.
So you think you know what the price of Hive is, but you actually don't. Even more importantly, Hive itself doesn't know the price of Hive, and relies on witnesses to act as oracles to guess based on the price action of outside exchanges. According to Hive, the price of Hive is whatever the witnesses say the price of Hive is, which is super weird when you think about it... because if the witnesses just claim the price of Hive is higher than it actually is, we would print more HBD, and if less then less.
The only thing that keeps all these markets around a similar value is arbitrage, and most arbitrage is done with bots because bots are a million times faster than people. Thank you bots, for making this appear much more simple than it actually is. It was nice while it lasted.
EXAMPLE:
Let's say we have a massive HIVE/HBD AMM pool with 100M Hive in it and 100M HBD. For simplicity, this means the ratio implies that 1 Hive = 1 HBD = $1. However, if Hive suddenly spikes on a centralized exchange to say $2... what does that imply? The ratio on Hive is still 1 to 1... does that mean that HBD is worth $2 now? It must, right? Again, Hive layer-1 doesn't even know the value of HBD, and simply assumes it is worth $1. However, if you could trade your HBD into Hive and then the Hive into $2... we can safely imply that HBD is actually worth $2 in that case.
Now that we can actually convert Hive into HBD these scenarios play out a little better than they did before. In this case, Hive would get dumped on the exchange because users in the LP would speculate that dumping HBD for $2 is a very smart thing to do (which it is). During this process the ratio of the internet Hive/HBD AMM starts going up in order to bring the value on the centralized exchange down. This is just how arbitrage works.
Assuming there's a lot more liquidity on the internal market than on the centralized exchange that is spiking, after everything is said and done Hive might have a 1.1:1 ratio internally and externally it would have a value of $1.10 on exchanges after the arbitrage was completed. See how complicated this gets in very short order? It's not as easy as you'd think at first glance.
In the case of Hive being dumped down to 50 cents, what happens? AMM LPs could remove their LP tokens and dump Hive for HBD, expecting Hive to drop... but they can't add liquidity to the exchange because the exchange pair is HIVE/BTC (not Hive/HBD). In that case any HBD/BTC pools that existed would get used to buy BTC and dump that BTC for Hive, but all the HBD pools I've seen are extremely thin and don't help a whole lot. In this case of Hive dumping it is much harder for the AMM pool to equalize the price because turning HBD into BTC is difficult. Rather it would be more like some kind of weird virtual arbitrage where users are expecting the AMM value to go down so they dump, but they can't actually turn the HBD back into Hive via Bitcoin... it's all very weird.
Still we see that during Hive spikes an AMM market makes it very easy for users to sell Hive for the external coin, and when Hive dumps the AMM makes it very easy to dump Hive on the AMM speculatively knowing that HBD the value of HBD has theoretically gone down and will be converted for Hive, thus flooding the market after the 3.5 wait period.
The Hive liquidity problem
When the price of Hive spikes on exchanges, what happens?
Everyone is like "FUCK!" because all their Hive is powered up, and by the time it gets powered down the price of Hive has already crashed and they didn't get to sell any. We see this happen all the time and it's one of the main reasons I suggested Hive implements a "Power Cooldown" That would allow users to unlock their first powerdown instantly at the click of a button (with the disadvantage that powered up Hive would not give any upvote benefits for an entire week to counterbalance this feature).
Again, what happens when Hive has a massive Hive/HBD liquidity pool that they are earning yield on? Oh, look at that, all of a sudden most people on the network have powered up Hive in addition to providing liquidity. The liquidity isn't locked, so when Hive spikes on exchanges they can just remove it instantly and dump Hive on the pumped market, or conversely if Hive gets dumped they can dump Hive for HBD in the exact same fashion and convert that HBD back into Hive over 3.5 days. Either way, providing Hive users a way to continue yield farming without having that liquidity locked is a huge advantage for everyone, and an internal Hive/HBD AMM can provide liquidity to outside markets even without having a direct liquidity connection to that market.
Our liquidity... is embarrassing.
And it's only going to get worse. If it takes us like 3 years to implement AMM we are seriously gonna get laughed at and people on other networks are gonna point and be like, "What the actual fuck are you scrubs doing?" That's a fact. AMM is the future. This is very much a wen-not-if scenario. I have all the patience in the world. We are still very early in this game.
The fact that no one can even buy 10,000 HBD instantly without slippage is fully unacceptable. Even if an internal Hive/HBD market provided zero liquidity to outside markets (which is a ridiculous claim to make given the examples above) it wouldn't matter. We need to be able to trade Hive for HBD and HBD for Hive... in mass quantities, instantly... with very little slippage and little or zero trading fee.
Zero trading fee?
Hive is in a unique position to offer $0 trading fees, just like HiveEngine (although they are changing this soon to incentivize more liquidity). The only trading fee Hive actually requires to avoid a bandwidth attack are resource credits, so we have that attack vector covered. That being said, a 0.1% (which is the same as Binance) is the lowest and competitive fee in crypto, which would probably be good to reward liquidity providers with a little extra bonus, thus adding even more totally liquidity to the books while avoiding massive wash trading.
Ultimate goal
Honestly my vision for Hive is that we have a deep Hive/HBD AMM pool and a native listing on ThorChain. It's a lot of work but it's worth it. Of course this is just me talking, as the chance of me actually helping make this a reality is quite small. However, once we have HIVE/RUNE and HIVE/HBD we are pretty much good. A HIVE/BTC AMM would be nice... but not necessary because once we have RUNE we can use that to trade for anything connected to RUNE.
Also trading on ThorChain would be extremely cheap because Hive has zero fees and RUNE fees are relatively cheap as well. Not sure how many years I have to wait for this to be a thing, but I am pretty sure it will happen eventually. Rune is the only game in town at the moment. I'm sure some forks will pop up but why integrate with some ripoff token when we can get the one that already has established liquidity pools? Just my hot take on the situation.
Conclusion
Look around. Bitcoin is 13 years old. Imagine crypto is a 13 year old person. That is how early in the game we are. Think about the difference between a 13 year old and a 20 year old. I think even just in the next 7 years things are going to get pretty crazy. Bitcoin is very... shall we say... Chad. For lack of a better term. Crypto is here to shake things up, not toe the line.
Hive is also in its infancy. There is a lot of work to be done around here, and very few devs around to actually do it. Every dev here has their own priorities and their own goals. No one ever said decentralized growth was going to be easy.
Liquidity is a huge issue. There are many super smart nerds out there saying that liquidity itself is the killer dapp. If that's true, transitioning to AMM farms is all but guaranteed, even if the timelines are a bit fuzzy.
The main point here is that so much Hive is powered up that many of our most diehard members never even have the chance to participate in providing liquidity. HODL culture is a toxic one in many regards. Choking liquidity and putting the network into literal shock on the supply side is not a healthy practice to be incentivizing. AMM incentivizes users to not HODL and allows everyone on the network to share liquidity slippage equally, while getting paid to do it. AMM is the future. Soon™.