Written | Danny
introduction:
introduction:The NEST oracle machine is an on-chain game model: the bidder provides a two-way option, which is verified by the arbitrageur.first level title
Price Deviations and Parameters
A careful study of the game (https://cofix.io/doc/CoFiX_White_Paper.pdf) reveals that,The main variables that determine the deviation between the NEST price and the market price are: transaction costs, hedging costs, and two-way option costs (not related to quote commissions).We use bias to represent the deviation between the NEST price and the market price:
The transaction fee is recorded as g/E in proportion, where g is the gas fee for each quotation, E is the size of the quotation, and the hedging cost is recorded as h, which can be understood as the transaction fee rate generated by the exchange transaction (plus the impact cost ratio, For highly liquid assets, this cost is negligible), and the cost of two-way options quoted per unit size is denoted as c, which is a function of the second-level volatility σ, which is basically equivalent to the value of σ according to the calculation in the link. If we look at the deviation with the idea of arbitrage, when the bias exceeds the arbitrage cost of the verifier, the price will be verified, so under the assumption of effective arbitrage, it can be considered that bias < g/E+h+2c, where 2c is Because the verifier needs to double the quotation, the approximation can be expressed as bias According to the actual data, the h of a professional verifier should be relatively small. If the quotation scale is not large and there is no impact cost, the h should be within 0.05%, and σ is generally 0.02% to 0.2% (the extremely high fluctuation may reach 1%, such as 312,519 quotations), so generally the cost of the last two items is about 0.1% to 0.5%. However, the g/E item fluctuates greatly, and the gas consumption is determined by the ecological congestion of Ethereum.According to the current prosperity of the Ethereum ecology, when the network is very smooth, consuming 10 gwei and burning 50,000 gas limit can be successfully traded, that is, consumed According to the data that the gas limit consumed by NEST quotes is between 80,000 and 100,000, we assume that the burning value is set to 100,000 as a reference, then when the gas price is 1gwei, the gas fee is 0.0001 ETH, which is quoted at 30 ETH. The ratio g/E is 0.00033%, which can be ignored. If it is 20 gwei, it is 0.0067%. If the quotation scale is 10 ETH, it is 0.02%, which is a value that needs to be considered. Once the gas price rises to 200 gwei, under the basic quotation scale of 30ETH, g/E will have an impact of 0.067%, and 2000 gwei will even cause an impact of 0.67% (of course, all transactions on the chain will fail at this time).Therefore, considering the price fluctuation rate in extreme cases, it will have an impact of 0.2% on the price deviation, and congestion may cause a deviation of 0.67% or even higher, because in extreme congestion, other traders in the Ethereum ecosystem may use gas The limit (combustion value) is set higher. Suppose gas limit = 100000, as shown in the figure: Price density is a parameter of the number of blocks, which is measured by how many blocks take effect on average to generate an on-chain price. The smaller the number of blocks, the higher the density of quotes. Therefore, there are two main indicators that affect the price density of NEST: NEST mining cost and price volatility of quotation pairs. This is because,The mining cost determines the quotation density, while the price volatility determines the survival probability, and the product of the two is the price density (note the difference between quotation density and price density). NEST mining cost mainly depends on NEST price and quotation fee. Miners determine the cost of mining based on the NEST price. We can approximately think that the two are linearly related. The higher the NEST price, the higher the mining cost, or the unit cost = NEST price, and the mining cost = (Quotation fee +g)/(quote block interval*unit block output), that is, quote block interval=(quotation fee+g)/(NEST price*unit block output), because the unit block output The amount of ore is relatively fixed, and the 240W block only decays once, so it is approximately a constant. The price of NEST is a dynamic variable. Once the price is low, the higher the interval of the quotation block, the lower the quotation density. In the formula, the NEST price is determined by the market, the quotation fee can be determined by the contract, and g is determined by the congestion level of ETH. Generally speaking, the fee is an order of magnitude higher than g. Therefore, we can reduce the quotation fee To increase the quotation density, thereby increasing the price density. A more dynamic way of thinking is to determine the quotation fee according to the NEST price, so that the quotation density can always be dynamically maintained in a highly available range. This scheme can be written as, quotation block interval = k/unit block mining Quantity, and quotation fee/NEST price=K, this design can trigger a correction every day (miners will trigger when they reach a certain block height), and give a certain NEST mining bonus every time it is triggered. This solution can ensure NESTs stable quotation in most cases and avoid redundancy. However, there is a situation that may lock this adjustment, that is, when the NEST price is extremely low, the quotation fee is 0, but g/NEST price>K, which will increase the quotation block interval. If the NEST price is extremely low, it may be at 0 In the case of handling fees, the quotation block interval is still extremely large. At this time, NEST is in the bottom vortex. To get out of the vortex, only the price of NEST will rise. According to the calculation in the link, when the volatility of asset prices rises, some normal quotations will also be eaten up, and the price ratio that is eaten up is called the verification probability. Generally speaking, the limit of the verification probability is 50%, that is, no matter how high the volatility is, half of the price will remain under normal quotations. Under normal circumstances, the volatility is 0.01%-0.02%, and the verification probability is 5%. -7%. You can calculate the verification probability based on the data in link 1. Quote block interval/(1-verification probability) = effective block interval, that is, price density. Therefore, in extreme cases, the volatility can be further introduced into the K value, that is, the dynamic K=K0*(1-verification probability), so that the quotation density can be corrected to make it equal to the price density. Summarize Based on the above analysis, we propose a dynamic scale adjustment model based on liquidity, and a dynamic fee model based on NEST price and quotation pair volatility, so as to improve the price density and quality of NEST. It should be noted that this dynamic adjustment has its cost:Part of the value that originally belonged to the repurchase will be dissipated to ETH miners in proportion, reducing the repurchase value and requiring downstream applications to contribute more calls to achieve NEST value-added. This part can do more detailed analysis. Note: Without fully understanding the project, it does not constitute investment advice. Analyzing the above variables reveals that the option cost affected by volatility is an exogenous variable, while the proportion of deviation caused by congestion can be reduced by increasing the quotation scale.first level title
Price Density and Parameters
Summarize
