Nu currently has trouble bringing sufficient liquidity to the sell side.
@Nagalim drafted a motion to come to the aid of this situation. Posting there made me think about ways to mitigate these situations.
TL;DR make custodians operate NuBots. Track the broadcast liquidity. If the NuBot runs dry, fund them. Nu trusts the custodians with NBT and receives the proceeds on T4. Big amounts of NBT can be injected into the market this way in a short time.
Nu will (hopefully) soon be in a better situation. After the compensation model for providing liquidity has transitioned to fixed cost, putting funds on a side with low volume is compensated better than putting funds on a side with sufficient volume. A low (T1) sell side with fixed cost compensation creates more demand for NBT than a fixed rate compensation model.
Admittedly I don’t know how to sell the NBT without custodians or FLOT/FSRT being involved…
Buying NBT from FSRT (and hopefully soon from the FLOT provides no financial incentives - at least none I could identify - but poses a volatility risk:
if liquidity providers trade owned BTC for NBT (with FSRT, off-exchange) to put them on sell side, it takes some time until they have their BTC back by trading them at an exchange for the NBT. This might lead to a gain or a loss, but in general poses a volatility risk to them. They don’t have an incentive to do that. If they wanted to speculate on BTC price they could do that without dealing with FSRT.
At least that’s my interpretation why the FSRT doesn’t sell tens of thousands of NBT for BTC in the current situation.
A possible solution looks at first glance similar to what Nu wanted to get rid of:
a model that includes custodians dealing with funds owned by Nu.
Some might feel reminded of liquidity operations Nu initially had with @KTm and @jmiller operating bots on the exchanges and offering buy and sell side liquidity.
The big difference is that now custodians would only be used to inject NBT into the market and put the proceeds in the hands of Nu. Funds would be only for a short period of time out of Nu’s control and on an exchange.
The liquidity operations on T1-3 remain untouched: Nu incentivizes liquidity providers by compensating them for their effort and risk providing buy and sell side funds.
This idea only deals with emergencies that require action of the FLOT/FSRT.
This still requires a lead time, but once it is installed, it can be used continually.
Sell side custodians are elected by a grant and have each an NBT address that can be used to broadcast liquidity information. Only 1 NBT gets granted to these addresses.
They operate NuBot on an exchange (e.g. Poloniex) . NuBot is configured to maintain only sell side. If need be the FLOT/FSRT can trust the custodians with NBT which get sold at the exchange and pile up as BTC. The BTC proceeds are sent to T4 buy side.
As soon as everything is prepared (grant did pass, NuBot is configured and running), NBT can be put onto T1 in a very short time. Withdrawal limits might cause some delay for getting the BTC sent from the exchange to the T4 address, but provide an almost unlimited gateway to inject NBT into the market.
As long as NBT or BTC are at the exchange, there’s of course the exchange default risk. This risk is one that Nu needs to face in this solution; both NBT and BTC are property of Nu. In difference to the operation of @KTm and @jmiller this is no ongoing risk.
The process can even be automated to some degree: if the custodian’s exchange NBT deposit address is known, the community (or ALix?) can track the liquidity that is being broadcast by the NuBot. If there’s need to have NBT on sell side, the FLOT/FSRT can deposit NBT at the exchange address and NuBot puts them automatically into the sell wall. This allows using the gateway with little delay.
The FLOT/FSRT should make sure that the custodian’s NBT deposit address didn’t change and that the custodian has still access to the exchange account and is responsive to messages,because the BTC need to be sent to T4 soon.
To provide an incentive for the custodians to keep the exchange information up-to-date, stay in contact with FLOT and not to steal the funds, they could provide Nu with a collateral, which could be managed by FLOT.
Once BCE is ready that will make things much easier, but it’s still possible to manage it now.
Because of lost opportunities associated with the deposited collateral (and to compensate for the efforts of maintaining NuBot, etc.) these custodians should receive a compensation.
Even without deposited collateral it might be cheaper for Nu to face a risk trusting custodians with funds and a temporary exchange default risk than to risk the soundness of the peg.
The more custodians who operate NuBots, the better the risk would be spread. Picking well-known community members is recommended.
The idea can be turned upside down and be used to remove NBT from the market.
It could make sense to have both sell side and buy side custodians operational at the same time; the FLOT would only fund the side which is in need of liquidity while NuBots on both sides are available. Having a “dual side” gateway would pose no additional risk to Nu as only one side would be funded at a time.
Withdrawal limits on Poloniex (and other exchanges) might limit the ability to withdraw funds to a Nu address, but there’s no deposit limit. The peg can be supported without limit.
I’m talking of Poloniex, because it just has the highest demand for NBT at the moment and it doesn’t serve Nu’s purpose to ignore that and look at the overall liquidity. Poloniex is one of Nu’s officially supported exchanges (supported by paid liquidity operations!). The peg must be kept there. Arbitrage is no option here!