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

[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.

[masterOfDisaster]

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.

That’s important information which throws a different light on the whole BKS collateral approach.
Unless you compromise people involved in the deal (which I can’t imagine), would you be able to tell the price per BKS in these escrowed transactions?

[tomjoad]

Unless you compromise people involved in the deal (which I can’t imagine), would you be able to tell the price per BKS in these escrowed transactions?

I don’t plan on sharing any information regarding the transactions performed, sorry. Any piece of information could identify the participants, who wish to remain anonymous.

[masterOfDisaster]

Any piece of information could identify the participants, who wish to remain anonymous.

That’s comprehensible to me. Thank you for caring for that!

[Dhume]

I have updated my proposal, removed the part referring to @Jordanlee possibly holding the BKS collateral. I added in an additional 2M NSR collateral, which does not need to be hold but which I will burn and is to be regranted upon successfully ceasing operations and thus returning collateral. Additionally I added an additional fee, a 30k NSR bonus per month, this due to increasing collateral on my part and thus risking a larger amount of collateral.

[mhps]

I really worry about your exchange USD. It may look ok month after month until needed to be used, because the exchange has become insolvent.

[Dhume]

Due to security/privacy issues I won’t entail exactly how I plan to hold the USD but insolvency won’t be a problem. You don’t park large amount of dollars on small illiquid exchanges.

[Dhume]

If there are no further objections I will hash this later tonight and update to voting.

[ttutdxh]

This is remarkably similar to what I propose here, but in my opinion the current proposal adds a fatal flaw.

• Nu can’t control the value of the collateral. The current version is basically exchanging BTC risk for BKS and NSR risk. Nu business risks would not be improved.

If I were to choose right now were to store 50k USD I would certainly not save them as BKS or NSR. First option would be NBT and then BTC, by far of any other crypto including BKS and NSR.
Reasons for this:

• Slippage in a trade would drive prices to insanity in either direction, and I would instantly loose money.
• Risk. As mentioned by others, BKS is a share of an unfinished product. I understand there is potential, but the current price reflects the level of risk. It is potentially worth orders of magnitude more, but it is just that, potential. Storing wealth in potential is just investing, not hedging. And in this case Nu is hedging against @Dhume.

I would only support this if the collateral were burned NBT, like this. Safer, cheaper and simpler for both sides.

[Nagalim]

Burned nbt completely defeats the purpose of this proposal. We are not storing the money as BKS, we are simply using them as collateral to avoid dhume running with the money. The money is stored as USD, not BKS. To burn nbt would completely defeat the purpose of having a buy side, and would end up with a peg breaking upwards.

[ttutdxh]

To burn nbt would completely defeat the purpose of having a buy side, and would end up with a peg breaking upwards.

I don’t think so. That is exactly the purpose of NBT. What are we doing here if we can’t support a 50k NBT sale?
It will not be possible to purchase it in one trade, but that is because we have a tier and reserve system preventing just that. And it is working.

Ideally these large trades would be arranged directly off exchange to prevent lowering walls, but you can just buy whatever is available, then traders/tiers/FLOT/JordanLee reserves/other members will come up to refill the demand, take the profit on the spread and everyone’s happy. That is exactly Nu business model.

We are not storing the money as BKS, we are simply using them as collateral to avoid dhume running with the money.

Merely taking the collateral will be a trade to Dhume without slippage. Is is instantly a wining trade for Dhume.

[Nagalim]

we can’t support a 50k NBT sale

So you propose that we take 50k NBT, sell it for BTC, give the BTC to Dhume, and tell him to buy 50k NBT and burn it? I’m really not getting the point here. How can you possibly store buy side funds in burnt NBT? You can only store sell side funds in burnt NBT. Burnt NBT is not buy side support, it is a reduction in sell side supply.

[masterOfDisaster]

Burnt NBT is not buy side support, it is a reduction in sell side supply.

What about parked NBT then?
Can a reduction of sell side supply not be buy side support?

[Nagalim]

Can a reduction of sell side supply not be buy side support?

no

We aren’t talking the global peg, we’re talking T4 funds. If you were to take all the T4 buy side and buy up a bunch of NBT and burn it, would we therefore be storing T4 buy side funds as burnt NBT, or would we just be breaking the peg and the whole tier structure? When someone buys NBT from us, do we just buy it right back from them to burn because it’s the safest way to store it?

[ttutdxh]

So you propose that we take 50k NBT, sell it for BTC, give the BTC to Dhume, and tell him to buy 50k NBT and burn it

Not exactly:

1. Dhume has 50k USD
2. Dhume buys 50k NBT with that (over a week, from reserves, whatever).
3. (Motion) Dhume agrees to burn 50k and get equivalent of BTC. He also agrees to have the USD available on short notice.
4. The burn and sending of BTC funds takes place (or PPC, or anything else. This is only a method of payment of the 50k USD).
5. Now part of Nu reserves in BTC are now in USD, and Dhume can profit from it every month.
6. USD in dhume pockets is effectively buy support, because he is committed to send them back to Nu or buy NBT at market on short notice.

I would be happy with a smaller amount, just to prove it works and is profitable before going deep.

Can a reduction of sell side supply not be buy side support?

no

We aren’t talking the global peg, we’re talking T4 funds. If you were to take all the T4 buy side and buy up a bunch of NBT and burn it, would we therefore be storing T4 buy side funds as burnt NBT, or would we just be breaking the peg and the whole tier structure

Point 6 address that concern.

In this case we are exchanging BTC volatility risk for the risk of dhume default.
But dhume default and the decrease in sell side is covered, because the decreased buy side can be easily paid for by the collateral held by Nu, marked as “Funds locked the entire month” in the example spreadsheet.

All of that without relying on other cryptos price, liquidity, potential, hope.