100% NBT reserve and elastic NSR supply

[Sabreiib]

1. you submit a smart contract request to park your 5 million NSR for 11.4 days.
2. That day, the NSR is 0.003$ per share, your 5 million NSR=$15000,
   the voted pledge ratio several days agao is 1000NSR: 1NBT, so you get 5000NBT.
   Actually you pledge 15000USD to get 5000USD, that 3:1 ratio.
   Next day, NSR price drops sharply to 0.0015$, you collateral is only worthy of 7500USD, but the community believe no need to vote a new ratio since it’s still safe.
3. After 11.4 days
   3a) if 5000NBT has been sent back to protocol from you NBT address, 5.01million NSR returned to you. The extra 0.01 million is your reward of service for Nu.
   3b) if not, the protocol keep/freese 5 million NSR and give you another 11.4 days as grace period, after that, the protocol will sell 5 million by auction, anyone can send 5000NBT to protocol and redeem those 5 million.

With regard to pledeg ratio, NSR Cap. is 3 million USD(1 billion NSR), while only 0.6 million NBT needed in the market.

In an extreme case where NSR Cap.not sufficient, our “kiara” will work with NBT granted by community.

4. return to step1. your wallet automatically send a request to system and get passed by protocol naturally. If NSR price drops to 0.001$, we vote a 1500NSR:1NBT new ratio to keep safety and avoid LPC running off.

Therefore, there are two types of LPC: those with NSR pledged and granted by community as today.

In normal operation, NSR pledged LPCs are enough, and Nu get decentralized by many small LPCs with their NSR pledged.

Some NSR holders may buy 5 million NSR and sleep, neither mint nor act as LPC, their NSR get diluted every day, they are deserved.

[tomjoad]

I’m interested to see how @Benjamin’s eventual updated analysis compares to yours Sabreiib. I can see a couple areas of similarity already. Thanks for taking the time to write out your thoughts.

[Chronos]

If this NBT-production model were used exclusively, would there be any dividends? If not, what gives NSR its value?

[Sabreiib]

[quote]Apple’s dividend history
Until 1995, Apple was a regular dividend payer. When founder Steve Jobs returned to the company in 1996, he canceled the dividend, and Apple didn’t pay a dividend again until 2012. The company’s first payout for 17 years wasn’t much of an effort, either – the $2.65 per share payout equated to a dividend yield of just 0.5% at Apple’s 2012 year-end share price of $509.[/quote]

From 1995 to 2012, for 17 years, Steve Jobs never pay dividend at all and he leads Apple to become the largest Company in the world.

There are formula calculating the share price upon dividend , but let’s forget about it, what Jobs said.

[quote]Asked in 2010 why Apple has never paid a dividend and rarely bought back its own stock, Jobs said dividends do not increase the value of the company for shareholders. “Our goal is to increase enterprise value,” he said. “Which would you rather have us be? A company with our stock price, and $40 billion in the bank? Or a company with our stock price and no cash in the bank?”
To Jobs, the answer to that question was clear, and the reason Apple last paid a dividend in 1995 — the year prior to his return to the company.
[/quote]

In future, if we make enough profit by Nubitmessage or OT exchange, we may distribute dividend although I believe anti-inflation has higher priority.

Nu= Apple Co.
NBT=iphone
NSR= AAPL

Let’s sell as more NBT as possible and make NBT better quality(stable, even anti-inflation), then NSR price will soar.

Our Nu is like Apple in 1995 rather than in 2012 when apple’s cash flow was so great that Tim cook issued some dividends in order to release some opportunity cost pressure. That happened only because Jobs is dead, otherwise he will continue to hold 150billion USD without any dividend.

I like Steve Jobs’ “no dividends” policy.

[sportscliche]

I don’t think this is an accurate comparison. A company such as Apple has a balance sheet that reveals assets, liabilities, debt, income, earnings, and book value. Investors can assess this information and decide if the market is under- or over-valuing the company shares. In the absence of a dividend, this is the only driver of share price. But if a company insists it will never pay a dividend, how does a shareholder unlock or access its value?

What must be present is the expectation that some outside entity with sufficient capital will purchase enough shares to gain control and either i) commence dividend payments or ii) break up the company and sell off its components for profit. If such a threat is not present, stock owners simply own a ticker symbol, voting rights, and the belief that enough like-minded investors see value in the same way to sustain the share price. When a company grows to the size of Apple, there isn’t much hope of finding an entity with even more capital to acquire it. That threat is not present.

Anyone investing in the stock of a non-dividend payer is relying entirely on the market to value its ticker symbol more in the future than now. The market is under no obligation to cooperate. There are numerous examples of companies reporting record profits only to see their stock price falter. The market can and does tank the price of dividend payers. But it can only ignore a stock that is dispensing cash like an ATM for so long.

What does this mean for Nushares? A distributed peer-to-peer network doesn’t have an obvious enterprise value as Apple does. There must be a mechanism to derive financial benefit for holders aside from the hope of selling shares for profit to a greater fool. This means access to (or eventual access to) a portion of the revenue stream. The Nu network provides this with dividends and transaction fees.

[woodstockmerkle]

I think I can summarise the “fractional reserve” attack in simpler terms:

1. malefactor who is well funded slowly accumulates a significant percentage of NuBits thru open market operations; let’s say 10%

2. Custodians issue dividends; shareholders liquidate dividends, we are all rich and happy and thinking we are masters of the universe. Let’s say there are reserves, but 5% of the open market value of NuBits.

3. malefactor optionally collaborates with others and/or an exchange to leverage up on qty of NuBits that can be sold

4. malefactor aggressively sells thru all the bid walls, leaving most or all of the custodians with no way to support the ask side; NuBits price slides significantly. Or perhaps a more sustained attack where the bid walls are hit every time they are replentished (like a Distributed Denial of Service attack – “where does it keep coming from?”)

5. we try to crank up the interest rate, or shareholders try to cobble together a buy-side liqudity fund but it’s too little too late, headlines are written “NuBits breaks the buck” …

6. we lose the trust of the community.

So there are really a few threats that are shown:
a) a malefactor with a lot of ammo. By developing the infrastructure to hold proceeds from sale as our ‘reserve’ and being ready to defend the peg thru emergency custodial actions we can mitigate it.

b) slippage of other currencies that lose their value. This implies some amount of open market operations to make sure the reserve is in good custody: i.e.: BTC slides from $350 to $35; we lose our cushion

c) a malevolant exchange, who would manufacture and sell NuBits.

Why are they manevolant? Because they are. Read up on Soros; he likes to break things. All is fair in love and war and money.

And one real interesting opportunity:
a) NuShares becomes the worlds largest cross-currency / cross-crypto mutual fund

So my thought is that there needs to be a mechanism and policy to keep reserves, while having the ability to leverage the budding wealth of the currency to continue its development and fund its increasingly necessary operations. (All the headaches of a central bank are now ours to own, fyi.)

Maybe we can do it better than Wall Street – Basel 3 only requires something like 5%. If we started with as high of a reserve while we are still vulnerable, then perhaps reducing to 75% once we are the size of Bitcoin ($5 Billion), then maybe eventually to 30% as we are able to be toe to toe on established government currencies.

Wouldn’t it be great if Nubits had enough reserve to save some small country’s currency? I’d vote my NuShares on that motion

[masterOfDisaster]

The only problem that I see: how do you keep the reserve? In USD at the exchange (could be too easily attacked by government regulations)? If not on the exchange, where? If you keep the reserve in BTC or something else (to prevent from having the funds locked/confiscated) you are doomed if that price goes down.
While I completely second the arguments for having as high a reserve as possible, the question how and where to keep that reserve needs to be answered as well…

[Chronos]

The reserve is subject to fraud. Even with the best policies, the custodian could steal the funds. @Sabreiib’s ideas in the opening post are a unique way to avoid this.

[woodstockmerkle]

In the case of a malefactor trying to break the peg, Sabreiib’s proposal does not address how more funds could be added to the bid side of NBT on any of the crosses.

The issue, of course, is trust across the board. Trust that the LPCs / Custodians won’t run away. Trust that the exchanges traded on won’t fractionally invent NBT / NSR. Trust that the NSR shareholders are motivated to vote and participate to spirit of the effort.

The success of NBT/NSR may ultimately be about how we bake best fiscal / central bank practices known for centuries into the distributed protocol with the levers in the hands of the NSR stakeholders.

Perhaps there is a new type of custodianship – custodian of reserves. Their reward is to simply hold the funds in other denominations, and are compensated in either NBT/NSR. When the SHTF, it behaves as some sort of callable bond or other measure to reintroduce the reserves as buy-side liquidity.

Some percentage of reserve custodians will be fraudulent. Perhaps we can partner with the biggest exchanges to help us identify coins held by a reserve custodian as being pre-blacklisted, thereby reducing that risk. We “un black list” them when we need them out of cold storage. Again, what are the best practices we can put in place, and automate into the protocol. (RPC for exchanges to see what addresses we’ve blacklisted)

By having a pool of reserve custodians (a sensible balance: not too few, not too many), the risk of one custodian walking with the funds or being compromoised (that will happen invariably) should be mitigated to single digit percentages.

We don’t have to be perfect (likely impossible), but hopefully we can provide support to NBT better than most, to reduce the reasons why one would want to attack to break the peg.

[tomjoad]

The success of NBT/NSR may ultimately be about how we bake best fiscal / central bank practices known for centuries into the distributed protocol with the levers in the hands of the NSR stakeholders.

Nicely put. Nu will move over time from a group of cryptocurrency enthusiasts making educated guesses (our present shareholders) to a system that relies on quantifiable models and data to inform decisions.

Perhaps there is a new type of custodianship – custodian of reserves. Their reward is to simply hold the funds in other denominations, and are compensated in either NBT/NSR. When the SHTF, it behaves as some sort of callable bond or other measure to reintroduce the reserves as buy-side liquidity.

I was discussing this with @Ben the other day. This type of position would likely require a custodian’s real-life identity to be known. I think this type of position would actually be very suitable for brick-and-mortar financial companies that have proper auditing practices in place for reserves. The danger is that this begins to introduce more counterparty risk to the system, namely that financial regulators would seize funds to cripple the reserves. It would require the custodian to be operating in a very crypto-friendly jurisdiction. If a project like Kraken’s www.cryptocurrency-bank.com ever overcomes the regulatory hurdles to get established, this would be an ideal place to hold funds.

Some percentage of reserve custodians will be fraudulent. Perhaps we can partner with the biggest exchanges to help us identify coins held by a reserve custodian as being pre-blacklisted, thereby reducing that risk. We “un black list” them when we need them out of cold storage

I’m not sure many of us favor blacklisting coins, as that’s another element of centralized control. A better solution is the existing multisig functionality in Nu.

[Raythma]

While I completely second the arguments for having as high a reserve as possible, the question how and where to keep that reserve needs to be answered as well…

I second that, if we can’t secure the reserve, it doesn’t matter how much we have, and i think the fiat reserve will always be the Nu weakest link, thats why the 0% reserve and dual side burning of shares and bits is more sustainable in my opinion.

[Cybnate]

I’m reading a lot of good ideas here. In my opinion things doesn’t need to be either or. I think having a decent reserve, which should spread it’s risk across a basket of cryptocurrencies and crypto assets (all anonymous) and a number of ‘reserve custodians’ keeping a percentage of the risks.

Besides that we can still throw in the dual side burning of shares and bits which can be the first defence mechanism before we need to pull funds form crypto and finally from fiat or stock funds which would be the most expensive to run and withdraw. Just a layer of mechanisms to defend the peg against different types of attacks and events. A risk assessment should be done on the percentages each layer would cover. E.g. 40% in crypto (layer 2), 25% in fiat/stocks (layer 3) and the rest managed by dual side burning (layer 1). This might require keeping an index.

[Sabreiib]

What does this mean for Nushares? A distributed peer-to-peer network doesn’t have an obvious enterprise value as Apple does. There must be a mechanism to derive financial benefit for holders aside from the hope of selling shares for profit to a greater fool. This means access to (or eventual access to) a portion of the revenue stream. The Nu network provides this with dividends and transaction fees.

Why doesn’t DAC have an obvious enterprise value？ Bitcoin, as a share in bitcoin network, has no dividend at all and price rocketed from 1$ to 400$. Market Cap. is several billion USD which is larger than many public companies in USA.

The sale of NBT is not our profit, while dividend must come from extra profit earned by extra service such as transaction fee or Nubitmessage service etc. I support dividend payment only if we make extra profit.

Nu system operation is crystal clear to the public. How many NBT in strategy reserve, and on sell wall & buy wall, etc. What’s kind of vote/motion is passed/denied etc. That’s the only way we get the public trust us.

Nu is a 21st century central/commercial bank, which is already set up by investors who put their hard earned money (USD,CNY,EUR) into Nu DAC. We have great technical advantage over traditional 20th century banks because they have to pay for big buildings, high salary personnel, paper money factory, expensive ATM, Armor Cash Carrier, etc.

[Sabreiib]

So my thought is that there needs to be a mechanism and policy to keep reserves, while having the ability to leverage the budding wealth of the currency to continue its development and fund its increasingly necessary operations. (All the headaches of a central bank are now ours to own, fyi.)

Imagine in 2016:

There are two types of custodians, one is granted custodians just like Kiara today, another is collateral custodians who pledge their NSR to borrow NBT.

There are 1000 collateral custodians, averagely each has 10000$ value NSR pledged to Nu protocol and 5000$ NBT held in hand, they provide NBT liquidity on various exchanges such as Bter, ccedk, btc e, btc38…The incentive of their being LPC is that Nu protocol will reward them extra NSR(e.g. 10%annually ) for their LPC work. The more they contribute for Nu, the more NSR they have. Those lazy NSR holders get diluted/punished.

Totally there is 5 million NBT on sell/buy wall when you check it in your wallet.

In this way, Nu system get decentralized and hack/stolen/run off risk is almost eliminated because you cann’t steal 1000 persons’ private keys and one government can’t control 1000 persons all over the world. FOR EACH LPC, THEY CANN’T STEAL THEIR OWN MONEY.

If NSR price attacked by vicious parties and plumbs, or the NBT demands so high that NSR Cap insufficient to issue extra NBT, our classical granted custodians come on the stage, Kiara will be granted for millions of NBT and play LPC role, and work together with other 1000 collateral LPCs.

[henry]

I do agree that shareholders can’t treat the sale of custodian’s NBT as profit earned. Transaction fee is the only profit made and thus can be distributed as dividends.

I do like open NBT lending business based on NSR collateral for shareholders. That’s a better way to increase NBT amount to the market.

I suggest NSR collateral just freeze the fund so that can’t transfer to other address, no effect on minting and voting.

[Sabreiib]

We can vote NSR/NBT lending ratio to 1000:0 so that NBT supply will become zero within 5.7/11.4 days given that all NBT holders wanna sell it at 1$, if some holders keep NBT, it takes less time to shrink supply and maintain peg.

[backpacker]

Nice crystal ball you have there

[masterOfDisaster]

Yah, and for that challenge

how do you keep the reserve? In USD at the exchange (could be too easily attacked by government regulations)? If not on the exchange, where? If you keep the reserve in BTC or something else (to prevent from having the funds locked/confiscated) you are doomed if that price goes down.While I completely second the arguments for having as high a reserve as possible, the question how and where to keep that reserve needs to be answered as well…

that allows keeping a high reserve to tackle attacks, we have a solution: NuSafe.

[mhps]

Nice crystal ball you have there

Excellent foresight all around in this thread. Many points are not theories but experiences for us now.

I hope now is not the beginning of the end, but the end of the beginning.

[masterOfDisaster]

This depends on the lessons we learn and on the near future.
The brand image of NBT has been damaged; how much can be seen in the next bearish BTC phase.
Is there enough confidence in Nu to buy NBT for hedging BTC drops?
We need to do our homework to give reason for that confidence!