Yesterday I tried to give you a layman overview of what SMT (or Smart Media Tokens) are, how can you generate them and what you can and can't do with them on the Steem blockchain. Today I'm trying to understand the chapter related to "Automated Market Makers" for SMT, from the white paper.

But first, a short recap: SMT are tokens issued by a distribution mechanism (they are bought in a specific time window, with STEEM), they carry application-level features, like inclusion in voting, curation, the ability to vest and to transfer them. They can't be used for witnesses voting, and there are no price feeds published for them.

The last bit is interesting and I think it connects with this market maker stuff.

The Ignored Liquidity Reward

Now, when I first read in the SMT white paper about Market Makers, something in the back of my mind ticked.

I don't know how many of you are aware of this, but in the Steem blockchain there is a very specific (and probably quite ignored) type of reward, called "liquidity reward" (read the white paper if you don't believe me). It's not something you get as a witness, it's not something you get as an author for posting, nor it is something you get as a curator for your votes.

It's something you get when you put aside, or "block" as "collateral", a certain amount of STEEM. The internal market of Steemit.com is the place where this happens. If you ever wondered how the buying and selling are going on so smoothly (pun intended, you'll see in a bit why) on the internal market, well, it's because some deep pockets are putting in it some liquidity and are offsetting the public orders with their own stash.

By looking at the trades I did on the internal market, I saw that many of the buyers where some accounts with "smooth" in them. My hunch is that @smooth, a Steemit witness and veteran, is doing the market making on the internal market and it's getting that liquidity reward.

Market Legs From Day One

Why is this important for SMT? Well, as far as I understand, these automated market makers are functioning in a similar way. They are providing liquidity for the public orders, by "blocking" or making available, a certain amount of STEEM for your SMT.

Let's say you launch your own token, called TOKEN, and it gets subscribed 100%. Now you will have a lot of TOKEN out there but the price discovery and liquidity are still uncertain. It very much depends on user input and that is something you cannot predict. But by putting together a part of your STEEM and a part of your TOKEN in an account designated as a market maker, you offer some "legs" to the market, helping it walk from the day one, so to speak. You make sure that whatever orders are issued, they get filled. Not only they get filled, but they get filled fast and - most important - they may also get filled according to various scenarios that you build (see below).

I think the real power of these automated market makers is in their ability to play with the ratios. In the white paper there are a lot of formulae, parenthesis and greek letters, but I'm not gonna bother you with this. In my opinion, all those formulae and economical terms like "fractional reserve", "constant portfolio ratio" or "CRR invariant" are meaning one thing; you get a tool for managing your SMT supply, based on your own scenarios.

For instance, you may have a scenario in which you want your TOKEN to be always 1STEEM (to be "pegged" to STEEM). By using a market maker, you can constantly monitor the supply of TOKEN versus STEEM and buy or sell accordingly, to maintain the supplies at a certain level, which will enforce the "peg". All the buying and selling will be done automatically, by the market maker.

In Steemit, this is done - more or less, please tell me if I'm wrong here - with SBD, which is "pegged" to the dollar. The peg is mostly enforced by price feeds supplied by witnesses, so the mechanism is not quite automated and, as we all saw this fall, once outside the price feed ecosystem, in the wild supply and demand territory, SBD can break the peg up or down easily.

But in the case of SMT, market makers will only have to deal with one asset, STEEM, keeping the operations inside a "walled garden", which may make the task of creating "pegged" SMTs a bit easier.

That was for the automated market makers. Really looking forward for your opinions on that.

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I'm a serial entrepreneur, blogger and ultrarunner. You can find me mainly on my blog at Dragos Roua where I write about productivity, business, relationships and running. Here on Steemit you may stay updated by following me @dragosroua.

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You can also vote for me as witness here:
https://steemit.com/~witnesses

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If you're new to Steemit, you may find these articles relevant (that's also part of my witness activity to support new members of the platform):

• Rewards: Were Does The Money Come From?
• Netiquette: How To Avoid Being A Steem Douche?
• Witnesses: What Are They And Why Should You Care?
• How Can I Mine Steem And What CPU / GPU Power Do I Need For That?