About option 1 and all the alternatives where the rate is adjusted, note that even if all the shareholders vote for the NSR market price as burning rate there will always be a lag behind the market. If the median is calculated from the 10,000 previous blocks as planned in Jordan’s initial motion, the burning rate would always be the NSR market price about 3.5 days earlier.
A possible way to fix that would be to elect one (or more) person to decide the actual price. Shareholders would only decide whether burning is allowed, and who is responsible to decide the price.
While that would solve the problem with the lag, it would introduce a new dependency from a person (or persons).
Could you imagine a solution that would be based on a kind of feed, a feed that provides market information form several exchanges to make it hard to game the market price.
The share holders would then decide whether burning is allowed based on price from feed x, y, z.
The motion that allows burning would need to tie the burn rate to the information provided by the feed(s). I for one prefer a dependency from a feed to a dependency from a person.
The problem I see with that approach is that it introduces an attack vector by manipulating the exchange rates or the feeds.
If someone would plummet the price by selling large amounts of NSR, the burning of NBT would create even more NSR compared to the price before the big selling.
So it would be incentivized to sell large amounts of NSR (for NBT), burn those NBT and maybe get more NSR back than have been burned before.
That could create a race to the bottom or it could stabilize the price, because the dropped price could trigger buy orders.
This is one of the problems that need to be thought of, because it basically applies to burning in general. It might just be easier to game with that by burning based on rates by feeds.
The problem is we need an exact consensus on the price. We can’t achieve that from external sources. What if some nodes have trouble contacting feed y, while the others don’t? The network could split. The price must be determined from the blockchain.
I understand.
If the motion deals with burning based on rates from a feed (or feeds) I could imagine that this rate information is written into the block chain together with the vote for the motion.
But once the motion has passed there’s no need to continue voting on that motion and there’s not necessarily the rate written into the block chain.
And even while voting it would need to be guaranteed that the rate is really the rate from the feed.
It seems I’m out; doesn’t sound feasible.
The risk of splitting the network by writing feed information into the block chain while voting and the scenario that some clients can contract the feed while others can’t, remains.
Please allow me to ask one more question:
how would those trusted persons put the information into the block chain in a reliable way?
Compared with all these alternatives, I like what @benjamin suggested most.
It is an effective and the simplest way to convert NBT to NSR.
Since we will need dividend payout custodians anyway, It actually doesn’t introduce additional role and risk to the system.
There are multiple possible ways. The first that comes to my mind is allowing special transactions signed by an allowed person and providing the price in an output (the transaction would not move any amount).
@sigmike , what if shareholders can vote for a validated xml/json price feed(s), rather than one or more person?
The problem is we can’t achieve consensus from external data. Also, we need to be able to get the price in the past (when you download the initial blockchain). We could record the price in the blockchain, but that’s the same as allowing shareholder to vote for a rate.
Wouldn’t that be possible with a feed as well?
Could those (administrators of the) feeds that were part of the motion not be provided with the keys to sign these transactions?
That would still require people to initialize the whole setup, but then it would provide the rates automatically by signing the transactions and writing them into the block chain.
Sure, and then that would be exactly the same as:
Ah I got confused there. I mentioned shareholders above because I thought shareholders are probably most interested in selling their shares to buy NBT in order to get more shares back.
At the moment I agree #1 seems to be the best option because it is simple and good enough.
There is a conflict of interest in this vote-burn scheme which should be studied. Currently we think that the shareholders collectively want a low conversion rate X where X NSR will be generated for 1 NBT burnt, because shareholders want low inflation; the burners on the other hand want a high rate to generate more return. If the voted rate is too low there won’t be enough NBT getting burnt. We assume this conflict can be solved by shareholders’ starting at a low rate and gradually increasing it until there is a healthy burn going.
The interesting part to note is that a high burning rate could cause serious inflation to nushares. This inflation is not exactly equal to all shareholder. It will put those shareholders who don’t or couldn’t burn at disadvatage. So I think the burn voters are incentivized to vote for high rates, basically to reward themselves. If the burn rate is allowed to be far higher than market rates, it could be a powerful deflation mechanism for nubits, and nushares would have a proof-of-burn mechanism to distribute new shares (which doesn’t sound bad). Manipulators will probably get interested in becoming big shareholders, set rates and profit from it. Exchanges with a lot of shares, too.
True.
In the scenario you depicted you should also think that Shareholders are also likely to be NuBits Holders.
And if a burning rate is appealing enough, I imagine shareholders will be among the first to notice, and take the opportunity of buying NuBits (from custodian sell walls), just to burn them and obtain NSR at a better rate. In this scenario, also consequences on custodians walls needs to be taken into the equation. Not a problem as these events .
There is also arbitrage to keep into account : The burn rate is static, isn’t it? I think that the burning rate will make NSR price converge to that value.
If the burn rate offered is higher than NSR price in open markets, even for a limited time, its a window of opportunity for arbitrage. Buy NBT, burn NBT, sell NSR. Repeat until NSR price on open market goes below burn rate.
The main point is that the burn rate setters and NBT burners will be the same people if burning is executed by minting blocks (random arbitrageurs can’t just buy NBT and burn them for NSR). It is basically someone moving higher fraction of nushares wealth to themselves (while increasing NBT reserve ratio). Note that less than 15% of peercoins mint. This will get people to mint, but also push down NSR unit price.
I’d like to discuss the potential advantages and disadvantages of my proposal over option #1 in the OP.
Advantages:
1). It is far more fair to NuShareholders. Rewards able to be captured by burning NuBits at advantageous rates would be more proportional to the cost of NuShare dilution.
Option #1 would enable a minority of people in privileged positions to rapidly consume arbitrage opportunities that result from the dilution cost that is borne by NuShareholders.
My proposal to only permit burning a specific quantity of X NuBits for Y NuShares when solving a block would allow shareholders to capture a discount reward (received from burning NuBits at a favorable rate) that is more proportional to the dilution cost they pay from the creation of additional NuShares. Although this would only apply to those minting NuShares, having an additional incentive to mint could improve the strength of the nu network.
2). It is less expensive to NuShareholders.
Option #1 would likely require a significantly higher rate of NuShares rewarded per NuBit burned in order to be effective. First, I’d like to note that the effects of monetary policy are extremely difficult to predict. Especially if NuBit burning is intended to only be used for emergency situations, it would be difficult for NuShareholders to set a rate that wasn’t much higher than necessary to achieve the desired results. During an emergency, NuShare price is likely to become much more volatile and difficult to predict. The cost of not responding to an emergency with sufficient speed could be very high. Therefore, NuShareholders may tend to offer burn rates that are far higher than necessary in order to ensure that sufficient quantities of NuBits are burned (partly due to panic and partly due to the high cost of offering a rate that is too low to be effective). Attractive arbitrage opportunities may be rapidly captured by people in privileged positions, who may not be significant shareholders and therefore less likely to hold NuShares received from burning (as they would tend to be less confident in the future success of Nu than NuShareholders). The end result is a greater number of NuShares created, a greater number of NuShares sold, and a greater reduction in NuShare price.
My proposal would result in a burn rate that responds to actual burning decisions made by NuShareholders, would adjust more rapidly to volatile market conditions, and would be closer to the actual burn rate required to achieve desired results. The initial rate that is voted upon by shareholders would be similarly inaccurate to the initial rate voted upon in Option #1, however, the rapid micro adjustments that could occur each block would quickly converge to the rate at which shareholders are actually willing to burn NuBits.
3). It is less vulnerable to attacks.
Significant NuBit and NuShareholders could manipulate markets in order to cause NuShareholders to vote for high burn rates. They could then be well positioned to capture most of the arbitrage opportunities that result under Option #1. Under my proposal, only those with significant interest in maintaining NuBit price would be able to capture significant arbitrage opportunities. Someone who sold a large number of NuShares in order affect prices would be less able to profit from resulting arbitrage opportunities.
Disadvantages:
1). It is more complex.
Although my initial proposal could be simplified to some degree (for example, you could remove the “total number of NuShares allowed to be created” variable), it would ultimately be more complex and therefore more difficult to implement successfully.
2). Clearly more time has been devoted to figuring out how to implement Option #1. Therefore, it would probably delay the release of NuBit burning.
To elaborate a bit more on why Option #1 would be expensive and potentially dangerous, consider the following:
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If there’s an emergency that necessitates burning, NuShare price is likely to fall rather quickly in additional to becoming more volatile.
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If the NuShare price is falling at an unpredictable rate, a burn rate that offers a modest discount would likely be insufficient to motivate much burning (as by the time the Burn Rate becomes effective, the quantity of NuShares able to be purchased for NuBits/USD could increase substantially).
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If a modest discount is insufficient, a significant discount would be required. After accounting for an uncertain future and a plummeting price, this could be fairly extreme.
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Smart traders would recognize that a high burn rate would offer excellent arbitrage opportunities that would result in large numbers of NuShares being sold in a short period of time. They would likely short NuShares in response, and put additional downward pressure on the price. This could result in a fairly high burn rate being insufficient by the time it passes.
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A mature nu market would likely involve mechanisms that allow speculators to short NuShares with significant leverage. This amplifies the degree to which NuShare price could fall, and increases the chance of a high burn rate failing to achieve the desired results. It also facilitates attacks that take advantage of vulnerabilities that are introduced with Option #1.
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The arbitrage opportunities afforded by Option #1 would result in more severe liquidity shocks, as arbitrageurs would rapidly consume profitable opportunities and dump resulting NuShares on markets unable to handle the additional selling pressure. This can be extremely profitable when combined with well leveraged shorts.
Imagine the following scenario:
At some point in the future, NuBits and NuShares have become very successful. NuShares are selling for $10, and there are billions of outstanding NuBits. An event occurs that threatens market belief in the NuBit/USD peg. Could be a flaw discovered in the protocol, an unfavorable regulatory change, an attack from wealthy speculators, the rise of a potentially superior competitor, etc. NuShares rapidly lose 20% of their value (dropping to $8 per share), large quantities of NuBits are being sold, and debate about ideal burn rates ignite nu discussion forums.
Some shareholders tend to be more confident, and argue for a lower burn rate in order to minimize dilution cost. Other shareholders tend to be more panicked and argue for a much higher burn rate. There is some amount of time required for a majority of minting shareholders to notice the change, some amount of time required for them to react to the change, and some amount of time required for the number of blocks to be solved before the rate is actually changed. This latency could be substantial in a mature market.
Perhaps the initial burn rate of $5 or $6 per NuShare is too conservative. The price of NuShares could drop too quickly for it to result in the required degree of burning to stabilize NuBit value. As the price of NuShares continue to drop, more shareholders will lose confidence and either sell their shares and/or vote for more extreme burn rates. Eventually, a burn rate becomes available that presents an attractive arbitrage opportunity. At that moment, a very large number of NuBits could be burned for a very large number of NuShares. If expected by sophisticated traders or part of an attack, this could rapidly result in a large sell off that is combined with significantly leveraged NuShare shorts for substantial profit.
I think your first three points echo the concerns I raised in October in this thread: **Draft** motion for currency burning
@Benjamin also introduced us to some basic economic incentive theory in his analysis of our system. Unless NuShareholders believe a new all-time NuBits demand high is possible by saving the peg, they may find it preferable to let the peg fail by not offering burn rates. Assuming Nu still has an existing user base, brand equity, and other intangible assets, a new currency or project could be introduced at that point. NSR holders would avoid diluting their shares, and simply begin pursuing a new venture using the existing intangible assets present.
That’s not to say I’m against the proposal though. As @JordanLee has said from time to time, we shouldn’t avoid introducing a new innovation simply because it’s not perfect. I think getting even a rudimentary burning system in place will allow our community to begin thinking about the next evolution of NBT stability protection.
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Now imagine how a similar scenario would unfold if my proposal were implemented:
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The burn rate offered at any given time would be very close to the actual NuBit cost of NuShares on markets. It would converge to the rate at which shareholders choose to burn roughly 50% of the time. Additionally, this burn rate could be utilized for other valuable functions that require access to a highly reliable NuShare market price.
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Under normal circumstances, the quantity of NuBits allowed to be burned for NuShares may be extremely low if shareholders prefer lower rates of inflation. An equilibrium could form, balanced between the desire to have low inflation and the desire to protect the NuBit/USD peg. If the price changes rapidly, the burn rate would also change rapidly due to an acceleration variable that comes into play when several minting shareholders choose to burn or not burn in a short period of time.
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The burn rate might fluctuate around a slight discount to market price, although it could potentially be available at a slight premium if enough shareholders are interested in acquiring additional shares without having to utilize exchanges.
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It would be quicker to respond to unfavorable events, such as a serious threat to the NuBit/USD peg. Although the magnitude of the response would initially be low (as it would take time for Shareholders to increase the quantity of NuBits allowed to be burned per solved block), the rate itself would rapidly adjust to the actual rate required to incentivize NuBit burning. Rather than requiring shareholders to make future price predictions of a volatile market, shareholders would just have to recognize that a response is necessary and that they should increase the quantity of NuBits able to be burned per block.
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Attacks that combine leveraged shorts with NuShare price manipulation would be far less effective. Attackers would be unable to capture most of the burning opportunities; those would only be available to NuShareholders. Shocks would be far less severe as NuBits would be burned for NuShares over a greater period of time.
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If the peg is secured more rapidly, NuShare price is more likely to stabilize and recover.
I agree with your reasoning, and also agree that it would be wise to consider the implementation of a burning mechanism. It is vitally important to inspire confidence in the NuBit / USD peg, and perfect solutions are often infeasible to implement in reality. I also think that implementing a seriously vulnerable burning mechanism would be unwise at this time, despite the fact that it would probably be unnecessary for a very long time. Opponents of Nu (or simply honest writers) would likely recognize the vulnerabilities in a flawed burning mechanism and they may write articles about these flaws. This would reduce the attractiveness of NuShares and NuBits, and would render such a burning mechanism counter productive.