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

Dhume 2015-12-15 16:11:06 UTC #110

Correct me if I’m wrong, but you’d prefer to hedge 30k USD with 10k BKS as collateral valued at 40k USD for a 1% fee, the fee over the hedge or over the BKS? So either 300 or 400 Nubit a month.

Nagalim 2015-12-15 16:28:36 UTC #111

That sounds great! I was thinking 300 NBT/month. Is that actually an option? I’d vote for that.

Dhume 2015-12-15 16:33:24 UTC #112

I feel 10k BKS is worth 500 Nubit a month, which would correspond to my original version of the proposal. But seeing as it is now needing to cover a lower amount of funds. I would be willing to lower it to 400. This would correspond to a 1.33% fee over the hedged amount.

Nagalim 2015-12-15 16:40:46 UTC #113

Well cause what I was thinking was you put up 7,500 BKS and take $300/month. Still a $30k hedge.

Dhume 2015-12-15 16:55:05 UTC #114

Oh okay, yes I have no problem with that, 300 NBT for 30k hedge with a 7500 BKS collateral would be fine with me.

Edit: Would like to hear if other shareholders agree so I can update my proposal and hash it for voting.

ttutdxh 2015-12-15 18:24:57 UTC #115

I didn’t said that. The scenarios you propose breaks the peg anyway. With or without DR or NuSafe or nothing or both. I am just saying that in that situation, at least we have a profit that can help ease the situation. At least better than nothing at all or devalued collateral.

You keep saying that I don’t understand, but you don’t back up your claims with real complete examples:

NuSafe on the other hand have real demonstrable risks caused directly by NuSafe, that would have not existed without using it, and that risk have incentive to you:

I want to make some points (purely about NuSafe, no comparisons here):

You are putting more surplus than funds received to safeguard, so your collateral is more than 100%.

You risk losing 100%.

I still don’t understand why would you take a risk of losing 100% your collateral, $10.000 BKS you value at 65-70k USD for a profit of 500 NBT a month tops.

The historical odds are against you to 3x and even if you were successful in avoiding exchange default for a month, you would have to avoid that risk for 100 straight months to make up for a single problem with your funds. That is a 0.01:1 risk-reward ratio, which adjusted to historical statistics is 3x = 0.0033:1.

You are taking a bet with 3x chances of losing. You need to have some serious leverage over the exchange (like being your property) to eliminate that chances, or else it is just a really risky bet.
You said you think:

so it is a bet.

Shareholders have to remember that Nu is also taking that bet with you, and will be screwed in the event BKS does not have the market price/demand you bet on in your other bet:

I as a shareholder would like to know what is your leverage over the exchange risk, if any.
Else NuSafe is basically a combined bet. Let’s see if odds appeal to shareholders.

Dhume 2015-12-15 19:35:54 UTC #116

No the difference is that you are willing to bet on a 1% collateral and NSR sales being enough to maintain the PEG if the contractor defaults. In Nusafe we essentially have a 100>% collateral to make up for me defaulting.
The difference being that incase my collateral doesn’t cover the hedged amount there is a net loss of value for Nu since we’ve effectively given out more to me to safeguard then I have “paid” collateral to reimburse Nu. This is indeed not true in your scenario in which a default would be profitable for Nu.

I’m not arguing that, my argument is that the whole reason for having a T4 reserve that is linked to outstanding Nubits, is desired to protect the peg. To protect it we need funds. In my scenario even if the collateral doesn’t cover the full amount hedged at the very least there will be funds to protect the peg. In your scenario there might be a net profit but no actual funds left to protect the peg. This risk of not being able to protect the peg is a lot more severe than a possible net loss of some funds for Nu.

This is what you don’t understand, Nu should care less about a 1% profit in a scenario that endangers the peg. Our losses will be much more severe and might possibly bankrupt and destroy Nubits if we break the peg. That is why we ALWAYS in our current state need to have funds ready to protect the peg, and that is exactly why your idea is terrible. It puts us in a situation where we have a small net profit in case of contractor default OVER protecting the peg.

Let’s say I hedge 30k for 7500k BKS and I default, and my BKS only bring in say 15k so 2$ a piece.Yes that means a net loss for 15k worth of USD for Nu but at the very least Nu then has 15k to maintain the peg. This buys us time to sell NSR to restock our reserve.
If we hedge 30k in your proposal and contractor defaults, we have a net profit of 300 Nubit (the collateral) but NO funds besides these 300 Nubit (in BTC ofc) to maintain the peg. Forcing us instantly to have to dump NSR as quickly as possible to gain funds to maintain the peg.

Like I said before you are willing to trade our T4 reserve required for balancing the peg for a contract with 1% collateral. The net profit we gain from contractor default is NOT worth the tradeoff of having no funds for maintaining the peg.

I suggest instead you use your proposal as an additional layer of defense, in that scenario I think it’s a great idea, so right now we have agreed to have 15% of outstanding Nubits backed in T4 reserve dedicated to maintaining the peg. I propose another 10% of funds so essentially that would buffer our T4 to 25% dedicated for protecting the peg.
In that way 0-15% are actual funds we as Nu control (directly by BTC in T4 or indirectly by means of Nusafe and similar proposals that have to provide 100>% collateral and possibly even by a multisig Tether fund). And 15-25% are funds secured using your DR, in case we rely on them to muster up our buy side it’s okay for the contractors to default, since that is profitable for Nu and we still have our ACTUAL reserve of the 15% T4 funds (however those may be secured).

Nusafe risks for Nu are very simple, it is me defaulting and the collateral not being able to cover the full amount. Hence why collateral needs to be 100%>

That is not really a fair example since those numbers have been adjusted severely. In the most recent proposal we are talking about 7500 BKS for 30.000 USD. That means if and only IF BKS price falls below 4$ USD this would be profitable.
That is of course assuming BKS price drops by over 33% of its current market value and starts selling for less than the 4.16$ they were sold for in the auction. A price by the way that managed to pull in roughly 100k USD in funds in a 1 / 2 week time period. Since that time there has been an strong expressed interest in BKS shares both on bitcointalk, here (see @tomjoad’s comment) and the only market they have been trading on. Having been steadily trading at well over 5$ USD and even in the 6-7$ dollar range. But you have already expressed strongly that you believe there to be 0 value to BKS as collateral, let’s just agree to disagree on that.

Yes I meant roughly 150%

[quote=“ttutdxh, post:55, topic:3169”] I still don’t understand why would you take a risk of losing 100% your collateral, $10.000 BKS you value at 65-70k USD for a profit of 500 NBT a month tops.
I as a shareholder would like to know what is your leverage over the exchange risk, if any. [/quote]
Obviously I have my reasons for taking on such a risk, due to the nature of these reasons it’s not smart to publicly state as to what these exact reasons are, as they could potentially have both security and privacy implications. Let’s put it down to insider knowledge. I feel disclosing more could have negative repercussions.

ttutdxh 2015-12-15 19:59:55 UTC #117

As expressed multiple times before, these scenarios do not have the same circumstances.

For the first scenario to happen a decline on demand of 0 NBT has to happen. For the second scenario there have to be a decline in demand of $30k, (to eliminate the positive unbalance generated when burning in the first step of DR). So the peg does not have to be balanced until a $30k decline.

If we apply the circumstances you apply for the DR scenario to the NuSafe scenario, the decline in demand would be $30k and BKS only bring 15k at 2$ a piece, so the peg is broken by -$15k.
In the same circumstances DR scenario, with 30k NBT demand decline, peg is saved by the unbalance produced by burning ($30k more in buy side than sell side, and also 30k NBT less in circulation), and peg would not be broken.

Dhume 2015-12-16 20:01:43 UTC #118

[quote=“ttutdxh, post:117, topic:3169, full:true”]
For the first scenario to happen a decline on demand of 0 NBT has to happen. For the second scenario there have to be a decline in demand of $30k, (to eliminate the positive unbalance generated when burning in the first step of DR). So the peg does not have to be balanced until a $30k decline.[/quote]

This is the fundamental problem with your proposal, you seem to think we can “buffer” an decline in demand with a previous decline in demand. I’ll try to explain why we cant.

Before we start it’s important to note that you are already operating under the assumption that the “burned” Nubit in your proposal were already out in the wild (stray nubits). As I’ve explained in earlier posts if someone actually buys Nubit with the purpose of burning them for DR then there is no effective decline in demand. Say outstanding Nubits are 700k and someone buys 50k Nubits to burn them for DR essentially our outstanding Nubits grow from 700 to 750 (due to the person buying Nubits to burn) and then decline again from 750 to 700 due to 50 being burned. In this scenario the burning of Nubits has no other function other than to “confirm” someone has the money.

But in the next example we are operating under the assumption that the Nubits were already out in the wild (assuming this is why I think you think DR works). Okay so let’s say there’s 700k Nubits out in the wild this causes us to maintain a 15% T4 reserve aka 105k USD worth of BTC. In this example we have no other T4 buy side funds (they have been spent on buybacks/dividend/previous declines/whatever) so the 105k USD worth of BTC is all we have to support buy side.

Now in order to get DR running with Nubits that are already out in the wild there needs to be a decline in demand, or possibly DR creates the incentive for Nubit holders to instead burn rather then hold Nubits to partake in DR. So let’s say we find people willing to do DR who already have Nubits (which will already be hard in itself), we even find enough people willing to do this that we can “hedge” our complete T4 reserve. So this means there is 1 or multiple contractors willing to burn 105k Nubits that they already hold and partake in DR.

So the contractors burn the 105k Nubits and we repay them 105k USD worth in BTC – the 1% collateral. So they receive 105.000-1050= 103.950 and we hold 1% 1050 USD worth of BTC in our reserve as collateral.

Now normally we would be required to “restock” our T4 with NSR sales to adhere to the 15% requirement. In your scenario however this is replaced with “contracts” were the contractors pledge the amount they received for their burned Nubits (99% of the its value) to be used in future buy side balancing. Requiring them to rebuy Nubits when Nu requires them so, over this service they get paid interest + their collateral at the end of the service period.

So far so good it seems, if they default we’ve effectively made a net profit of 1% (the collateral). Now sure this seems great on paper except for the fact that if they default we have almost no funds (except the 1% collateral) to support buy side. So say another 50k decline occurs in demand, and the contractors default suddenly we’re faced with a 50k deficit in T4 funds. If this leads to braking the peg I argue that it might even bankrupt Nu. Under normal circumstances we’d have already been selling NSR to restock our reserve but instead of doing so we replaced an actual reserve consistent on funds with “contracts”. Hence why I’ve stated multiple times that DR is essentially just the trading of a reserve for “contracts.

I disagree with you and I hope that many shareholders feel the same that your DR “contracts” are to be preferred over Nu holding a Nu controlled reserve that is not depended on the compliance of contractors. I rather have our reserve be exposed to BTC volatility then for it to be depended on the compliance of contractors on a shallow 1% collateral basis.

Your argument however seems to be centered around stating that the same can be said for Nusafe if I default, but this is where I disagree with you. If Nusafe would be used to cover the full 105k and I default we’d be hearing this the moment Nu request any part of the funds I hedged Back. The 105k decline in demand (that enables the creation of DR) and the additional 50k that cause the DR contractors to default are not at the same moment. If they would be at the same time we’re essentially asking the people who are burning the Nubits to immediately rebuy them, there would be no point for us paying them to rebuy them if we could just do the same by directly buying back those Nubits with our reserve.

This is different for Nusafe in which case we’d immediately know if I defaulted. This is obvious because the moment our full reserve is in Nusafe and there is a decline in demand Nu immediately would need part of or the full amount of funds I hedged returned to support our buy side. I even argue that there is an incentive on my part to immediately report a default (since this would give us more time to sell my collateral at better prices and thus more likely for me to recover any part of my collateral).

This is a crucial difference I tried making a simple visualization to illustrate.

Nusafe vs DR

ttutdxh 2015-12-16 20:47:12 UTC #119

If 700k NBT is all the money in circulation, burning 50k NBT arrives at 650k. Your math implies that NBT are generated, when they aren’t.

And, again, the circumstances to your examples are not the same:

I don’t see why it is different.

You are implying we need a part of the money, like $10k. You say that if you default you can’t pay that money, and we know you are in default. Well not true since you could have lost only half. You pay $10k, everyone’s happy.
In the DR case, same premises, Nu needs $10k. You imply that DR custodians are in default. In the same way they could pay the required $10k and nobody notices. One contractor pay $10k, everyone’s happy.

You never know if someone defaults until it is asked all the money back.

Dhume 2015-12-16 21:30:39 UTC #120

[quote=“ttutdxh, post:119, topic:3169, full:true”]
If 700k NBT is all the money in circulation, burning 50k NBT arrives at 650k. Your math implies that NBT are generated, when they aren’t.[/quote]

……………

You are not reading properly what I’m typing. In this example I am referring to NEW money burning Nubits that REQUIRES them to BUY Nubits FIRST BEFORE YOU CAN BURN THEM. Thus increasing the money supply and then decreasing by the same amount when they burn them (so no change to money supply). Later on I deal with the scenario where the Nubits were already in circulation. It’s important to make this distinction in DR since in this example there is no effective change to the money supply while when they burn Nubits that were already in circulation there is a decline in the money supply.

KEY DIFFERENCE: Is the contractor burning Nubits ALREADY HOLDING NUBITS or does he need to BUY THE NUBITS FIRST. These are NOT the same scenarios, you do not seem to make this distinction but argue that there is a decline in money supply, aka the contractor was already holding Nubits. It’s important to make this distinction even though you seem to not understand why this is.

The key difference is that in Nusafe scenario we would only lack the part that my collateral can’t cover, in the DR scenario its guaranteed that the collateral can’t cover the extend of the default.

Say both DR and Nusafe are responsible for 50k T4 reserve and Nu needs say 30k due to decline in demand. If I 100% default it’s likely that the collateral will cover the 50k, even if it covers less then 50k there will at least still be funds to cover the 30k decline in demand (unless collateral wouldn’t bring in anything at all) in DR if contractor defaults all we have is 1% collateral so 500 Nubits and that’s it.

Now while in case of Nusafe there might be a net loss for Nu at the very least there will be funds available when we need them, in DR’s case there will be a net profit for Nu but NO funds.

The problem here is that consequences of have NO funds compared to a net loss but at least some funds is greater than the net loss that might occur with Nusafe. That is the nature of our business.

As I’ve said before I think DR could be a great addition on top of an ACTUAL reserve consistent of funds in Nu control (in Nusafe case BKS) but not as a main reserve. The risk of not having funds when we need them most (when the peg is in danger) is greater than the risk of possible net loss but at least

ttutdxh 2015-12-16 22:54:52 UTC #121

Please don’t use caps, I take them as a disrespectful behavior, and makes me feel this is drifting from a discussion to an argument. I really want this to be a constructive discussion.

DR contractor was already holding 50k NBT, burn those 50k NBT. Demand is down by $50k. Since DR contractor used that 50k NBT for this, he does not demand them anymore, so that gives two outcomes:
- If DR don’t exist, that $50k are dumped into buy walls, forcing T4 to pay for it sooner or later.
- If DR exists, that undemanded $50k NBT are directly bought by T4 (In the step where the payment in BTC is made).
  Demand is either way, down by $50k, and T4 is is either way paying $50k. That breaks the DR at the end, of course, because demand is down by $50k, the contract of $50k is also lost. Same totals either way.
Contractor have $50k USD, buys 50k NBT in the open market and burns them, demand is $50k bigger, circulating NBT are the same, that eats sell side. Buy side is $50k USD bigger than sell side. Fast forward Nu needs $10k, nothing happens because Nu never needs $10k in the first place, since buy wall is $50k bigger.

That key diference you are talking about is, in fact, a diference in demand, so a difference in external circumstances, not solved/altered by using or not using DR/NuSafe/Nothing at all.

DR - Distributed reserves

Dhume 2015-12-16 23:18:11 UTC #122

[quote=“ttutdxh, post:121, topic:3169, full:true”]
Please don’t use caps, I take them as a disrespectful behavior, and makes me feel this is drifting from a discussion to an argument. I really want this to be a constructive discussion.[/quote]

After discussing your proposal for countless hours and 5 days now, even though I feel it has little to do with Nusafe, excuse me for accentuating with caps. I feel I’m having to explain the same thing over and over again.

[quote=“ttutdxh, post:121, topic:3169, full:true”]

DR contractor was already holding 50k NBT, burn those 50k NBT. Demand is down by $50k. Since DR contractor used that 50k NBT for this, he does not demand them anymore, so that gives two outcomes:
- If DR don’t exist, that $50k are dumped into buy walls, forcing T4 to pay for it sooner or later.
- If DR exists, that undemanded $50k NBT are directly bought by T4 (In the step where the payment in BTC is made).
  Demand is either way down by $50k, and T4 is is either way paying $50k. That breaks the DR at the end, of course, because demand is down by $50k, the contract of $50k is also lost. Same totals either way.[/quote]

Exactly, hence why I said in this scenario there is a decline in demand. The difference between using DR or not using it is that when we use DR we are not restocking T4 with actual funds but a contract. If we wouldn’t use DR we’d be required to restock our reserve. Instead of restocking it we replace it with a contract. That is what DR essentially does, replacing reserves with a contract for future demand.

No this is wrong, when buy side gets 50k bigger and the sold Nubits are burned (and thus disappear from the sell side) an imbalance is generated. This will eventually lead to this imbalance (the 50k USD worth of BTC that the contractor used) being rebalanced and ending up as BTC in our T4.

However since we now have a “contract” for 50k future demand, the 50k that ends up with Nu is seen as a surplus (funds above the 15% threshold) thus causing us to spend them on buybacks/dividends/whatever. Then if the contractor defaults and thus not providing the future demand we are suddenly faced with a lack of reserve funds, since we spend the funds earlier due to our “reserve” being over 15%.

So in the first scenario there is indeed a decline in demand, and instead of restocking T4 we replace it with your contract. In the second scenario there is no increase in demand, its net effect is 0 on demand (or the money supply) since the bought Nubits are burned and payed back by Nu. The only thing that happens is us replacing our reserves with your contract and spending our reserve on buybacks and other things since our T4 is now a contract instead of actual funds.

DR - Distributed reserves

ttutdxh 2015-12-17 00:29:10 UTC #123

Ok, now we are getting somewhere. So the problem after all is that our current way of re-balancing liquidity can pose risks to DR collateral.

That is an argument I agree with, and why I proposed a demand based liquidity formula while our discussion.

I will continue the discussion on the DR topic, since NuSafe risk comparison is finished now.

Getting back to NuSafe, I really didn’t like that this puts you in a almost (exchange can default @Dhume) win-win situation if BKS price does not meet everyone expectations.

I am not saying that It will actually happen, or that you will default Nu on purpose, but I am not comfortable with a single person having that big of a responsibility/opportunity.

In the event of BKS going down half to 3$, (even if it is successful as a exchange, but other issue arise) which chances are real, as no one can predict the market, you will literally have the option to fail Nu for 7200$.

It is not that “much” money anyway, but It could explain to some degree why are you taking a exchange risk that we have the only option to see as “suicidal”.

Dhume 2015-12-17 00:40:33 UTC #124

I understand your sentiment BKS could still completely fail and lose considerable value, thus enabling the scenario you describe. Not that I personally would go for such an action, but Nu shouldn’t trust me or anyone else solely on their word.
However, would you not agree that it’s unlikely that such a change to BKS value happens overnight? If BKS price starts dropping considerably let’s say from roughly 6 to 4.50 I would advise Nushareholders to considering terminating Nusafe, I personally would prefer this as well. Or at the very least in light of the devaluation of the collateral request additional collateral or a reduction in the hedged amount.

ttutdxh 2015-12-17 00:43:25 UTC #125

That is reasonable.

Dhume 2015-12-17 01:23:42 UTC #126

Seeing as there, are no more votes being cast in my poll and @Nagalim suggesting 30k with 7.5k BKS for a lower fee I’m going to update my draft with his suggestion. I will repost and link to this topic, so that shareholders are not overwhelmed by all the discussion in this topic for which a lot of it is about DR instead of Nusafe. I will change this topic to discussion instead of draft.

mhps 2015-12-17 02:28:19 UTC #127

I don’t agree. Both Nu and B&C are based on technology of Peercoin, which has been out of sync with the lasted bug fixes of bitcoin. Not many weeks ago PPC experienced a fork. It was @sigmike and several other devs’ (@mably @glv… ) quick action, coupled with the fortunately fact that the exploit was already understood and the exploiter didn’t use it to double spend on high profile major exchanges, that saved Peercoin (and Nu and B&C) from further damage. Similar event could happen again. Fixes may not emerge so quickly next time. FUD would be waiting at the corner. Value of your collaterals in BKS and NSR are highly correlated in this regard, and can drop greatly over night.

Dhume 2015-12-17 02:38:55 UTC #128

To a certain extend the same can be said for bitcoin, an overload of transactions causing the network to jam, something huge like Huobi defaulting, a major continent banning bitcoin and bitcoin businesses, etcetc.

If you believe this risk to be very likely to occur then I would advise you to not vote for Nusafe, I’m afraid I cannot alter the proposal in a way to 100% avoid the collateral devaluation risk. There is a risk of being in BTC there is a risk of BKS/PPC/NSR/LTC/DOGE etcetc. I think he best strategy is diversification. I would love to see some similar proposals like Nusafe but with different collateral units.

Also I urge a shareholder to research Tether, that might be a great addition or even replacement of Nusafe.

mhps 2015-12-17 04:01:54 UTC #129

I don’t believe the odd is high (once a year i guess).

I agree with you that any other cryptocurrency has similar problems. What I want to point out is that B&C and Nu are correlated so using BKS as collateral against Nu’s valuation is not the same as using say BTC.