Decentralized liquidity without counterparty risk not yet implemented


#1

Here is a quote from the original whitepaper:

What Jamie Miller and Kiara Tamm are doing differs from what is described above in a number of important ways. Most importantly, they are not using their own funds, but shareholder funds. This simple fact introduces tremendous counterparty risk and is a source of centralization. It is a serious deviation from my design with potentially disastrous consequences. With data feeds now in beta, decentralized LPCs presenting zero counterparty risk remains the only major feature described in the whitepaper which has not been implemented. This feature is by no means of peripheral importance. In fact, I believe Nu will not succeed unless it is implemented. Time that we spend waiting to implement it is time that we put the network at considerable risk of failure, including catastrophic and total failure.

The software needed to implement this is already distributed. What is missing are LPCs presenting proposals and shareholders willing to approve their proposals.
The situation is comparable to a healthy person who reasons they will not purchase medical insurance to save money (in our metaphorical scenario there is no government provided health care). After all, they have better things to spend their money on that improves their quality of life now. Being healthy, not having medical insurance is not a problem, until suddenly it is a very big problem because they develop cancer. Similarly, it is clear to me that shareholders are choosing an option that is cheaper in most circumstances, but is vastly more expensive in certain failure modes.

Consider what would happen if KTm lost control of the aproximately one million NuBits in her possession and they were brought to the open market suddenly for sale. At a minimum, very high interests rates would need to be offered to stimulate enough demand for NuBits. At worst, the young system would be unable to stimulate sufficient demand in the wake of such a scandal. With a plummeting market cap, currency burning may not be effective enough and the peg may be permanently lost. However, the liquidity KTm provides is very cheap compared to the proper alternative.

Now consider what occurs if @muchogusto or someone with a similar proposal providing liquidity lost control of the funds they were using. In order to have NuBits in the first place, @muchogusto must buy them, so it would only represent the reversal of that initial purchase, not a brand new liability like with KTm. So even if those lost NuBits were immediately sold (and there would be much less incentive to so than with KTm), the sudden sale of 25,000 stolen NuBits carries no risk to the system. The loss is borne by @muchogusto, not the network or shareholders.

The network had begun a transition to offering decentralized, counterparty risk free liquidity but in recent days it has become clear that the network is actually turning back toward increased reliance on KTm and Jamie. KTm and Jamie understand that their role is supposed to be transitional, and they are hesitating to expand their operations beyond Bter and CCEDK to provide shareholders incentive to do the right thing. So in fact what is occurring is that the network is failing to expand liquidity provision to newer exchanges while increasing reliance on centralized liquidity that brings risk of systemic failure. It is important this development not escape the attention of shareholders, because shareholders are certainly in a position to change the course of events.

So, as a shareholder, if you find yourself saying that a specific decentralized and counterparty risk free liquidity proposal such as the one proposed by @muchogusto is too expensive, it certainly is more expensive than the liquidity being offered by KTm, just as not buying medical insurance is cheaper than buying it. My advice would be that if you think it is too expensive, present a competing proposal that is less expensive. If you are unable or unwilling to do so, you cannot demonstrate that it is too expensive.

It was my expectation that liquidity provision would be comparable in some ways to Bitcoin mining. It is a relatively simple way (all that you need to do is run some software and deposit some funds on an exchange) that people involved in the project can use modest skills to support the network while being rewarded financially for their contribution. It is a bit more complicated than Bitcoin mining, in that shareholder approval must be gained to receive compensation. In an era of data feeds, that should not be a formidable barrier. It has occurred to me that it might be possible to automate the rewards for decentralized liquidity provision by basically giving a reward to a liquidity provider in each block, where each NuBit worth of liquidity being provided represents a chance to receive the block reward for liquidity provision. Even if such a scheme were implemented, shareholders would still need to make a decision to pay for liquidity provision, which they are not doing right now.

When Nu first began liquidity providers received no transaction fee discounts on exchanges. We felt lucky just to get support on exchanges at all. Now, the profitability of having NuBits on your exchange (with liquidity support) is undeniable, and we have begun to move toward zero transaction fees for liquidity providers. But when the market was immature, we had to pay a higher price for liquidity. Shareholders face a similar dynamic with decentralized counterparty risk free liquidity provision. That market is extremely immature, and the only path to lower prices is the creation of a market for those services. This market will provide innovation for hedging, ways to reduce exchange default risk, etc, but if there is no market than those innovations will not occur. Therefore, it is of paramount importance that shareholders pay whatever price is necessary to establish a market in decentralized liquidity provision. If they do so I’m certain innovation and competition will bring pricing down. If they don’t, the Nu network will continue to be exposed to centralization, counterparty risk and serious lack of scalability in its liquidity operations.


We need much more liquidity providers....Let us think of strategies
Grant to provide 50,000 liquidity to Exco.in for 60 days
Ending counterparty risk now and holding an NSR auction
[Passed] NSR auction motion
[Withdrawn] Motion to create a new Tier 6 (Restricted Network Access) of liquidity
Wake up Shareholders! Raise Park Rates Now or FLOT Will Need to Start Selling NuShares to Increase Reserves!
History of the Nu Network (Feedback Please)
Adding liquidity pools to docs page
Next week, Nu will be 1y old. What did we achieve?
[Draft] motion to increase the percentage of reserves
#2

我的英语不好,所以一直在阅读,很少发言
今天,我认为有必要讨论一下分布式LPC:
1、我们有9个交易所,但NSRer不知道哪个有LPC?具体费用多少?有多少人在竞争这个交易所的LPC?这些能展示在http://blockexplorer.nu/?
2、在ccedk上面,NBT可以兑换USD、EUR,但是没有CNY,相信CNY将能够提供非常大的流动性,bter上更需要
3、近期比特币的价格开始上升,相信会影响到buy wall,而事实上比特币目前对我们影响太大,我们的最终目标是兑换法币,所以能在各交易所提供相关法币交易吗?例如:NBT/CNY、NBT/EUR、NBT/HKD、NBT/INR。。。

My English is not good, it has been read, rarely speak
Today, I think we need to talk about distributed LPC:
1, we have nine exchanges, but do not know which NSRer have LPC? How much specific costs? How many people in this competition LPC exchange? These can be displayed in http://blockexplorer.nu/?
2, in ccedk above, NBT can exchange USD, EUR, but no CNY, believe CNY will be able to provide a very large liquidity, also need on the bter
3, the recent Bitcoin prices began to rise, I believe it will affect the buy wall, and in fact a bit too much influence on our current currency, our ultimate goal is to exchange legal tender, they are able to provide relevant currency trading in the Stock Exchange Act it? For example: NBT / CNY, NBT / EUR, NBT / HKD, NBT / INR. . .


Grant to provide 50,000 liquidity to Exco.in for 60 days
Grant to provide 50,000 liquidity to Exco.in for 60 days
#3

#4

@JordanLee , I tend to think that shareholders are more willing to vote for LPC proposals asking for NSR than for NBT because they are reluctant to printing out new NBTs without some stronger confidence in the ability of the LPC to create economic value for Nu.
It is easier for shareholders to give away NSR.
I encountered the same issue in my own proposal here, at least at the beginning.
I asked for NBT but so far (before me) all proposals offering liquidity with the custodian’s own cash asked for NSR.
I guess if it is an issue, the burning mechanism should solve that, in that custodians would be able to ask for NSR in a decentralized way without waiting for your bonus proposals, which requires time from your side.

In any case, can you clarify your stance on the pros and the cons of offering NSR or NBT as a reward for LPC work?
In other words, which one do you think is best for what kind of provider?


[Passed] LPC grant request for supporting NBT/USD on CCEDK
#5

Agree!

Jordan, I appreciate your Nu system design very much, and this is the only scheme which is close to Hayek model out of 500 alt coins! But as you said above, Nu has counterparty and centralized flaw now, my suggestion is quite radical:

  1. Since our NSR cap. is 10 times of NBT, Nu system has enough “fund” to issue and adsorb NBT, we don’t need to pay high price to anyone. Just let NSR holder borrow NBT with their NSR pledged, we vote ledge ratio to expend or shrink NBT circulation. NSR holders(LPC) get extra NSR (newly generated) just like they mint to contribute network security.

  2. Decentralize LPC in this pledge way, our goal is to have 1000 LPCs.

  3. 100% reserve of LPC is possible in this way. And FIAT/NBT pairs.


#6

How would you reliably measure the number of NuBits worth of liquidity? As far as I understood it the custodians have to provide this information, and therefore they would have an incentive to cheat on these numbers in order to increase their expected reward.

However, IF there is a method to proof liquidity on blockchain level, then we could define a set of exchanges where we want to have a certain amount of liquidity via motion. Afterwards we let custodians without further permission provide as much liquidity as they want on any of those exchanges. The only thing custodians would need to do is to write their requested reward per NBT / day liquidity on the blockchain. The blockchain then automatically pays the custodians with the best offer and only as many custodians as needed to satisfy the liquidity specified in the original motion.


#7

Being a LPC must be profitable business. I think custodians are mainly two types: those who believe in fiat and those who believe in crypto coins. If we exclude exchange default risk, it is easy with the first. They just have to provide liquidity on NBT/USD pair. But being a dual side LPC which operate on NBT/XXX crypto pair is a very high risk and is a bottleneck in current Nu (NuBot) design.

Perhaps these ideas would help:


I want to help Nu project to succeed and provide 100 BTC or even more liquidity on NBT/BTC pair but as a strong crypto believer I want to have at least the same amount of BTC in the end of my operation.
How to proceed?


#8

Why not selling the rewards (NBT or NSR) for BTC?


#9

You can a use future markets to transform the risk into a calculable cost. Jordan described it here:

So in the end its mostly the risk that the exchange gets hacked and of course the missing opportunity that should be the basis for the reward calculation.


#10

There was a thread started here a few days ago (that I can’t easily locate) that discussed the idea of using pools for liquidity provision. I think this is a great business idea that is likely to be profitable and very helpful to the network. While it means you have a pool operator centralizing the control of funds (which isn’t as ideal as each liquidity provider controlling their own funds) it is a huge iterative improvement over what Jamie and KTm are doing. It doesn’t use shareholder funds that present systemic risk, and presumably a number of these pools would develop, providing some degree of decentralization. It is a way that very small players can provide liquidity and earn a return on their NuBits, all without having to run NuBot or face the hassle of hedging the BTC used.

Some basic software is needed to facilitate deposits, withdrawals and accounting. It is likely that off the shelf exchange software could be used. It is also possible for an existing exchange such as Bitspark, Bter, Excoin, Bitcoin.co.id or CCEDK to offer pooled liquidity provision. In the interest of fairness, this could be done in a cross exchange manner, so that liquidity providers don’t have the advantage of seeing the contents of exchange accounts. For instance, Bitspark could use its deposit, withdrawal and accounting infrastructure to run a liquidity pool on Excoin.

One way a pool could get paid for liquidity provision is rather than agreeing to provide a specific quantity of liquidity as has been done in the past, simply ask that the pool be paid a certain percent for each NuBit of liquidity brought per unit of time: 0.25% for each 24 hour period liquidity is provided, for example. Shareholders approve a contract for a 90 day or 120 day period, and then every two weeks or every month a custodial grant is passed to pay for liquidity actually provided in accordance with the contract.

I would love to see liquidity pools developed. Please let me know if I can assist you in doing so. It is a priority for me.

The passage of LPC proposals such as those offered by @muchogusto and @cryptog will indicate to entrepreneurs that there is a profitable market for liquidity and that it is a market worth competing in.


#11

You must be alluding to that: We need much more liquidity providers....Let us think of strategies

I feel the future of Nu depends on that.


#12

I am glad you like this idea. In my opinion this functionality should be included in NuBot. NuBot could just memorize inputs (in BTC) and make withdrawals based on insterest rate. Also this should be faster and less error prone than human (custodian).


#13

I like the idea of separating the liquidity provider from the bot operator and I think this can be accomplished only by using the blockchain.
For every incoming transaction, the full amount + a interest gets repaid to the sending address once a certain number of blocks has passed. The interest rate scales (exponentially) from the full amount to zero around a funding target. Therefore everyone can independently calculate the current interest from the blockchain.

I quickly implemented the idea in Python to show you what I mean (not much tested, may have bugs):

Different interest rates for different time spans can easily be implemented by using multiple addresses. I like the solution because it is simple, robust, and externally verifiable at any time. Would love to read everyone’s opinion on that.


[Passed] Motion to create the first liquidity pool: The Nu Lagoon
[Passed] Motion to end LPC operations of KTm, Jamie and NSR sales of Jordan
#14

I was wondering about this the other day. When issuing currency to be used for projects it makes far better sense to give a stable currency to gaurantee funding until the project is completed. How does issuing nushares ultimately differ from someone selling those shares for nubits in order to store the value?


#15

Right now as a reward you can ask for both assets: NSRs or NBTs.
It is just that it is more complicated to ask for NSRs since it is not yet at protocol level (you need to trust JL to give you the shares once your mission is completed) but the automatic rewarding process is being implemented right now.


#16

Thanks for the info. As always i am pleased with the game plan going forward and hopefully we will have quick implementation going forward as well.


#17

When our liquidity operations are 100% conducted by self funded LPCs (or liquidity pools where users provide funds like what @henry is forming), we will be able to say liquidity operations are counterparty risk free, from the perspective of the network.

While what constitutes decentralized liquidity is a matter of degrees, my short term goal is to ensure that no single LPC provides more than 25% of total buy side liquidity, and that there be at least six LPCs providing at least 5,000 NBT in buy support each.

Once liquidity operations become counterparty risk free and decentralized according tho the above definitions, I will unpin this topic. In the meantime, I will periodically articulate our progress toward liquidity operations being counterparty risk free and decentralized.

Here is my present assessment of liquidity operations:

Using the getliquidityinfo RPC with B as the parameter, I can see that currently 21.1% of our liquidity is currently being provided by self funded LPCs where the liquidity operation poses no systemic risk or potential loss to the network.

There are six LPCs currently operating, although two LPCs have trivial funds at work (< 150 NBT). One LPC, @jmiller, provides 47% of all liquidity and more than 90% of all buy side liquidity. Having <5,000 NBT buy side liquidity being provided by all LPCs besides @jmiller is quite hazardous to the peg. @jmiller, @henry and @KTm: will you work together to balance the buy side liquidity among yourselves please?


#18

Some questions:

Are these for NBT/Crypto pairs or also including NBT/USD ? NBT/USD has little exchange rate risk.

The 5000 NBT number seems arbitrary. We have seen that some exchanges don’t have more than a couple of hundred NBT traded everyday on average. Crpto activities in general has ups and downs. There is little need to risk many times liquidity when it is obvious that there isn’t all that much trading. So I think tier 1+2 should be adjusted maybe on a 10-day moving average of buy-side (or buy+sell) liquidity basis or on a10-day MA of daily volume basis (the calculation can be made by the bot).
Or give this speific decision to the LPCs to make and only ask the LPCs to follow general guide lines in the beginning. After a while when this new mode of operation goes well, more specific requirement can be added based on experiences.


#19

Time for another evaluation of our liquidity operations:

Currently, 74.8% of liquidity is being provided by self funded LPCs that present no systemic counterparty risk (this excludes liquidity being reported from KTm, which is shown erroneously right now). This is a huge improvement over last week’s 21.1%. The change is due more to KTm and jmiller reducing liquidity than it is due to an increase in activity from new self funded LPCs (though that was a factor). This means total liquidity is very low at ~69,000 for both walls (once again excluding the erroneous KTm figure). More LPC proposals and shareholder approval of those proposals is needed. I’m hopeful the Nu Lagoon will improve things quickly once the motion paying for their operation is passed. Given that NuBits volume has been in the low 10,000’s recently, this low liquidity is not a serious problem. However, providing more liquidity should positively impact NuBit trade volume.

The buy walls of @henry and @creon are quite unbalanced, in opposite directions. Would the two of you consider balancing your walls together, please?

There are four LPCs providing liquidity, with 45% of all liquidity being provided by a single LPC. Quite a bit of improvement is needed in the area of decentralization.


#20

The only thing that is holding be back doing this is that it would violate my grant proposal. If the liquidity balance generally is considered as something that can be changed later on then I can transform half of my funds into NBT.