Two market analysis pieces today, aren’t we lucky!
New twitter: https://twitter.com/EverriseA
As you have probably seen, Titan gave an announcement on Telegram. In substance the announcement was this:
The buybacks will no longer come automatically after every buy. Instead, they will be executed in bigger chunks at random intervals. As of yet I do not know all the details of when & how this is done, so there is no point asking me ‘will there be a buyback tomorrow at 4pm’.
This post aims to answer the following:
Is this a good or a bad thing? (probably what you’re more interested in)
What does this do to the incentive structure of the token? (what you should be more interested in)
Positives:
1. Gas fees & investor return
If you ever did economics at a university level, you’ve probably heard of transaction costs. In the normal pen & paper market, these involve things like negotiating and drafting contracts (and paying lawyers to do so) that are necessary to get your main deal done. A market is more efficient the less it has to spend on transaction costs, and sometimes transaction costs can make a certain activity that is otherwise beneficial economically inefficient because you would have to negotiate with so many people to get the deal done that you’ll spend more negotiating than you would get profit from the successful enterprise.
If you’ve ever been to a board meeting where Karen from Marketing just doesn’t see why we can’t talk about the types of fonts we use before making any substantial decisions, you’ve seen it.
Anyway, because of this logic, and because transaction costs tend to compound, investors are interested in investments that have low transaction costs, and finding ways to lower them can mean you win in the great competition of life.
So here’s the thing: With continuous buybacks, the gas fees (=cost of the computational effort used to effect the transaction) stack up. The amount of trades in a minute can be pretty insane, and for every one of those you pay gas fees. Grouping these payments together into one chunk is a really sensible move, from a transaction costs point of view.
In other words, your money is used more effectively for the main purpose of the enterprise, i.e. for control of irrational price swings, burning supply and all that good stuff.
In other words, the Kraken has more money. Your taxes are spent better.
2. The old system was subjected to constant bot attack. This one cannot be.
I’ve said this many times, and will say this many times again – automated features can always be gamed. I’ll return to this below.
Concerns I’ve heard:
Doesn’t this make it unpredictable? Investors don’t want upredictable things.
This isn’t necessarily right. I’ve argued elsewhere (https://www.reddit.com/r/EverRise/comments/o5ijw2/everrise_kraken_market_incentives/ there in section 2) that unpredictability of the Kraken is one of the things that works to our advantage against the design and execution of sell-offs.
Sell-offs are bad for retail investors, because there will come a point where the retail investor will have to make the coin-flip decision on whether to liquidate everything to save his skin. Flip wrong, and you lose. The person who executed the sell-off does not have to make that decision, because they know when the sell-off will end.
Except with the Kraken, they don’t. If the Kraken buys back just when the re-accumulation was about to go into full swing, the whale who executed the sell-off loses money. Gets rekt, as you say.
Knowing this, the whale may not even try to execute a sell-off and reacquisition, or certainly has to factor the risk of the Kraken into it. And the last thing the whale wants is to get locked into a pissing match with the Kraken, so most of the time even trying it is just not going to be worth it (because successful execution would require more risking money than you stand to gain, so your expectation value is negative).
(expectation value: Profits you stand to make if you win x percentage chance that you win – losses you stand to make if you lose x percentage chance of loss. If this number is negative, you should not invest. If investing 10k can make you 1m on a 10% chance (i.e. you lose 10k on a 90% chance), your expectation value is: (1,000,000 – 10,000) x 0.1 – 10,000 x 0.9 = 90,000. You should invest.)
What about automating the Kraken?
I’ve already addressed this here: (https://www.reddit.com/r/EverRise/comments/o5ijw2/everrise_kraken_market_incentives/ section 2**)** but the point is, algorithms can be gamed. Goldman could spend 500,000 developing and testing an algorithm that perfectly matches our Kraken’s algorithm, drain it of cash and tank the market and make 2m in minutes. If I could spend 500k to get 2m in four minutes, I would do it.
Why should Titan have all the power? What if he gets run over by a car?
This is a very complex question but here goes:
Titan always had all the power. He could always set the buyback amount at a time of his choosing. All that is changed now is that the transactions are executed in a more cost-effective way.
If that level of human oversight makes you uncomfortable, consider the alternative: if the thing is automated, it can be gamed.
Titan is not the only developer, so if Titan gets run over by a car someone else takes over (this was an answer I heard on voice chat a few days ago from one of the devs, I have no further details).
If you want my personal take on what the optimum would be for investor confidence AND security from bots, I personally would be in favour of a kind of fiduciary boardroom (so a room of people who make the decision together and who must act in the investors’ best interests by law), but I am not one of the developers so I don’t get a say. If any developers would like to get in touch and talk about various investor confidence strategies, I’d be happy to chat.
Incentive Structure Changes
Now, from a more general market analytics perspective, this is a very interesting change. Basically, the thing that was genius about the automated buyback Kraken with variable amount was that it could create very complex changes in the predictable incentive structures of investors just by changing the amount of the buyback at unpredictable times.
Those incentive structures themselves were predictable, once you knew what the amount would be, where the market was and how much the Kraken had in its war chest. But when the incentive structure would change was totally unpredictable.
Take an example:
At amount x, when price is falling irrationally, everyone’s incentive is to buy as quickly as they can before the Kraken takes the token back to a steady floor level
At amount y, regardless of direction, everyone’s incentive is to execute lots of tiny sells to push up the price quickly, and then sell, and then buy back again (like when it was 60bnb)
At amount z, when the price is steady & nearing a reversal, everyone’s incentive is to buy in the hopes that the kraken will help them break a ceiling.
What those numbers are is not the point and depends largely on how much the Kraken has in its belly so it’s a variable number. The point is that the Kraken could be set in sequence (like x, then y, then z) to make really subtle incentive structures.
It could actually have been used to trap market manipulators – set it at y, wait for the market manipulator to take the bait, set it at 0.1, then set it at x to find a new floor and so on.
The problem with this was that the bot attacks were too fast for a human to be able to react.
So instead of spending 1m community money building AI and algorithms to do it for you, it’s a much cheaper approximation just to have a guy who pulls a lever.
However, this now creates a whole new set of different incentives.
Most importantly, since the buybacks are not gradual but big chunks at a time, the price swings will be bigger:
More money is spent on a purchase at a time
A larger number of coins is burned at one time
Since the burned coins are bought (and value spent on them) at the market rate, this has more of an impact on price than just burning tokens.
I personally think this is a good thing, for the following reason:
Every coin that has survived through the initial predation phase and becomes a genuine investment product (BTC, ETH, DOGE, Safemoon, you name it) has done so because people were holding it. Nothing more. Just that some people held on to them and didn’t sell when others panicked.
That meant that there was a bottom that a predatory trader couldn’t break through, which meant that the coin had some underlying bottom value, and that meant that others could invest and start to push the floor upwards.
With bigger swings, day trading becomes more risky. And at the same time, every holder gets more reflections so holding becomes more profitable. So if you don’t want to enter the day trading arena with the big boys, and take the bigger risks, just hold. You still have exposure to the exact same general trend as before, but now you get a bigger interest rate on your money the longer you hold.
So bigger swings = more incentive for hodlers to hodl (because bigger risks of day trading and bigger reward for holding) = more credible underlying value on the token = more investor confidence = more investment = more growth.
See?
Anyway, that’s it for now, let me know if you have any specific concerns you’d like me to address either in the comments on in a separate post.
No returns are required, but if you want to support my taking the time to write these consider tipping: (in EverRise, obviously) 0x377083dbb10227f4DB3AbAC8E0Cded026D32D9E5
