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

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

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.

I estimate collateral being currently valued at 75-80k

That is assuming a BKS price of roughly 6.50/7$ each resulting in an estimated value of 65000-70000 and 2M NSR being valued at roughly 7/10k USD. Thus resulting in an estimation of roughly 75-80k. Which is in my opinion more than enough to cover a 50k USD value. Let’s not forget even if my collateral drops significantly in price Nu only starts losing from 50K USD and downwards. That is of course already assuming there is an exchange default or me running away with the funds.

Honestly I feel someone putting up a surplus value of 50% as collateral to provide a service from which I think Nu really benefits for a fee that doesn’t properly compensate the exchange default risk is a great deal. If shareholders disagree I urge them to not vote for my proposal. It’s very simple and straightforward and personally I strongly disagree with the notion that the collateral dropping so much that it doesn’t cover the 50k anymore is highly unlikely.

Let me try being devil’s advocate: what’s in for you? You are based on your explanation on the losing side, so why would you seriously consider making that deal?
And why is it important to stick to the 50k USD value and not start with a smaller amount (like 10k USD) that wouldn’t overly concern most NSR holders? 50k USD is almost half the value that’s in T4 buy side.
I can’t imagine putting half of T4 buy side funds in an untested endeavour.

The promise of freeing that part of funds from BTC volatility sounds enticing. But I’m hesitant when thinking of the trouble for the peg if things were to go pear-shaped and half of the T4 buy side were in BKS (and NSR) and not BTC.
I’d rather have assets with more market depth there like PPC.

BTC (and other T4 buy side assets) volatility is a serious issue and one of the reasons why I created a motion to keep T4 buy side on a minimum level and start refilling it if it gets reduced (by being consumed or assets losing value) too far.


[quote=“masterOfDisaster, post:70, topic:3169, full:true”]
Let me try being devil’s advocate: what’s in for you? You are based on your explanation on the losing side, so why would you seriously consider making that deal?[/quote]

Cause I have reasons to believe my plan for holding them (aka the exchanges I’ll be using) is safer then what history has thought us about holding funds on an exchange. Aka I think I can minimize the exchange default risk enough to make a 1% fee lucrative enough to cover the risk I’m taking. Now as @Jordanlee has pointed out I could very well be wrong, and the odds are from a historical perspective against me. I think if you look historically you’d need at least a 3% monthly fee to make it a fair deal. However I think that’s so expensive that its essentially not worth doing it for Nu.

My apologies if I have given the impression that it needs to be at least 50k USD from my side, that is not my intention, as posted earlier I suggested lowering the amount. However I got the sentiment that concerns where more about if the collateral was sufficient and not about the amount hedged. Hence why I added 2M NSR as additional collateral + an additional fee as compensation for the extra collateral.

How about alternatively the fee is static and Nu is free to store as much as they want up to a 50k USD? Then instead Nu could store say 30k for the same amount of collateral but the fee remains the same.

[quote=“masterOfDisaster, post:70, topic:3169, full:true”]50k USD is almost half the value that’s in T4 buy side.
I can’t imagine putting half of T4 buy side funds in an untested endeavour.[/quote]

Well essentially this is true currently T4 holds 638.9 BTC which 17hours ago was valued at over 290k and is now worth roughly 270k. Only a large part of this is deemed to be used for NSR buybacks. While I agree with the buybacks I feel the threshold of T4 funds designated for buybacks could be higher but that’s a different discussion.
The main point is say we roughly have 100/110k designated as buy support reserve. If that amount is 100% in BTC a large price swing down could cut those funds in half. Of course a swing the other side results in the opposite but in the negative scenario we suddenly don’t have the required 15% outstanding Nubit value reserve. Instead we are left with a 7/8% reserve which I’d say is critically low and dangerous to the peg. Hence why I feel at least securing roughly half of our reserve in USD means we at the very least are always able to provide 50k USD worth of buyback strength even if BTC crashes.

Put it like this currently BTC is at 420+ after having spent most of the year around 250. Would you not agree this is a great time sell some of your holdings if you have a large chunk? Sure if BTC moons Nu is rich but if it crashes it could seriously endanger our peg even though we are pegged to USD. This is a weak part in the current design and we would not be having this problem if Nu could somehow hold 50k USD in a multisig.

[quote]The promise of freeing that part of funds from BTC volatility sounds enticing. But I’m hesitant when thinking of the trouble for the peg if things were to go pear-shaped and half of the T4 buy side were in BKS (and NSR) and not BTC.
I’d rather have assets with more market depth there like PPC.[/quote]

I agree with you but unfortunately I don’t have other long term holdings that I can offer up as collateral.

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Thank you for your detailed explanation.
I very much appreciate all your efforts for the sake of Nu.
I just didn’t know why you would take such a risk (and I still haven’t completely understood it), but I understand a bit better now.
And of course I see some risk for Nu.
But there is risk keeping all as BTC as well.
Because NBT are pegged to USD it makes a lot of sense to try storing some of the NBT buy buffer in USD in some way.
A long time ago I was proposing something similar (storing BTC value in USD), but not on T4, but rather T2 (on exchange, but nit on order), maybe T3 (off exchange).
The incentive was much easier to understand in that propsal.

If I understand correct your proposal meant Nulagoon holding it’s excess BTC that would be balanced by buying Nubits from T4 on ccedk as USD right? Isnt that essentialy merging T4 buy side into T1-3?

Tiers 1-4 are divided in terms of response time, trust requirements, discretion etc. I don’t see why refilling tier 3 from tier 4 is a “merge”.

forget T4 or Tn, just hold usd

The idea was rather to rather pay some tx fees to convert BTC on buy side to USD (and back if need be) than face BTC volatility.
If the T1 buy side starts to accumulate funds, a part of it would be traded on the BTC/USD pair to USD and held on the exchange (T2).
If T2 buy side (USD) would get to big, a part of the funds might be moved from the exchange (withdrawn to user account).
If the same LP needs NBT (balance with T4), the USD of course need to be converted to BTC first.

This obviously only works with sufficient orders at small spread at BTC/USD.
And having an MLP in stead of ALP is a prerequisite as well.
That’s why I thought of NuLagoon.

I wouldn’t know how to create such a system, that buys USD if BTC are in excess and sells USD if BTC are required.
That would require a dynamic shift of the BTC/USD orders depending on the balance of the buy and sell side on T1.

This is a form of order book mirroring. It’s on the nubot roadmap.

Thanks @dhume for the initiative. Just my own take -

I think 50% margin is on the low end of being enough, for cryptocoins in general, for a 3 month period.

I am not sure one can liquidate that many BKS at $5 although private tradings of that magnitude has happened.

btw I have read @ttutdxh’s proposal and agree it is good ( except potentially it may have complication with authorities but the risk is not on NU’s side).

I am willing to vote for the OP if it’s 20k USD with the same amount collateral.

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Tier 1-3 are funds not owned by Nu, tier 4 are reserves owned Nu this is a big difference. By giving T4 funds to lower tiers without selling them for Nubit we are essentially placing Nu funds into individual hands. Nothing necessarily wrong with that (my proposal does the same) but how is Nu secured from counterparty risk? Hence why in order for us to do something like this safely we need collateral aka my proposal.

How is BTC going to accumulate in Nulagoon if they do not get their Nubit for free from Nu? The only way they can accumulate excess BTC and store them in BTC/USD pair is by instead of us selling Nubit for BTC to Nulagoon we are giving them Nubit for free and require they hold the BTC (that they would have paid us for it) for us in USD on an exchange. Sure this would work, but do we require collateral from Nulagoon for holding T4 funds? Does Nulagoon get payed interest over holding these funds? What happens if exchange defaults is Nulagoon willing to shoulder this?

Again this is essentially the same as my proposal.

When it comes to a 3 month period, Nu can always cancel Nusafe at any time, if they feel the value of the collateral is dropping. Say BKS price starts going down and is being consistently traded at 5, a few weeks later 4.50 etcetc. Shareholders can just cancel Nusafe when they feel like it. The 3month period is only a hard commitment from my side not from Nu.

Taken into consideration that there seems to be a strong desire for a an greater amount of collateral in comparison to the hedged amount I will update my proposal with a static fee instead. This would let shareholders decide the ratio of Hedge vs Collateral. Essentially it would mean the lower the hedge the higher the collateral is to cover it but also the higher the fee is relatively to the hedged amount. That would make it a tradeoff for Nu in terms of risk and cost.

I’m sorry but @ttutdxh’s proposal has nothing to do with hedging our T4 reserves as a matter of fact it would actually increase our T4 reserve (the BTC collateral we’d hold) and thereby increase our exposure to BTC volatility. It stems from a misunderstanding of his first step (burning NBT by custodial), which is only possible by either buying NBT from Nu (thus not decreasing our T4) or from a private person who has already bought NBT. In the last case that private person would already “secure” T4 funds in USD by just selling back his NBT to us.

I’m absolutely baffled that no one else seems to understand my explanation of why it doesn’t work. Either I’m misinterpreting @ttutdxh idea or I’m failing horribly in explaining why it doesn’t work despite typing a considerable amount of text to explain it. Or did shareholders not read my comments?

Tier 1-3 need not be external to Nu, it just happens to be so for more decentralization. Tier 3 custodians are also an intermediate solution and would be meaningful if they collectively hold much less funds than Tier 4. And balancing NuLagoon involves buying NBT for BTC and vice versa.

As with @ttutdxh’s proposal, there’s a roundabout in the flow of funds but I am not convinced it’s fundamentally unworkable. The NBT burnt need not be created just for the purpose, and there isn’t necessarily a “matching” act of deposit into Tier 4. It can just be carried out with funds available in the open market. Also when the contract period ends Nu does not necessarily have to pay back in BTC; one should explore the possibility that Nu settles some or all of the debt incurred in the process purely using NBT, in which case it can be seen as a more productive alternative to parking.

So how do you envision this buying of NBT to be burned without a matching deposit into T4 (either through tier workflow or directly buying/selling NBT from FLOT/Jordan)? This essentially is what happens when there’s a decline in Nubit demand, resulting in T4 balancing. You suggest this custodian to buy NBT on the open market for more than 1 USD each? Sure if you’d offer 1.10 per NBT you’ll fine many willing sellers but this would just be costing Nu and the custodian money since they can just rebuy the NBT for 1 USD each. Or do you suggest shutting down the Liquidity pools buy side so our custodian can place a 50k buy side offer to get filled first?

Honestly it makes no sense, if someone holding USD wants to provide liquidity for Nu and get compensated for it he/she can already do so by using an ALP or Nulagoon.

There is no way to lower T4 by buying Nubits on the open market and have the funds not end up in T4, unless there is a decline in demand. Which is the reason for the existence of having T4.

Now please tell me how to arrange this decline in demand?

One option not being discussed: why not use Tether? It is equally centralized to holding USD in one person’s bank account, in that it only takes one entity being attacked for the funds to be lost, but with the notable improvement that we can hold the funds in multisig among many people. This eliminates the risk of @Dhume running away with the funds, or refusing to return the USD if his collateral has lost value.


Wow, I wasn’t up to speed about tether but damn I kind of feel Tether is an excellent competitor to Nubits. We have some advantages in terms of privacy, democratic and decentralized but in terms of security, stability and integration with actual use cases they seem superior to Nubits. Thinking about my proposal I was actually thinking a company that does what I’m trying to do for Nu is a great idea aka a 1 on 1 fiat backed digital currency/token guess they beat me to it.

Seems like a good way to hedge our T4 but how exactly does this work, do they offer TetherUSD multisig address? Or would it still mean 1 person has to essentially make a Tether account and hold the USD or TetherUSD rather.

They’ve held $1.00 US since they released, same as NuBits. They also haven’t had any major security issues, same as NuBits.

Their critical flaw is that there is one point of failure: the Tether organization. Regulators could shut it down and all Tether would become severely devalued overnight. Nu has no central point of failure and that’s part of the brilliance of the design. It is far more robust.

Tether does allow multisig accounts as far as I’m aware. Holding Tether instead of Bitcoin is just a trade in risks; with Bitcoin you have more value stability risk, with Tether you have more counterparty/regulatory risk. Shareholders might decide that holding Tether in a multisig account is less risky on the whole than Bitcoin or USD, or they might not. Given the choice between USD in a bank account and Tether in a multisig account though, I would prefer Tether.


I agree, but the in terms of security they can get shutdown / screw up etc. However if they’re actually backed 1 on 1 it means they’d be immune to a “bankrun” something which is a threat for Nubits. If everyone would sell they’re Nubits tomorrow our peg would break, it’s an unlikely scenario but one that a tether user doesn’t have to worry about.

Will withdraw my proposal in light of Tether I guess.

That is a good point, Someone has to pay attention however. The onus is on Nu and Nu has to pay 1% for it per month. Can you promise to remind Nu if collateral value is getting too low than a certain value?

Sorry to bring up @ttutdxh again. It should be a separate issue from your proposal. In my eyes your proposal is ok except for collaterals (and an intransparent confidence that you can somehow manage exchange default risk).

Sorry to allow me to go on a little to make my take clearer. You said @ttutdxh’s proposal

In the proposal you not only get your own BTC back, you also increased NBT money supply. But the increased amount is not wild – it is burnt and cannot come back to hit the buy wall. In the mean time T4 increases its reserve for the NBT sold to you according to the 15% rule. So the T4 reserve for all the NBTs that CAN hit the buy wall increases above 15%. That is the value of the scheme. Consider this extreme case – if 15% of all NBTs money supply are in @ttutdxh’s scheme, they can pay all T4 reserve that are needed. Nu doesn’t need to hold its fund in T4 any more. And these T4 reserve can be all distributed in USD (some have to be in BTC on call but you get the point).

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