The DutchX — Take Part in the Arbitrage Opportunity

It’s free money, basically

Note: This arbitrage opportunity is no longer live. This post is only available for informational purposes.

TL;DR:
* There is currently an ongoing arbitrage opportunity on the DutchX
* Gnosis will in addition place $1,000,000 in DAI/ETH orders to attract market makers and demonstrate the system

The Economics of the DutchX

Like any two-sided market, the DutchX faces an inherent chicken-and-egg problem: what comes first, the seller liquidity or the bidder liquidity?

We believe it’s crucial to first ensure a healthy level of seller liquidity. With higher seller liquidity, bidders will be incentivized to take part. As the number of bidders increases, more sellers will follow, driving a more liquid market and a fairer price for participants.

Full Transparency

So, what are we doing to kick-start the DutchX and boost network effects on both sides of the market?

We have always encouraged projects that list themselves on the DutchX protocol to ensure the initial liquidity needed. In addition, we have onboarded several market makers to the DutchX mechanism and guided projects on setting up what we call minimal liquidity bots.

In the spirit of full transparency, we’d like to explain exactly how these bots work — fully aware that this will lead to their exploitation. In fact, we would like them to be exploited!

What is there to gain?

Free money! Disregarding gas fees, and the liquidity contribution (more on this below), there may be arbitrage opportunities worth at least 40USD per auction.

Given that there are two auctions per pairing (i.e. A-B and B-A run simultaneously) approximately every 6 hours, this may come to 320USD per token pair, per day in arbitrage opportunities.

So how will the arbitrage opportunity work?

For this, let’s take a look at how our minimal liquidity bots operate.

1. SellBot — Ensures that auctions run consecutively. About 10 minutes before an auction should start, the bot checks that there is sufficient funding or, if not, it fills up the auction to the necessary 1,000USD threshold.
2. BidBot — Ensures that other sellers are not selling significantly below other market prices. Currently, the bots are configured to buy up to 50% of the sellVolume at -2% to comparable market prices and the remaining volume at -4% to comparable market prices.

Note: your bot would need to buy up to 50% just above -2% and the remainder just above -4%, effectively closing the entire auction volume marginally above -4% to gain the most per auction.

There are currently bots running on WETH-OMG (and OMG-WETH) and WETH-RDN (and RDN-WETH) and will continue to run. Several projects provide minimal liquidity with similar set-ups.

We use external price feeds for market prices. Check out the entire documentation and guide here.

Is that it?

No.

Gnosis will also fund 10 DAI-ETH auctions each day for 10 days leading up to the vote staking period* of the dxDAO in early April — each with the equivalent of 100,000USD worth of DAI. More info (auction indices and likely dates) on this soon (keep in touch @gnosisPM).

A list of reasons why you want to be trading on the DutchX

Beyond the obvious benefits of its mechanism, the DutchX protocol is designed to have intrinsic motivation and benefits for traders — even without “free money” promises.

• All traders are treated equal — no trader or market maker has an unfair advantage over others.
• No one has sole control over the protocol, minimizing arbitrary decisions and changes.
• No value is extracted from the DutchX protocol as liquidity contributions are redistributed amongst traders of the DutchX (within each token pair).
• Individual liquidity contribution can go down to 0.1% (or even 0.05%) depending on the traded volume (facilitated by the Magnolia token model).
• Users may even register a net benefit through the liquidity contribution mechanism, if their contribution is less than the average contributions in the pair they trade.
• There are already graphical user interfaces available for non-technical users.
• The DutchX protocol will be governed by a community-held DAO (called the dxDAO). We would like users to be the main stakeholders in the dxDAO. Any Magnolia that is generated by using the DutchX may be used by a user during the vote staking period to acquire Reputation (non-transferable voting rights) of the dxDAO.

* formerly published as Reputation Distribution Period

Note:

• Though no changes are planned, we cannot guarantee how long and with which parameters we continue to run the bots.
• You are yourself responsible to comply with any legal requirements for running the bots from your jurisdiction.
• We are re-deploying a new, audited set of smart contracts governing the DutchX in the first week of February and the bots will continue to run thereon. More information will follow.

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Special thanks to Eric Gorski.