[Discussion] Nusafe - Hedging 50k tier 4 funds in USD

[Dhume]

As discussed in this topic: [Discussion] Mitigating BTC volatility risk of T4 funds, hedging in USD

Here’s my draft for a T4 fund hedge in USD called Nusafe. Let me know what you think.

Updated draft to change fee into a static fee, See recent comments for a poll to vote how much you feel should be hedged.

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To overcome the risk of our complete reserve (designated to protect the peg) being in BTC and therefore being exposed to BTC volatility. Shareholder @Dhume proposes to hold X amount (to be voted on) of funds currently in BTC to be held as USD on an exchange of his choosing, this operation is to be known as Nusafe. The purpose of this is to create part of our T4 reserve to be value stable and exempt from BTC volatility. In order to do this, part of the T4 BTC funds worth xxxxx USD at the moment of exchange are transferred to @Dhume which he in turn will sell within 24 hours (as fast as possible but sending BTC to an exchange takes time) for USD and hold on his exchange account for Nu.

In order to protect Nu from malicious intent or mismanagement/misuse of these funds at @Dhume puts up collateral worth 100>% of the hedged funds. @Dhume will report an update about the perceived value of his collateral every week. This to alert Nu in a timely matter incase underlying collateral assets see a devaluation that endangers the 100%> collateral requisite. This collateral is to be untouched unless @Dhume fails to returns part or all of the xxxxxx USD in BTC (at the moment of exchange) in which case Nu has the liberty to use the collateral to reimburse Nu shareholders for any lost value. This also holds true in case an exchange default occurs causing @Dhume to lose all or part of the USD he is holding. In short @Dhume takes upon him the exchange default risk.

As a member of FLOT @Dhume has already committed to a 36 hour response time and he shall adhere to the same time frame for Nusafe as well. This motion is to remain valid indefinitely and can only be cancelled by @Dhume after 3 months of operation. This means at @Dhume promises to continue this service for at least 3 months and extend his commitment for more 3 month timeframes unless he notifies Nu at the end of every 3 months operation period. Contrary Nu can cancel this commitment at any time they see fit by shareholder motion. Besides shareholder motion @Dhume will use the funds incase all other T4 funds are depleted and the peg is in danger to refill FLOT T4 reserves. He will coordinate such action with FLOT and publicly announce and account if this action is ever to be taken.

Therefore @Dhume is not to take any other action with the funds besides keep them safe and return them to Nu as decreed by shareholder motion or an emergency depletion of T4 funds.

For collateral @Dhume is required to put up 100>% of the hedged amount in USD. For this @Dhume proposes to put up 10.000 BKS (valued at the open market between 6-7+ USD a piece at the time of this proposal) which current value is estimated to be 60.000-70.000 USD as collateral. This collateral is to be held in a FLOT multisig address which @Dhume will not be a part of.
Additionally @Dhume will burn 2 million NSR (currently valued at around 8-10k USD), to increase the total collateral amount to an estimated 68-80k USD). This NSR is to be returned to @Dhume by means of creating 2M new NSR (or the equivalent number after the NSR number chop) when Nusafe operation has seized.

For this service @Dhume will charge a 500 NBT fee per month, totaling 1500 Nubits per 3 month service period. Next to the Nubit fee, is a monthly NSR bonus of 30.000 NSR per month (or the equivalent number after the NSR number chop) totaling 90.000 NSR per operating period.

@Dhume will take payment after every 3 month operation period by requesting a grant to be passed at the end of the operation period. He will also use this grant topic to report anything he deems relevant to know for Nushareholders regarding Nusafe and to state whether he will commit to another 3 month period. The amount of additionally gained NSR will be granted upon successfully ceasing Nusafe upon which Nu is to grant the 2M NSR + the cumulative bonus NSR (30k per month). The fee is to compensate @Dhume for the loss of access to his funds + the exchange risk which he takes upon himself. Thus shielding Nu shareholders of any risk having USD reserves on an exchange would normally hold.

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[Nagalim]

Would you consider reducing it to 25,000 USD and putting up 6,000 BKS collateral?
$5/BKS is still optimistic for that volume in my opinion. As for the $50k, well that would be ~7.5% of the circulating NBT supply. I’d hate to see your chosen exchange default with that kind of money.

[Dhume]

If multiple shareholders desire a smaller USD fund then I would lower it. If it is to be 50k I might split it between 2 exchanges, however this is of course my risk. Dumping 10k BKS at an exchange would obviously push price down but I think you’ll find many takes of 5$ BKS shares.

[masterOfDisaster]

I pretty much like the idea in general, but I keep asking myself: why BKS and not NSR as collateral?
NSR is the asset that is in some way tied to the value and the peg of NBT, but not BKS.
Even PPC would make more sense because they have much more market depth, could be used for dividend distribution and PPC are part of a motion draft to create reserves beyond BTC.

I fully agree with this:

Dumping 10k BKS at an exchange would obviously push price down

At the moment it’s not possible to sell more than a few hundred USD value on BKS pairs.

And last but not least: I know how much we long for BCE.
But BCE is not finished. We still don’t know whether it will ever be finished or work. Please think about that for a moment before you start bashing me for having said it. I’m not saying BCE will fail. I’m just saying that BCE is not finished with some uncertainty left.
I’d never accept BKS as collateral at the current state of BCE. I wonder why Nu should. And even if I did, only at a brutally discounted exchange rate of like $2 per BKS to take the uncertainty and low market depth into consideration.

I’d hate to see your chosen exchange default with that kind of money.

Why should the USD remain on the exchange facing that risk?
Is it because of the questions tax authorities might have?
If not, is it really necessary to have this kind of hedge available within one business day? Wiring USD to an exchange shouldn’t take longer than two business days…
Finally I think (and that has become apparent) that T4 should really not be involved in daily business and with little lead time.

[Nagalim]

sell for USD and hold on his exchange account for Nu

I’m pretty sure the whole point is to avoid legal trouble.

[zoro]

I am also not in favor of using BKS as collateral.
About the exchange risk, i think there should be exchanges that secure the fiat deposits of their users.
If i find them, i may be able to make a proposal like this my self

[Dhume]

[quote=“masterOfDisaster, post:4, topic:3169, full:true”]

I pretty much like the idea in general, but I keep asking myself: why BKS and not NSR as collateral?
NSR is the asset that is in some way tied to the value and the peg of NBT, but not BKS.[/quote]

Simple, I do not have that much NSR. If we estimate NSR to be worth 0,00001344 BTC (as in this weeks buyback price) you’d need over 13 million NSR to have the same 64/70k collateral according to market value that I am able to provide in BKS.

[quote]Even PPC would make more sense because they have much more market depth, could be used for dividend distribution and PPC are part of a motion draft to create reserves beyond BTC.

I fully agree with this:

At the moment it’s not possible to sell more than a few hundred USD value on BKS pairs.[/quote]

The exact same problem is there for NSR, apart from the buybacks there is nearly 0 buy side support, currently less than 2 BTC on Bter and less than 3 on Poloniex in total.

[quote]And last but not least: I know how much we long for BCE.
But BCE is not finished. We still don’t know whether it will ever be finished or work. Please think about that for a moment before you start bashing me for having said it. I’m not saying BCE will fail. I’m just saying that BCE is not finished with some uncertainty left.
I’d never accept BKS as collateral at the current state of BCE. I wonder why Nu should. And even if I did, only at a brutally discounted exchange rate of like $2 per BKS to take the uncertainty and low market depth into consideration.[/quote]

I don’t disagree with you, but the alternative is staying in BTC which would not surprise me to go down almost 50% in value back to the 230-250 levels it has been in most of this year. From what I understand progress on B&C is going very well leading me to believe we will not see, at the very least sub 4,16$ levels (the price shares were originally sold for).

If BTC price goes up that’s great the value of our reserves increase. But that is not the scenario I’m worried about, the scenario where BTC price tanks in combination with a huge selloff in Nubits, which becomes more likely as we sell more Nubits could severely endanger the peg and thereby Nu itself. Hence why I think it’s wise to hedge in USD. Currently I’d say BTC price is strongly inflated and I suspect a correction to low 300’s or even back to 2xx’s levels. This would cost Nu 20 up to maybe even 40% of reserve USD value. Hence I think it would be wise to have part of that value secured in a hedge.

[quote]Why should the USD remain on the exchange facing that risk?
Is it because of the questions tax authorities might have?
If not, is it really necessary to have this kind of hedge available within one business day? Wiring USD to an exchange shouldn’t take longer than two business days… [/quote]

[quote=“Nagalim, post:5, topic:3169, full:true”]
I’m pretty sure the whole point is to avoid legal trouble.[/quote]

[Dhume]

I am also not in favor of using BKS as collateral.
About the exchange risk, i think there should be exchanges that secure the fiat deposits of their users.
If i find them, i may be able to make a proposal like this my self

One hopes that all exchanges secure the fiat deposits of their users. Obviously some do so better than others.
I would welcome your proposal.

[Dhume]

Would there be more support for my proposal if I lower the amount of Hedged funds to 42.000, while maintaining the 10k BKS as collateral? In that scenario the BKS would cover the hedged amount even if BKS price falls to 4.20$ which is 4 cents above the original price of BKS at 4,16$ that was used in the sale.

[Nagalim]

I don’t really care too much about the collateral. The hedged amount is my concern. 50k is way too much, I’m even starting to go back on 25k and suggest 10k. Can you convince me why we should put so many eggs in your basket?

[Dhume]

The idea behind my proposal is that enough collateral is put up to cover the hedged amount, so it doesn’t really matter if 1 person does this or if it is spread out over 5 persons doing the same service for 10k each. Ideally I’d like to see Nu have a 100k USD reserve that is hedging out of BTC especially as long as we keep growing in terms of outstanding Nubits, therefore I am all for having multiple people provide this service so we can insure 100k USD.

Although say a big investor shows up that can put up 100k himself with the best possible collateral we can imagine I would support such a motion as well. As long as we can hedge a large amount of USD while essentially being “risk free” due to sufficient collateral I think Nu is getting a good deal.

[Nagalim]

Is access to your discuss.nubits.com account synonymous with access to your collateral? How do we do proof of ownership? Or I guess you set up the address you want your collateral returned to in advance?

[Dhume]

That is a good question, I’d say maybe proof of ownership can be done by successfully signing a FLOT transaction? Then besides access to my forum account one would also need access to my multi sig private key to claim ownership? Although on the other hand the collateral would only be returned after I have returned the USD funds from Nu so the attacker would also need access to my exchange account in order to impersonate me, and claim my collateral.

[JordanLee]

I am intrigued by this proposal, and I thank Dhume for making it.

I will not be available to hold the BKS as collateral.

I would like to understand how the 50,000 USD would actually be used as part of liquidity operations. Under what circumstances would this be promoted to more accessible tiers? I presume in most cases to actually use it would require conversion to BTC for use on our BTC pairs. This leads me to ask whether there is enough liquidity in a BTC/USD pair on the exchange to be used to make liquidity operations affordable. To the extent the liquidity is used you will end up with a bunch of NBT instead of USD. In that case, will compensation be impacted? How will the NBT be exchanged back to USD, if that is the plan?

Finally, a caution to @Dhume: While it is theoretically possible to find an exchange with a low enough default risk to make your proposal profitable, the average crypto exchange has historically had a default probability that will cause you to lose money in the long term.

[tomjoad]

While it is theoretically possible to find an exchange with a low enough default risk to make your proposal profitable, the average crypto exchange has historically had a default probability that will cause you to lose money in the long term.

A regulated US exchange like Gemini has FDIC insurance on USD held in the account (but not BTC). So the risk of losing funds - as long as they’re in USD - from a hack or theft is near zero.

The greater risk may be that a government attempts to seize the funds if they are threatened by Nu. For that reason, @DHume should give consideration to how the BTC would be transferred from FLOT to himself with the greatest amount of anonymity possible.

@DHume I like your proposal. As long as the asset is reasonably liquid (and I think BKS will be very soon), Nu has nothing to lose by accepting an offer with >100% collateral. If we can reliably convert a higher portion of Tier 4 to USD our network will be stronger for it. I will support your motion for the full $50,000.

[Financisto]

Hello Gentlemen,

Did you think about USD funds being frozen (or even seized) @ centralized exchanges?

Exchange default risk too?

Government intervention?

Is it worth the risk?

[Nagalim]

Its not a risk for Nu if we have the collateral. It’s a risk for the person who puts up the collateral. That’s why we have to be super cautious about the collateral we accept.

Do we think we can sell 10,000 BKS for $5/bks within a relatively short time frame?

[masterOfDisaster]

Like I already said - I very much like the idea to get a part of the T4 funds converted to USD - ideally in no centralized way (a lot more proposals like this would be great, although they’d create more handling effort).

But I very much doubt that a big amount of BKS can be sold in a short time frame at a reasonable price. The BKS/NBT pair at CCEDK has approximately $150 on buy side at $5 or above with a total of $207 on buy side. The BKS/BTC pair has practically no offer on buy side, unless you want to sell 1,000 BKS for 0.0015 BTC.

Do we think we can sell 10,000 BKS for $5/bks within a relatively short time frame?

I don’t think so.

While this proposal solves the BTC volatility risk for the USD value stored in NuSafe,
it creates risk for @Dhume - the exchange could default.
And it creates a risk for Nu - selling or auctioning the BKS might lead to less revenue than the collateral was accounted.

@Dhume should request a lot more fees or have the collateral to be prized much higher to have compensation for the risk
Nu naturally is interested in the opposite: low fees, low prizing of the collateral.

The main problem I see is the low liquidity of BKS. In my view this ruins this great idea.

I wouldn’t feel comfortable with accepting such an illiquid asset as BKS.
That might change soon, but Nu might need T4 buy side funds even sooner!
I could imagine PPC as collateral. But not BKS, especially not as collateral for tens of thousands of USD value.

[Dhume]

I will not be available to hold the BKS as collateral.[/quote]

In that case I propose the BKS to be held in a multisig address from FLOT (I personally would not partake as a signer in this address to avoid conflict of interest).

I would like to understand how the 50,000 USD would actually be used as part of liquidity operations. Under what circumstances would this be promoted to more accessible tiers?

I envision it as a last resort reserve, currently our reserve is to be the size of 15% of outstanding Nubit value which equals roughly 115k at the moment, 50k of this value would be secured in USD through Nusafe.

Besides shareholder motion @Dhume will use the funds incase all other T4 funds are depleted and the peg is in danger to refill FLOT T4 reserves. He will coordinate such action with FLOT and publicly announce and account if this action is ever to be taken.

I presume in most cases to actually use it would require conversion to BTC for use on our BTC pairs. This leads me to ask whether there is enough liquidity in a BTC/USD pair on the exchange to be used to make liquidity operations affordable.

I do not expect this part of the T4 reserve to be used regularly, however I do plan to keep the funds in a place where enough liquidity exists so that conversion to BTC does not come at a hefty premium due to lack of depth in order books.

To the extent the liquidity is used you will end up with a bunch of NBT instead of USD. In that case, will compensation be impacted? How will the NBT be exchanged back to USD, if that is the plan?

I only hold USD for Nu I do not perform the actual liquidity operation other than refilling FLOT’s T4 reserves, therefore I would not end up with Nubits. If the amount I am hedging in USD drops so would the compensation, the fee I charge is 1% of the hedged amount. If the amount drops 50% the fee drops 50% as well.

[quote]Finally, a caution to @Dhume: While it is theoretically possible to find an exchange with a low enough default risk to make your proposal profitable, the average crypto exchange has historically had a default probability that will cause you to lose money in the long term.

I appreciate your and others concern, I would however not be making this proposal without the condition that I am free to store them on an exchange or exchanges of my choosing. Without this freedom I would feel uncomfortable holding large amount of funds and I would not have enough liberty to protect the funds from exchange default as I see fit.

I feel the main concern is if the collateral is enough to cover the hedged amount in combination with its liquidity. I understand these concerns and argue that they are very reasonable. I have been thinking about what I can do make shareholders more comfortable with the collateral, therefore I am prepared to add 2M NSR as additional collateral on top of the 10k BKS. Instead of holding the NSR it might be easier to burn them and reimburse them by means of creating 2M new NSR (or the equivalent after the decimation of NSR numbers) whenever Nusafe comes to an end.

[tomjoad]

But I very much doubt that a big amount of BKS can be sold in a short time frame at a reasonable price.

Without revealing identities, I’ve done two escrows of over $10,000 each in the past two weeks and I’m sure there are more private sales being completed that I’m not part of. It seems to me that CCEDK is unpopular to use, and so BKS are being traded privately. So, I don’t think $50,000 would be difficult to raise, especially if B&C Exchange is operational.