Hummingbot: Decentralized Market Making, Automating Trading Strategies, Liquidity Mining and High-Frequency Trading (Open source with support for a wide range of centralized and decentralized exchanges)

Hummingbot: Decentralized Market Making, Automating Trading Strategies, Liquidity Mining and High-Frequency Trading (Open source with support for a wide range of centralized and decentralized exchanges)

By rhyzom | rhyzom | 28 Jan 2020


Hummingbot is this really neat open source piece of software (with an interesting background/history) for decentralized market making and automating of trading strategies by Coinalpha Inc. Originally written in Python, but subsequently re-written in Cython to optimize for speed and memory efficiency on a lower level, it's algorithm is simple and straightforward (basically buy low, sell high), but more important than that it provides the technical infrastructure for running algorithms accurately and efficiently (it being open source, you can build upon it and implement your own algorithms and functionality). The creators of Hummingbot are themselves of both technical and financial background and Hummingbot is their company's main product.

Hummingbot provides support for a number of both centralized and decentralized exchanges, in addition to a few community contributed connectors (decentralized exchanges also require that you run an Ethereum node). The currently supported built-in strategies include pure (placing bid/asks for a single pair on a single exchange) and cross-exchange (making orders on a less liquid exchange and hedging them on another, more liquid one) market making, arbitrage and discovery. Discovery helps you recognize profitable trading opportunities between exchanges and markets by taking snapshots of the current market in the trading pairs and exchanges you specify and computing which are likely to yield the most profit.

Its stated design philosophy and rationale is to fuse simplicity and ease of use with flexibility and performance. Hummingbot seems like a valuable instrument for the more sophisticated and tech savvy out there, allowing the simultaneous plugging into a number of exchanges and integrating operations within a single command-and-control interface is in itself quite powerful. And unlike most trading bots out there, Hummingbot is open source! The developers having already gone through all the integration pains and hiccups for you and an active community (found at their public Discord) contributing additional exchange connectors and functionality.

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Bringing in more liquidity to the markets and defining the role of the market maker in the crypto space

Hummingbot is an effort towards bringing liquidity to the digital cryptoassets markets and the first of its kind in that it lowers the barrier to entry in opening up access to what has historically been a rather exclusive and specialized professional activity (market making). It builds upon and extends the work of other open source market making instruments like MakerDAO’s Dai, the BitShares decentralized exchange and the Uniswap automated market maker for creating liquidity pools for digital assets. Additionally, its stated mission is also to democratize high-frequency trading (HFT).

Hummingbot, just like other applications like Uniswap, enable users to profit from providing liquidity which is crucial to market efficiency and a significant problem for many crypto projects (see blog posts explaining why liquidity is beneficial and what happens when liquidity is missing). And both Hummingbot and Uniswap make it possible for users to provide liquidity for decentralized, non-custodial trading venues, the lack of which is what prevents decentralized exchanges from being more widely adopted and establishing themselves as compelling alternatives to centralized exchanges (which tend to carry significant risks, of hacks, breaches, manipulation and outright frauds).

Market making in real time

The Hummingbot client can run either locally or can be cloud hosted and makes use of an interactive command-line interface split between three separate screens (the log screen on the right, the exchange front-end in the far right in a separate window next to the terminal in which hummingbot is running).

Bringing High-Frequency Trading to crypto and to the masses

Earlier in January this year, Hummingbot partnered with KuCoin in introducing high-frequency trading to the platform. The KuCoin connector is said to be fully integrated and released by the end of January and will enable KuCoin accounts to deploy Hummingbot’s quantitative and algorithmic strategies in executing automated high-frequency trades. Additionally available strategies include liquidity mirroring, as well as trade execution strategies such as TWAP and VWAP execution. Hummingbot also allows users to create their own custom strategies. As part of the partnership, KuCoin will be contributing a percentage of the trading fees generated from Hummingbot usage to the development of Hummingbot. And earlier in October 2019, it announced its partnership upcoming integration Liquid.

It should be perhaps just mentioned in passing that HFT does not carry with it some controversy and it has in the past been associated with flash crashes. Some regulators are still debating whether or not HFT amounts to manipulation and the practice is still an ongoing legal and regulatory moot point. HFT desks tend to operate from jurisdictions which explicitly allow the practice, such as Singapore. Either way, the highly refined high powered weaponized kind of HFT taking place in the world of traditional modern finance (and its proprietary, secretive nature, as well as practice of methods such as black-box trading) is nowhere near the same or on the same level as the one talked about here.

Hummingbot also has various means and formulas in place for calculating profitability and measuring performance

Liquidity Mining and profitable market making

The digital cryptoassets space is characterized by highly fragmented markets, order book silos, competition between stablecoins and the various regulatory and compliance clusterfucks. Hummingbot, along with 8 other launch partners representing a broad cross-section of the crypto markets (centralized exchanges, DEX protocols, etc.) have launched what they call a liquidity mining campaign - basically a marketplace for liquidity powered by Hummingbot's software which lets anyone, be that organizations of some sort or another or individuals as such, run market making bots and be effective market makers. 

partners

Hummingbot's liquidity mining partners.

They've called it liquidity mining as the concept is somewhat in some ways similar to proof-of-work mining, in that computational power and resource along with a token/cryptoassets inventory is utilized in running the Hummingbot market making client (all described in more detail in the liquidity mining white paper). 

Summary/Conclusion

Won't go into detailed how-to's regarding installation and setting up, etc. as all this is really well documented and fairly straightforward a process. Just thought I'd bring it to your attention as it has been in my list of things worthwhile to explore in further detail and tinker and play with a little, see where they get me. Definitely unique in its kind and quite generous in providing all this open source for free, I'm personally quite fond of the whole thing and where it's going. I recommend having a look at the blog

Interesting to think how this will tie together with the sprawling DeFi ecosystem and as crypto-derivatives enter into the picture. For now though, there seems to be plenty of market inefficiencies waiting to be exploited and ironed out for profit and tools like Hummingbot are meant for precisely that purpose. Obviously, this is more geared towards your lab coat derivatives trader types and fintech nerds (more "sophisticated" traders) rather than your average "normie" Joe that prefers to stick to orienting himself around the one-dimensional vertical of the greed/fear roller coaster and no further questions asked. On the other hand, all this is at the same time also an amazing learning opportunity, one where you get to learn as you do and get your hands dirty and where you yourself can participate in the making of the emerging markets of tomorrow.


rhyzom
rhyzom

Verum ipsum factum. Chaotic neutral.


rhyzom
rhyzom

Ad hoc heuristics for approaching complex systems and the "unknown unknowns". Techne & episteme. Verum ipsum factum. In the words of Archimedes: "Give me a lever and a place to rest it... or I shall kill a hostage every hour." Rants, share-worthy pieces and occasional insights and revelations.

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