Deep dive: 7 common questions about hummingbot, the open-source market making bot
We’ll ship hummingbot on April 04, 2019!
In this post, we answer some frequently asked questions about Hummingbot that we haven’t addressed in other blog posts.
Table of Contents
- Why is liquidity beneficial for exchanges and token projects?
- What are the negative effects of illiquidity?
- How much money can you earn with Hummingbot?
- What types of markets are best for Hummingbot users?
- Does integrating with both centralized and decentralized exchanges make Hummingbot hard to use?
- As more people use Hummingbot, will that lead to diminishing returns for users?
- What is Hummingbot’s business model?
How much money can you earn with Hummingbot?
Hummingbot’s market making and arbitrage strategies are a lot like fishing. If you’re in the right markets at the right time, you can make a lot of money, but you have to constantly look for new spots.
After a while, other people find out about it and the trade gets crowded, just like a good fishing hole that gets over-fished. However, good traders, just like good fishermen, are always on the lookout for new opportunities.
For example, huge arbitrage opportunities like the Korea to non-Korea exchange arbitrage that was present at the end of 2017 are unlikely to appear again because people have developed infrastructure to close that gap.
But in today’s market where the explosion of #DeFi (decentralized finance) has led to the creation of all types of new instruments such as stablecoins and decentralized loans, market inefficiencies appear that are begging to be exploited via programmatic trading strategies. Not too long ago, you could borrow DAI for 2% from MakerDAO and then lend it on Compound for about 10%.
As long as we have more and more decentralized financial assets and a fragmented exchange landscape, that will give rise to a lot of inefficiencies and arbitrage opportunities.
Does integrating with both centralized and decentralized exchanges make Hummingbot hard to use?
It certainly adds to the upfront setup because our users need a wallet, an Ethereum node, as well as API keys on centralized exchanges.
However, that’s precisely why there are market inefficiencies to exploit. From a technical perspective, trading on centralized exchanges is very different from trading on a DEX. To run a trading bot effectively on a DEX, you have to take into account gas costs, node reliability and speed, the impact of blockchain congestion, as well as the risk of being front-run.
We try to abstract as much of that as possible for users, but ultimately we hope that by providing open infrastructure that users can customize and build on top of, they can experiment with various combinations of exchanges and strategies and eventually figure out something that works.
What types of markets are best for Hummingbot users?
There are some large market makers in crypto, like Jump Trading and DRW Cumberland. However, these large firm are really concentrated on the most liquid trading pairs on the largest exchanges, like the BTC/USDT pair on Binance or the ETH/USD pair on Coinbase.
On the other hand, there is the long tail of markets, such as the WETH/DAI trading pair on Radar Relay, that is currently underserved because there’s a dearth of smaller market makers. Right now, long tail markets are ideal for Hummingbot users, because we see a congruence of two factors:
- Individuals can actually trade on these markets because they don’t have to go through intermediaries like brokers. In crypto, we have something unique called direct market access: all exchanges offer APIs that allow anyone to trade directly on the exchange. This opens up strategies like market making and arbitrage that are harder in equities markets because you have to go through brokers and other intermediaries that snap up those opportunities before the average trader sees them.
- Crypto exchanges and protocols need to compete globally. Fiat exchanges have something akin to an oligopoly because they only compete with other exchanges in the same country. But anyone, no matter where you’re based, can create a crypto-to-crypto exchange and start competing with Binance. Similarly, anyone can create a decentralized lending protocol and start competing with Maker and Compound.
- You have this unfettered competitive landscape where new entrants have the ability to challenge incumbents, but they still need to generate liquidity to compete effectively. That’s why we think a tool that can be used by almost anyone to provide liquidity is the best way for smaller markets to reach a critical mass of liquidity.
#hummingbot Launch Party
Let’s kick off this new month by celebrating Hummingbot’s public launch! Learn more about how it works, meet our entire team, and make new friends! We can’t wait to meet you guys!
Date: April 04, 2019
Atrium LLP, 260 Townsend St #400
San Francisco, CA