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

NuShares Motions
#49

Point by point on your list:

  1. The NBT does not necessarily come from sell side, and if so it should not be a problem.
  2. As detailed in the link, NBT may or may not come from T4, so T4 status is not a concern.
  3. Let’s work it out with an example:
    Assumptions: T4 is 200 BTC, you burn 50k NBT, BTC price is $400.
    T4 pays you the equivalent to your burn less the collateral. 45k USD in BTC = 112.5 BTC.
    112.5 BTC are sent to you as a payment for the USD value($45k). You can sell the BTC now/keep it/trade it/ whatever, but at the end of the day you don’t owe 112.5 BTC, you owe $45k USD
    T4 is now 87.5 BTC and $45k that you “store”.
  4. [quote=“Dhume, post:45, topic:3169”]
    I then use the BTC (which I originally already had) to support buy side when needed.
    [/quote]
    Yes, this is necessary to prove you own the money AND to store the value in Nu (when you burn the NBT, and remove the value from NBT “value as a whole”)

5.- Yes, but you only locked $5k NBT to earn $5k NBT. That’s a 100% return, not bad. The rest of the money ($45k) is on your pocket and you can buy/invest in something else given that you can get your money back if asked by Nu.
The point is that you have control over the capital, you don’t have to trust the $50k you would lock in a bank deposit, only $5k.

Yes we can! This is solved with the proposal! That is the main point of that complicated contract!
When we get the USD we can pay them as BTC (our only anonymous, trustless, payment method) and the receiver exchanges it back to USD as explained in point 3. It is the replacement of a Nu bank account receiving and sending wire transfers. The wire is made over BTC. Do I explain myself?

#50

For what it’s worth, I still agree with dhume but have no new descriptions to add to the conversation.

#51

[quote=“ttutdxh, post:49, topic:3169, full:true”]Point by point on your list:

  1. The NBT does not necessarily come from sell side, and if so it should not be a problem.
  2. As detailed in the link, NBT may or may not come from T4, so T4 status is not a concern.
  3. Let’s work it out with an example:
    Assumptions: T4 is 200 BTC, you burn 50k NBT, BTC price is $400.
    T4 pays you the equivalent to your burn less the collateral. 45k USD in BTC = 112.5 BTC.
    112.5 BTC are sent to you as a payment for the USD value($45k). You can sell the BTC now/keep it/trade it/ whatever, but at the end of the day you don’t owe 112.5 BTC, you owe $45k USD
    T4 is now 87.5 BTC and $45k that you “store”.[/quote]
    Explain to me where the Nubits that I need to buy come from? Either I buy from sell side or directly from T4. If I buy 50k Nubit from sell side it will lead to an 50k imbalance which prompts us to sell Nubits from T4 to our lower tiers to rebalance. Inevitably these BTC end up back in our T4 again. Obviously if I buy directly from T4 (or @jordanlee which is T4 ofc) T4 also ends up with my BTC.
    The only way to not end up with the BTC in our T4 is essentially me buying them from someone else who already holds 50K NBT and wants to sell them. This however is not storing USD value with me but just performing a 50K NBT buyback.

[quote]Yes, this is necessary to prove you own the money AND to store the value in Nu (when you burn the NBT, and remove the value from NBT “value as a whole”)
5. Yes, but you only locked $5k NBT to earn $5k NBT. That’s a 100% return, not bad. The rest of the money ($45k) is on your pocket and you can buy/invest in something else given that you can get your money back if asked by Nu.
The point is that you have control over the capital, you don’t have to trust the $50k you would lock in a bank deposit, only $5k.[/quote]
No, I just bought 45k USD worth of BTC from T4 for 50k USD worth of Nubits. Your confusing a Nubit buyback with my proposal.

[quote]
Yes we can! This is solved with the proposal! That is the main point of that complicated contract!
When we get the USD we can pay them as BTC (our only anonymous, trustless, payment method) and the receiver exchanges it back to USD as explained in point 3. It is the replacement of a Nu bank account receiving and sending wire transfers. The wire is made over BTC. Do I explain myself?[/quote]
Lets use your example: [quote]Assumptions: T4 is 200 BTC, you burn 50k NBT, BTC price is $400.
T4 pays you the equivalent to your burn less the collateral. 45k USD in BTC = 112.5 BTC.
112.5 BTC are sent to you as a payment for the USD value($45k). You can sell the BTC now/keep it/trade it/ whatever, but at the end of the day you don’t owe 112.5 BTC, you owe $45k USD[/quote]
The problem is your assumption where I burn 50k NBT, before I can burn it I need to actually buy 50k NBT first. Where does this Nubit come from if not from Nu? The only way to do it would be to buy from someone else but where does this Nubit come from? Eventually it always ends up back around with Nu getting the 50k in BTC in T4.

Or I essentially buy up 50k worth of Nubit that we have not actually sold but credited to people for services provided (like our liquidity providers). In that scenario my BTC doesn’t actually end up in T4 but is just a reduction of our outstanding Nubit supply. This is the equivalent of a share buyback, it essentially is also a form of value storing but it directly decreases our T4 reserves. My proposal is not meant to decrease our reserves (which we do by NSR buyback) but to store 50k of the value of the T4 funds (recently set to be held at 15% of the outstanding Nubit supply).
We need to have a T4 reserve to ensure we always have funds to backup our buy side to maintain the PEG, you are essentially proposing to reduce our T4 reserves by buying back Nubits that people are not selling.

#52

Right, sell side. Ideally open market, the only way Nu can be self-sustainable. Right now it is not, we only have expenses. Right now we don’t have the ideal liquidity walls, so T4 (Nu) pays for it. That is a problem with the current Nu situation, again not with DR (I decided to name it to try to make it simpler to refer to).
If that is a problem we should not let anyone buy NBT, as they decrease sell side and T4. Does that mean we have to stop people to buy NBT? Isn’t that the base of this DAC, selling NBT?

I don’t see the problem.

The burning destroys the $50k the DR custodian is bringing in, to make the net result in Nu balance 0, so Nu is worth the same. When you buy the 50k and burn it we are storing the USD in a debt from you to Nu, because Nu does no longer have 50k in T4 and you do.
Even if you call it a buyback, what does it matter? Does that raise any disadvantages?

It does not reduce T4 reserve. It converts part of it to USD. If people is not selling/trading/buying we have a problem with liquidity, not with DR, because trading NBT should be profitable by itself and we should not have to support the peg given that we use a zero reserve model. If we rely in reserves to much, NBT is essentially backed by a big-enough-for-the-current-volume,-tomorrow-i-don’t-care reserve.

Nu bases it’s inner workings on people actually trading and using NBT for themselves.
Nu has to support itself and normal trading activity. If it does not, we have bigger problems unrelated to DR or NuSafe.

#53

I’m going to try to avoid the myre of what we ‘should’ be and stick with what we are. Let me try to summarize the argument

@dhume proposes to put up collateral and hold USD. We all understand that and the risks involved.

@ttutdxh believes that the perfect collateral is burnt nbt itself.

The ultimate statement that convinces me that ttutdxh is wrong (sorry, nothing personal) is that when I buy BKS to use as collateral the price increases but when I buy nbt as collateral T4 increases instead of the price (cause it’s always $1). This means that using nbt as collateral for T4 operations is at the very least a different process than using anything else as collateral because it couples to the very tier that we are trying to provide service for. Once you assume that nbt as collateral for T4 operations is funamentally different than any other collateral, it’s relatively trivial to come to the conclusion that we are chasing our own tail by attempting it.

#54

Basically your suggestion is impossible and I think it comes from a misunderstanding of how Nu works. I feel that further discussion should be in its own topic since I don’t feel it’s relevant to my proposal which is a fairly straightforward hedge for T4 funds. I will reply here once more regarding your proposal but feel further discussion would be more suited in its own topic.

[quote=“ttutdxh, post:52, topic:3169, full:true”]
Right, sell side. Ideally open market, the only way Nu can be self-sustainable. Right now it is not, we only have expenses. Right now we don’t have the ideal liquidity walls, so T4 (Nu) pays for it. That is a problem with the current Nu situation, again not with DR (I decided to name it to try to make it simpler to refer to).
If that is a problem we should not let anyone buy NBT, as they decrease sell side and T4. Does that mean we have to stop people to buy NBT? Isn’t that the base of this DAC, selling NBT?[/quote]

Our business model or at least how I understand it is essentially offering a stable crypto, we do this by maintaining the peg at exchanges. Your very right in questioning our current profit model, but it’s a long term plan. In the future with an increased demand and possibilities a lot of profitable enterprises will open up for Nu but we’re depended on B&C I feel. When Nubits grows our options grow but as a start up in essence we’re operating at a loss every month which is normal for a new company.

[quote=“ttutdxh, post:52, topic:3169, full:true”]

I don’t see the problem. [/quote]

The problem is obvious, lets imagine me directly buying 50k Nubits from Nu (let’s assume BTC price is 500$ each).

I buy 50.000 Nubits from Nu so I can Burn them, since Nu can’t accept USD (our whole problem) I can only pay with BTC (buying Nubit on a NBT/USD trading pair eventually would still end up with Nu getting BTC). Since I can only pay with BTC these BTC end up in our T4 funds. Nu then repaying me 90% of that lost Nubit value (which I burned) from T4 funds is essentially nothing more than a very weird way of me getting back my own BTC minus the 10% collateral you propose to hold. This is pointless we already have a way of liquidity provision without using centralized custodians using automated liquidity pools.

That means your proposal actually comes down to an argument for using our T4 funds to reduce the outstanding monetary supply (Nubits in the wild). The problem with this is that we’re already buying back all unwanted Nubits (if we didn’t the PEG would break). There are no unwanted Nubits in the wild since if people didn’t want them they can just sell them into our buy walls. To manage these buy walls we have a Tier system. You want to do the impossible, buy back Nubits that people want to hold, how do you imagine doing this? We cannot force people to sell their Nubits back to us.

[quote=“ttutdxh, post:52, topic:3169, full:true”]

The burning destroys the $50k the DR custodian is bringing in, to make the net result in Nu balance 0, so Nu is worth the same. When you buy the 50k and burn it we are storing the USD in a debt from you to Nu, because Nu does no longer have 50k in T4 and you do.
Even if you call it a buyback, what does it matter? Does that raise any disadvantages?[/quote]

We are already buying up all NBT to protect the peg, essentially we are in a permanent state of buyback. Just like we are essentially permanently selling, this is the whole point of maintaining a stable crypto, sell for 1 USD buy for 1 USD. I’m starting to repeat myself but what you propose is essentially

  1. Creating 50k Nubits
  2. Me buying them for 50k worth of BTC
  3. Me burning the 50K Nubits
  4. Nu returning 45k worth of value to me in BTC
  5. Nu having a leftover debt to me of 5k USD value

I might as well just transfer 5k USD worth of BTC directly to our T4 multi sig address. Net result is the same, we’re not accomplishing anything. The problem with your strategy is the first step, burning NBT. That’s not step one step one is buying NBT and the only way to do that is with BTC, which ends up in our T4. You cannot just burn 10k USD worth of Nubit without first buying that NBT. Every sold NBT ends up as BTC in our T4. This is why your proposal doesn’t work.

Alright lets agree to move further discussion regarding your alternative to a different topic.

DR - Distributed reserves
DR - Distributed reserves
#55

I agree this is going off topic. I have replied here.

Getting back to the topic:

This is in no way hedging. A hedge consists of taking an offsetting position in a related security, so when you lose in one you win in the other. BKS or NSR is not related to BTC, so it is not a hedge. Is like going long on BKS and shorting BTC. Movements of one are not offsetting the other, so you can win on both or lose on both.

That is why this proposal only exchanges the risk of BTC decreasing for the risk of BKS decreasing and you defaulting. There is still risk, I would say even more given that BKS is not finished.

On the other hand this is a win win situation for you:

  • If everything goes well you fulfill your part and earn interest. Nu pays for the service. You win.
  • If the price of BKS decreases to, for example 3 USD, you can default, buy the 10.000 BKS you originally had using the $50k in BTC you got from Nu, so you spend 10.000BKS*3USD=30000 USD, and then profit because you have the 10000 original BKS and 20000 USD left. You might even be able to buy them back from Nu trying to get rid of the collateral you left!
#56

I do think it’s worth pointing out that the risk of dhume defaulting is offset somewhat by being a FLOT member.

#57

I am not saying he will do, but it would be very profitable for him. That is a risk we can’t take. FLOT is arranged in a way so a single person defaulting is not a problem, this is not.

#58

To be fair, neither is T1 operations. It’s a matter of magnitude of extended trust in my opinion. I think for $10,000 this wouldn’t be an issue. For $50k, it becomes an actual concern.

#59

[quote=“ttutdxh, post:55, topic:3169, full:true”]
This is in no way hedging. A hedge consists of taking an offsetting position in a related security, so when you lose in one you win in the other. BKS or NSR is not related to BTC, so it is not a hedge. Is like going long on BKS and shorting BTC. Movements of one are not offsetting the other, so you can win on both or lose on both.[/quote]

You’re looking at it the wrong way, I called it a hedge because we’re transferring T4 funds to USD effectively shielding us from BTC volatility and thus hedging our T4 reserves.

This is not and I repeat not a trading of 50k worth of BTC for 10k BKS + 2M NSR (which you forgot to take into account below).

You forgot to take into account the 2M NSR but besides that you can’t really ignore option 3:

*Exchange defaults @Dhume loses 50k USD and thereby losing his collateral BKS&NSR

Personally I feel 10K BKS + 2M NSR would more then cover the 50K USD worth of Nu that I would be holding, I even feel this is a great deal for Nu. However I can imagine shareholders being concerned, cause indeed there is a scenario in which collateral sees a huge devaluation and thus Nu might see a loss. However the alternative is leaving our full reserves in BTC which poses a risk as well.

Currently the collateral (BKS + NSR) has a market value of around 75-80k USD, to me that seems like a sufficient enough margin to insure Nu won’t lose 50k USD worth of BTC by hedging it in Nusafe. If shareholders disagree I urge them to not vote for Nusafe. Planning to hash my proposal tonight.

DR - Distributed reserves
#60

That is your risk, I never said you are better off. I think your are in even worse position than Nu. This would derive in you defaulting Nu, Nu still have to sell the collateral and Nu can’t. That amount of BKS (and that 2M NSR) is orders of magnitude bigger than all the buy orders for that coins (there is only 60 USD in buy orders for BKS), counting them at current market prices is not realistic.

What I am saying is that the value of the collateral is unknown given the liquidity. Definitely not 75-80k USD.

DR - Distributed reserves
#61

Now your just stating assumption you can’t backup, we don’t know what value we would get if we sell 10k BKS. But seeing as there was a huge demand rush when the BKS auction closed at 4.16$ resulting in over 100k USD raised in like 2/3 weeks + BKS has been trading well above that price ever since I honestly would be surprised if 10k BKS auctioned don’t raise over 50k USD worth.

#62

Me claiming 10.000 BKS is worth $10 is the same as you claiming it is worth $70.000, and the same as me claiming it is worth $500.000, assumptions. But the fact is:

And only one exchange with BKS pairs.
So the value of it is a risk, and that is another risk of this proposal. How much risks are we willing to take to avoid a single risk of BTC going down?

#63

There’s only one risk, the collateral risk. I’m not sure what other risks you’re referring to.

#64

No the facts are over 300k USD worth of BKS was sold for over 4$ in the initial fundraising campaign. Since then about 2500 BKS has changed hands on CCEDK trading well over 4.50$ and price since then have been well above 5$ a piece. At the moment the cheapest BKS you can get is 20 BKS for 6$ a piece on the NBT pair with little BKS being offered and price going up quickly to 7+ $. On the BTC pair the cheapest you can get is 36 BKS for over 7,60$ a piece. In general very little buy and sell side are on the other books. Essentially no one is selling and people looking to buy have resorted to find sellers privately.

Now we don’t know in such an illiquid market and even one in which most BKS are traded privately what an actual piece of BKS is worth. But I’m going to say that my assumption, that 10k BKS is at least 60k USD worth, or at the very least 50k USD worth is a hell of a lot more reasonable then you randomly flaunting things like 3$ a piece or saying 10k BKS is worth 10$ total.

#65

Collateral risk, exchange default risk and safekeeper (@Dhume) default risk if conditions are favorable, which basically elevates collateral risk chances.

So you see easier for the price to go to >7 than to <3 from 6$, that is a personal opinion.

#66

exchange default risk and safekeeper default are not risks shareholders are taking. The only risk shareholders are taking is the collateral risk.

#67

You are right about that. I mean there is more chances because more things could go wrong.

#68

You are right that we need to asses this operation for if we think it will be successful or not, and if not what is the risk of under-collateralize worth the possible benefit of it working as intended? @Dhume needs to seriously consider whether the numbers chosen will entice the shareholders.