thanks for attention thanks for the
opportunity to speak delousing the
market of parasitic rent-seeking
agents dudes David Friedman that said
market mechanisms are institutions that
govern our economic interactions what
I'm gonna argue today is that continuous
auctions are evil don't use them instead
use back to actions with single price
clearing and furthermore the auctions
are just the first step to having our
economic interactions be mediated by
intelligent agents working in our best
interests not for the profit of somebody
else if there is anything original here
it would be this breakdown just
identification of four essential market
mechanisms the first to the issuer in
the clearing up the issuer and the
Clearing House are concerned with
settlement and clearing the next two are
the ones that I'm concerned with in this
talk
the auctioneer in the market maker have
to deal with trading in exchange you
don't have time to get into market
makers so I'm just going to focus on two
done
auctioneers but an interesting thing to
know is that the evolution up till now
the crypto currencies has been moving
these mechanisms from third-party agents
to on chain mechanisms Bitcoin was the
first to do this by having a non chain
issuer the Bitcoin reward the block the
block reward and the Clearing House is
the public private key transfer protocol
ripple had on chain order books directly
in the protocol and then
on chain marketing market makers done by
truth coin auger gnosis two basic types
of auctioneers continuous-time auctions
these are matched with pay s bid pricing
and discrete time auctions also known as
call auctions or batch auctions these by
definition use single price clearing if
anyone says it's a batch auction but
double check that they're using uniform
price clearing or single price clearing
because by almost any definition it has
to be single price clearing or it's not
a bad judgment I'm concerned with this
because if there's going to be a
thousand crypto currencies I don't want
to see them treated well I don't want to
personally trade them like all coins in
efficient markets then order books it's
just not much fun be and if you're
planning to use the past bid order
matching mechanism then you're just
you're feeding your users to the wolves
so don't do it
why is it a problem because pays bid
pricing is a primitive role it creates a
primitive game because limit orders are
free options you can go ahead and Google
this put free options in quotes and
you'll get a bunch of results it's not
incentive compatible you get
front-running sniping market market
orders are much better because you have
to pay the spread and your users will
suffer death by a thousand cuts and
their wallets will eventually be empty
and if you don't believe me then I mean
this is a high frequency trading
strategy so you just identify a limit
orders placed by humans
they're stale after five seconds so
what's the better mechanism single price
clearing what is single price clearing
all these you just match the supply and
demand curve and all the trades execute
at the same price it doesn't matter if
you over bid you still get a fair price
on your trade these are actually there
already use they've been used for a long
time they've just been taken for granted
because probably because Bitcoin
exchanges operate 24/7 so they don't
have opening and closing sessions
opening closing sessions uniform price
clearing is used on the NYC and Nasdaq
already it's and I would call it the
near indicative clearing price so it
gets kind of confusing because single
price clearing the uniform price
clearing second price auction there's so
many different names for the same basic
idea but the Vickrey auction victory won
the Nobel Prize of economics and
variants have been used and rebranded
over the years well isn't it better to
batch order super pass no read this
paper it is not better or just look at
the slice it intuitively it seems like
it's better because continuous-time
markets are more efficient in time space
but they're less efficient and volume
space because all limit orders are stale
and the fastest traders get to charge
arbitrage rents batch auctions solve
this problem they respect the reality of
computers and it's a excellent fit for
blockchains
you just think of the block times as the
batch periods the spectrum of mechanism
so continuous double auction is a simple
sorting process
there's no optimization it once you go
to once you move to a uniform with a
single price clearing batch auction
you're doing a simple batch optimization
and once you go further down the
spectrum the spectrum you get more and
more complex optimizations which are
better for your users like having your
own think of it like having your own
trading BOTS directly in the mechanism
working for you to get the best price on
your order
these are Penix phases phase zero what I
call pentek's phases phase zero is the
times before computers phase one the
computers just emulate exactly what
humans did base 1.5 now that this is
where we are now the agents on the
periphery are doing more statistical
optimizations for their own profit
they're exploiting the core mechanisms
and all you measly humans still using
steal limit orders are getting exploited
by the high-frequency traders face 2.0
that's where we want to go these are the
two basic types of intelligent agents
this simple reflex agent is a good model
for continuous double auction batch
auctions or even more obviously
automated market makers are model-based
agents because they actually have States
the inventory of the market maker is the
state and so unless you're going to run
your own trading bot then use a more
advanced mechanism recent paper in
science did has a nice description of
this for ad auctions the first designs
were first price auction so that's your
pay as bid clearing then that advanced
to second price auctions that's again
your uniform price clearing and then and
combining those with proxy agents what
so when we go back to phase 2.0
note that Google and Facebook are
already using advanced mechanisms
directly in the for the trade matching
but the difference is that they are
centralized and the that what they're
optimizing is the auctioneer revenue on
a decentralized mechanism we can
optimize instead trader welfare this
some solidity code to efficiently verify
the solution to a convex optimization
ask me about this later Thanks