Continuing the discussion from FLOT Operations - buy side / BTC related:
The buy side needs to be on a minimum level (in percent) of the NBT in circulation to increase resiliency over temporary decline of demand for NBT
I fully agree with these concerns.
T1 to T3 need to be bolstered up if more NBT are in circulation.
That can be achieved like @mhps already lined out:
It was necessary to adjust T4 buy side to NBT in circulation to have a sufficient buffer for temporary decline in NBT demand. I’m glad that the motion to do that passed.
But it’s it necessary to adjust T1-3 buy side to NBT in circulation as well. Otherwise the impact of a decreasing fraction of the NBT in circulation can mess the sides up and endanger the peg (I’ll explain later why I don’t think it’s necessary to adjust sell side dynamically as well).
With a static T1-3 buy side the peg can only be kept if static amount of NBT hit it. That is an unrealistic expectation.
This thinking (adjust buy side to NBT in circulation, but not sell side) moves Nu away from the scheme to have balanced walls, but spends money (for compensation) only where it’s required more urgently.
The sell side size can remain uncanged, because there’s no direct relation between the size of the sell side and the NBT in circulation. More NBT in circulation don’t necessarily increase demand for NBT, right?
But there is a direct relation between size of the buy side and NBT in circulation. More NBT in circulation means that more NBT can be sold for BTC.
In practice it could look like this:
- total value of T1-3 sell side (for which is paid a compensation): 40,000 NBT
- total value of T1-3 buy side (for which is paid a compensation): 4% - 7% of NBT in circulation
How do I get to 4%?
Approximately 746,710 NBT are in circulation at the moment.
The current total T1-3 volume is approximately 80,000 NBT. Each side (obviously valid for buy side) shall be between 40% (32,000 NBT) and 60% (48,000 NBT).
32,000 / 746,710 = 4.x%
48,000 / 746,710 = 6.x%
And why the 7% as upper limit?
There shouldn’t be a requirement to adjust compensation for liquidity providers with each change of NBT in circulation. A corridor is useful if the NSR holders don’t want to be kept busy with continuous adjustment of compensation to keep the T1-T3 volume on a desired level.
Plus a change of compensation might have only effect beginning next term, if there are no amendments to contracts which allow a dynamic adjustment without direct NSR holder involvement (this will be quite easy with the upcoming fixed compensation).
It needs to be taken into consideration that this compensation not only depends on the NSR holders’ desire to in-/decrease T1-3 to adjust to a changed amount of NBT in circulation, but to changed requirements of liquidity providers as well.
The situation of a particular exchange (compensating for liquidity providing on cryptsy should be quite expensive at the moment) or the market in general (other ways to make more money than bein an LP) play a role.
I recommend to focus on the the adjustment of compensation for providing liquidity to a changed amount of NBT in circulation here.
After all the 5% and 7% T1-3 buy side size are only a recommendation to initiate a discussion.
NSR holders decide over the amount of T1-3 buy and sell side with the compensation they pay for providing liquidity.
Why should we even start thinking about having unbalanced sides?
Should the sell side need to stay as big as the buy side (even if the buy side gets dynamically adjusted)?
My view is:
Sell side funds can be injected in the market through gateways in minutes. My NBT entry gateway for Poloniex is currently being up for voting. We need more of those gateways!
Buy side gateways (NBT exit or BTC entry, respectively) are possible as well (I have one of those up for voting as well), but transferring BTC is much slower and for that reason I think the buy side should offer more buffer.
The drawback of adjusting the T1-3 buy side dynamically to the NBT in circulation is an increased cost for compensating liquidity providers.
The benefit of adjusting the T1-3 buy side dynamically is an increased resiliency against temporary decline in demand for NBT.
Adjusting it to e.g. 5% of NBT in circulation is no defense against people who want to attack the peg by first buying a large amount of NBT and dumping it on the buy side son after, breaking the peg this way.
If an attacker buys 50,000 NBT a dynamical adjustment of the buy side like outlined above increases the buy side by 2,500 NBT value.
But it’s still better than no increase at all!
The next big drop of BTC/USD will very likely cause a lot of NBT being sold for BTC. Nu should be prepared as good as possible.
Adjusting the value of T1-3 buy side to NBT in circulation might be as important as adjusting T4 buy side to NBT in circulation.
Especially if BTC/USD crashes, keeping the T1-3 and T4 value above a minimum level is important.
One of the reasons for this motion: