Daniel Conrad
Jul 10, 2017 · 2 min read

Thanks for the note. Please do let me know where I’m getting this wrong — I’m genuinely curious about the problem and looking for a solution.

Here’s my logic. Like your white paper, I assume that (human) traders will exploit every opportunity to trade with the smart contract when its price differs from the market price available on other exchanges. If the price of tokens from the network of smart contracts is lower than its price on other exchanges, traders can “buy” from the network and sell on an exchange. If if the price of tokens is low, they do the reverse. Each time, they make money (in the form of ether). Each time, the smart contract loses ether. Arbitrage is zero-sum.

Imagine a round-trip trade. If the market price of a token goes up 10%, traders will buy it from the smart contract until the contract price rises 10%, making money along the way. Say, then, the market price drops back to it’s previous level. Traders sell the tokens back to the contract, making money again. At the end of the trip, the contract has less ether, the traders have more. This will repeat until no ether is left in the contract.

Introducing a cost, which is paid to the network in the form of a positive bid-ask spread, could fix this problem. (Until options trading becomes prevalent, then another mechanism will be necessary.) Note that I also assume the presence of BNT is irrelevant b/c it can be immediately swapped for ether, probably in the same block — liquidity is the whole point.

Let me know if I’m missing something. My perspective comes from trading, not building smart contracts.

    Daniel Conrad

    Written by

    Sixth-generation Californian, early PM on Android and Access at Google, now co-founder at Beep Networks www.beepnetworks.com