Burning a specific amount of currency

NuShares Motions
#35

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.

#36

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.

#37

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.

#38

To elaborate a bit more on why Option #1 would be expensive and potentially dangerous, consider the following:

  1. If there’s an emergency that necessitates burning, NuShare price is likely to fall rather quickly in additional to becoming more volatile.

  2. 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).

  3. 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.

  4. 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.

  5. 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.

  6. 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.

#39

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.

#40

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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#41

Now imagine how a similar scenario would unfold if my proposal were implemented:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. If the peg is secured more rapidly, NuShare price is more likely to stabilize and recover.

#42

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.

#43

I interpreted Option #2 (vote for an amount of currency to be burned at a fixed rate) to be more of an “event” based solution to burning in exigent circumstances, as opposed to a rolling window and an ongoing effort that would bring with it has 24/7 operational expense. Once the motion passes and the we’ve mopped up some NuBits to bring the peg back, crisis over. If the crisis isn’t over, then pass another vote.

This could keep the framing of “burning” as more of a “in case of emergency”, and while not perfect, it may be sufficient, and keep the overall complexity of understanding and operating Nu low.

“Nu has a way to burn NuBits if the peg is threatened” may be the simple message to communicate and keep to.

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#44

Do I understand right that your proposal is different from #1 because it adds more tune’able parameters to the burn?

#45

It’s true that my proposal involves more parameters than option #1, but the primary difference is that it requires a person to successfully mint a block in order to earn the right to burn a set amount of NuBits for NuShares. NuShareholders would determine the amount of NuBits that could be burned per solved block as well as the number of NuShares that would result from burning that amount of NuBits. Under non-emergency situations, the amount of NuBits able to be burned per block would likely be very low (including 0). This aligns the interests of NuBit burners with NuShareholders, and also allows all minting NuShareholders to recapture a proportional amount of value that they lose to the dilution cost from the creation of additional NuShares.

The other difference is that the burn rate would adjust according to whether or not minting NuShareholders choose to burn NuBits for NuShares at a given rate. If someone chooses to burn NuBits for NuShares at the current rate, we know that the rate is at least high enough for one person to think it’s a good deal. Each time someone chooses to burn NuBits, the rate would be decreased by some percentage (since the current deal might be too good). Each time someone chooses not to burn NuBits, the rate would be increased by some percentage (since the current deal might not be good enough to be worthwhile). The end result is that the burn rate would converge to point where minting NuShareholders choose to burn NuBits for Nushares roughly 50% of the time, which would hopefully be a very fair rate according to current market conditions (accounting for future predictions of minting NuShareholders).

For example:

Lets say that something like my proposal were implemented. Shareholders would vote for how many NuBits (N) can be burned for NuShares per solved block, how many NuShares (S) would be earned by burning that quantity of NuBits, and the rate ® at which the number of NuShares earned (S) changes when a block is solved. There could also be an acceleration (A), that could allow the burn rate to adjust more rapidly to turbulent market conditions.

Shareholders might initially set N and S to 0, or they might set N to some small number (so a fair burn rate could be established) such as $0.10 and S to some amount that is likely less than the number of NuShares that can be purchased with $0.10. Since the burn rate is low (in this case), no one would opt to burn NuBits for NuShares because they could purchase a greater number of NuShares for the same amount of NuBits (unless they wanted to test the system). However, each time a block is minted and NuBits aren’t burned, the quantity of NuShares (S) earned from burning N NuBits would increase by R (and R may increase by an acceleration rate if several blocks in a row opt not to burn NuBits). This would continue until S is high enough to convince a minting shareholder to burn NuBits for NuShares (in this case, they would only be able to create a very small number of NuShares; perhaps roughly 10 if NuShares can be purchased for $0.01). At this point, the quantity of NuShares earned by burning N Nubits would be decreased by R and acceleration of R would end. In subsequent blocks, now that the burn rate is closer to being a fair rate, it would tend to converge to something close to market value (either at a slight premium or discount depending on NuShareholders). If roughly 50% of minting blocks choose to burn NuBits, it would increase NuShare inflation by a fairly small, but not insignificant amount (40 NuShares rewarded per block to 45 on average). This inflation would be controlled by NuShareholders voting to change N. An additional benefit is that NuShareholders would have an incentive to purchase NuBits in order to take advantage of good burn rates (which ultimately helps account for the inflation cost). A potential flaw is that minting NuShareholders would have an incentive to increase N, especially if only a minority of NuShares are minting. However, this also means that there would be an additional incentive to mint, which could help account for this flaw.

The primary benefit of an automatically adjusting burn rate is that it would be better able to adjust to a volatile market in an emergency. NuShareholders (or any group of people for that matter!) would struggle to choose the correct burn rate in order to stabilize NuBit value in an emergency situation. They are very likely to either underestimate the burn rate, and lose precious time when prompt action is required. Or they will overestimate the burn rate and pay a far greater dilution cost than was necessary to stabilize the price.

#46

I think burning by minting blocks is the plan from @sigmike’s replies above

#47

There’s a problem with option #1 and all the options with adjustable rate through median: Some shareholders can vote for a very small rate and this rate will become effective for a very short period of time when the median moves. Some people can take advantage of this situation to burn a lot of NBT at a ridiculous NSR price. It only takes one shareholder to create this situation.

#48

Not really. My intent in this quote was to prevent a single shareholder from burning all or too much NBT. In GreatLogic’s proposal the burning process is only available to the shareholders finding blocks.

#49

I’ve added Benjamin and GreatLogic proposals to the first post.

#50

That makes me think of a similar solution that may have a better flow:
Someone wants to burn some NBT. He creates a transaction sending X NBT to a special output that puts them on hold with some informations like the number of shares he wants in return and the duration his proposal is valid. The shareholders can vote to allow it. If they do, the NBT are definitively lost and the NSR are created. If after the duration they haven’t approved the burning then the NBT are released.

It removes the risk on the shareholders’ side but it requires the person who wants to burn NBT to already have them.

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#51

On the surface, for most of the scenarios that I’ve considered, this is a positive side effect.

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#52

The end result would probably be similar to an auction, so I’ve thought more about the auction process.

Here’s how it could work:

Shareholders vote to burn a specific amount of currency after a certain duration. When the vote passes people can start bidding. To do that they send some NBT to a special output indicating the amount of NSR they want in return.
Anyone can bid any amount of currency for any amount of shares until the total amount offered for burning has reached the maximum. After that, a bid is accepted only if there’s another bid with a higher rate. When that happens the NBT of the other bid are released.

When the auction duration has passed, all the NBT in an active bid are definitively burned and the NSR are generated.

Shareholders could also define a maximum rate to avoid absurd rates at the beginning.

And we may need to add some rules on the amount of currency to prevent a small bid from releasing a much larger bid. For example the shareholders could decide that each bid output must have a specific amount of currency, so large bids would split the outputs.

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#53

Let’s get the terms consistent. The “rate” here is as the Y in
1 NSR (earned) = Y NBT (burnt),
right? It is different from the X in my post above, “where X NSR will be generated for 1 NBT burnt”. The shareholders want a higher rate so more NBT is burnt with less NSR generated.

But here,

You seem to mean that shareholders want a lower rate. Can you clarift?

#54

In my previous post the rate is the amount of shares obtained per currency burned.

So you have to bid at a lower rate to win (= there must be an existing bid with a higher rate).
And shareholders want a lower rate (less NSR generated for each NBT burned).

The final motion will have to be clear about that if we go to this way. Maybe we can just talk about amounts instead or rates, especially if each bid has a fixed amount burned.