Custodial Rules for the Static Peg with Fiat

[cryptog]

Now we see this in action, because any NBT in circulation is a perpetual threat to be converted to “USD peg support” and require a maintenance fee from shareholders.

This is only solvable by maintaining a state in which there is a constant demand for nubits because they perform a useful job: enabling fast and cheap transactions on the Net.

[Nagalim]

Just to be clear here, this is what the order book would ideally look like. Note that every order in this image is getting compensated the same amount and both sides have the same target (which is not actually relevant, the two sides could have completely different targets and this method would still work).

[woolly_sammoth]

It might be worth pointing out that this sort of orderbook manipulation is being developed for a future release of NuBot. It’s going to be configurable by each bot and potentially reactive to the movement of the market.
As the TLLP software is compatible with NuBot, it may be worth using that when the features are ready.

[Nagalim]

All well and good for btc/nbt. Market reaction is not applicable at all for nbt/USD in my opinion, however it would be interesting to see what does port nicely after all.

[Nagalim]

This is the situation we will most likely find ourselves in at first, until we get better at stuff.

Those with USD are paid in full while those with NBT are in competition.

[creon]

Doesn’t look like a peg. Here is another idea: Set the sell side interest rate to 0.3% and the buy side interest rate to 0.05%, which however increases every validation round up to 0.75% depending on how long your funds are in buy orders. The increase should take place every validation round and reach 0.3% after about a week.

This isn’t a solution, but it discourages switching since people will have to wait more than a week until they will get a higher interest rate, which is risky, since their funds could be converted back to NBT at any time.

It however would also discourage short term buy side liquidity providers, who only want to provide liquidity for a couple of days, however, these people would in fact be wise to buy NBT and to provide them at 0.3% instantly and to sell them afterwards. So in the end it incentivizes the short term liquidity provider to provide sell side liquidity, and the long term liquidity provider to provide buy side liquidity.

[Nagalim]

Great idea. What prevents us from using an asymmetric maximum interest rate? What if the buy side gets to 0.6% after two weeks?

[creon]

I don’t understand. This is a user individual interest rate, and in the end its asymmetric since buy side is 0.75% and sell side only 0.3%.

EDIT: I think this method could be particularly interesting for NBT/BTC markets because there you are risking to lose funds due to a price decrease when switching over. It would actually make sense to honor the long-term buy side liquidity provider in this case.

[Nagalim]

Sorry, i misread. I like it, let me think about it for a little.

So it requires us to keep track of an order. How do we know if that person who gets bought sells immediately and pretends to be that order?

[creon]

Well the problem is that the short term liquidity provider then will fight for a place on the sell side … However, since the sell side interest rate is small, and the switcher pays twice the trading fee (0.4% on ccedk), you could just add 0.2% to the allowed buy side spread and it would already take 2 days to make a switch on the sell side lucrative, which is already out of scope for many short term liquidity providers (I guess).

[creon]

So it requires us to keep track of an order. How do we know if that person who gets bought sells immediately and pretends to be that order?

No, it doesn’t require that, the order may change. At every validation round, the server credits the user orders and accumulates them. This is already the case right now, since its required to compensate users. The change would only be that the interest rate will be scaled by a factor that depends on the accumulated orders of previous validation rounds.

[Nagalim]

So if I have 10 USD up for sale for a month, then you come along and sell me 10 nbt, what stops me from selling directly back to USD and pretending like nothing happened? I’m sorry if you’ve spoken to this already.

[Nagalim]

I’d like to point out that the Price/Volume model leads to a stable state and can be shaped to take the impact of an abrupt large volume sell on a weak peg. Since the buy and sell sides are compensated equally and auction competition is an unknown, it lends itself to this stable conclusion when shareholders are compensating enough:

[creon]

right if the buy side naturally drops those high interest buy side liquidity providers will start fighting for their place.

EDIT: In your graph: Who is the fool close to the $1 mark and who sits around 0.01$ ?

[Nagalim]

Oh, the orders are labeled by the exchange, right? Ok, that makes more sense.

In the graph, the people at $1 came when the pool was already full. The guy at $.01 was probably the first one in the pool. The minimum bin can be whatever, we could make it $.1 or something. Also, it’s got the smallest USD equvalent value out of all the bins.

Anyway, I like yours better, I just wanted to show the third graph for completeness.

[creon]

Yes ok I understand, and it would be a good solution for buy side liquidity but not so much to establish a peg, which is what these operations are paid for. Remember that nothing prevents you from running large spread NBT trading bots (without server compensation). In an ideal Nu world its actually these people who should provide the liquidity itself (for free) and LPCs only provide a tiny slice of it to focus the peg.

In this sense, there actually should never be a need for a imbalanced interest rate at all and liquidity operations are not intended to encourage buy support. For that we actually should elect a custodian to buy NBT for a preset price < $1 and to burn them in exchange for NSR.

[Nagalim]

Of course I’m going to like that, but I think setting up a well-rounded decentralized pegging software that can deal with peg-break situations is important too for short term issues.

For the creeping rate model, you adjust the spread to punish people for bouncing over to NBT for the high immediate interest rates. If interest rates were lower we could use a narrower spread and the inverse if higher, so this should port well to a low risk NBT/fiat environment on more stable exchanges.

How does this model work with the dutch auction?

[creon]

The multiple-item dutch auction suffers from this issue right now and I guess the only reason we don’t see anyone doing this on Bittrex is because not many people did the math (yet).

Here is how you encourage buy support: Allow people via software to burn NBT for NSR, at any time, without talking to the forum or applying for a grant. The rate is just a voting parameter as parking rates, and should usually be 0 as long as there is no need to encourage buy support. Tbh I never understood why it wasn’t implemented like this, but when I mentioned it there wasn’t any response from the dev team on that. I would feel capable to implement this, but I don’t know if I want to propose a hard fork to change the holy Nu design now But that’s the method I am currently thinking about in a little side project floating around in my head.

[Nagalim]

I am totally behind you on that. I just think we should keep building the infrastructure for it as well and I think your model is useful for any number of uneven risk pegging scenarios, as you’ve pointed out for btc/nbt. I also think the Price/Volume model is useful in conjunction with almost any model, but it will be a pain to implement compared to your long and short model.

Is this why you no longer want to be part of the Nu project? I also believe decentralized burning to be a make or break point for Nu.

[creon]

I also believe decentralized burning to be a make or break point for Nu.

We will see, I don’t expect anyone to apply for a NSR grant to do the task and even if so then I don’t expect it to pass since we are just about to print 100 million (well they exist, but should have been burned, so …), which now will be auctioned in a centralized way. If we would have a blockchain defined rate which continuously increases over time then we will have a much better price discovery. Its how fish is sold lol. The Nu system allows really for a lot of interesting tools and we are currently just scratching on the surface of possibilities.