I’d like to discuss the potential advantages and disadvantages of my proposal over option #1 in the OP.
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.
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.