DR - Distributed reserves

Nu does not currently have a way to store USD or other fiat reserves to protect ourselves to BTC price movements, so this topic will be focused on discussing a method for achieving what I call “distributed reserves” or DR.
I have been thinking about this for a long time as I am a shareholder worried about liquidity and the exposure of reserves to BTC.

The procedure would be as follows.

  1. Custodian burn NBT as collateral (bought in the open market to unbalance liquidity on purpose).
  2. FLOT sends BTC to the custodian (less the collateral) to be treated as a payment in USD at current rates.
  3. The custodian take care of the USD, moving them wherever they want. (With the premise of being available in 3 days notice for example). The custodian can then use PayPal, OkCoin, regular Banks, accounts on exchanges, etc to keep the money.
  4. Nu needs USD
    • If the funds are requested as USD liquidity the custodian can buy NBT in the open market at a set price and then burn the NBT.
    • for other affairs FLOT can negotiate any kind of trade.

If the custodian decide to end services at any moment the debt is paid or burned and the collateral returned through a grant or a payment from FLOT.

This should be view as a long-term secure investment. The advantages of this kind of investment:

  • Yearly/Montly/Daily interest.
  • No exchange default risk
  • Availability of the USD invested; the custodian can reinvest or spend on something else while he is in control of the USD.

In case of a custodian losing the funds or being unavailable to pay back, Nu earns the difference to the funds the custodian originally burned, which should exceed the interest.
Given the very low risk and the incredible advantages of this investment I think a <1% annual interest should be viable.

Example with actual numbers

Accounting rules:

Edit: rules necessary to correctly handle DR are currently being considered.

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If i understand correctly, the risks move to custodian only?
I see below risks:

  1. single custodian=single point of failure
  2. USD in cash (as long as cash exists) risk of theft,fire,etc
  3. USD cashless, trust fiat institutes = no 100% control over USD (capital controls, negative interests)

If a lot of custodians keeping a “small” amount of USD (in any way they see fit) exist,
then this could be a good idea, i think :wink:

This is an interesting idea!
Thinking outside the box made you come up with a very stable solution.

I see some potential trouble with tax for the USD you withdraw after you’ve exchanged the BTC (depending on the country).
But as it provides the custodian with an incentive (interest) to do it and Nu with an incentive to do it (0 volatility of USD/USD), I like to understand it better.

I struggle understanding how the relation between the value of the collateral from 1) and the value of the BTC from 2) is and what’s the basis for the annual interest.
Would you be so kind and make an example with numbers?

Who said only one custodian is allowed?

Keeping the USD and don’t invest in this would eliminate those risks? I don’t think so. So it is not a risk of this investment.

There is also a risk that the earth ends, but we generally don’t count that as a risk.

  1. by “single” i mean no “multisig” way to handle USD unless the custodian can use trusted friends, relatives,etc
    2 and 3, i wanted to make clear what would be the risks for the custodians. NU will not have any risk, correct? (trying to understand)

1 What the custodian does with the funds is not our problem. If he wants to gamble with it or burn it, so be it. Remember the collateral, if he defaults, Nu is covered, no risks.
2 and 3. Again, I simply don’t see any risk for the custodian either, because not investing would not be better.

I don’t think you will, you previously put more money there than you are taking out, that is not taxable. Until, of course you end the custodian service and you get the money you put in, plus the interest. But again, it is exactly the same as any other investment.

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So, what’s happening here is Nu is paying interest to keep its reserves in stable and predictable USD, rather than in Bitcoin where it’s at risk of being devalued through volatility? Just like we pay interest for decentralized liquidity provision, here we would pay interest for a decentralized non-volatile reserve in USD, with the potential of making profit for Nu in case people default. Am I understanding this correctly or am I missing the point completely? I’m still trying to understand, so it’s possible I’ve misunderstood.

You completely understood. I would say you are paying for cash management.

This would also help with liquidity because it is effectively taking NBT out of circulation, and that is always good.

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Wow, that’s a pretty amazing idea. I’m interested in hearing what others think about this and if they can poke holes in it.

In the bolded part you are referring to a custodial grant correct? If so, I wonder how much stress that would put on shareholders if they have to keep track of all the grants they have to put out. Is there maybe a way to simplify it for shareholders, like having a group like FLOT managing things and giving out the NuBits to those who are owed them? Shareholders would make a larger grant to FLOT instead of making lots of smaller individual grants.

I have been thinking about this, it is beginning to be really difficult to keep track of Nu. We need a calendar, and a bookkeeper. If anyone wants to contribute to Nu without coding skills or more money please PM me, I have a few ideas.

We can pass a motion with the general rules, and FLOT will be free to use T4 to repay debts.

Time will tell how much FLOT needs.

Good idea. Can @CoinGame or @tomjoad split this off into its own thread?

It’s your idea, so what title would you like them to use?

Distributed funds management maybe?

I haven’t thought about that, I am open to suggestions.


“Creating a Distributed Non-Volatile Reserve Using Interest”

…or something similar

BitUSD is a broken product that is unlikely to ever gain widespread usage. I don’t understand why we would want any exposure to it. Integrating a weaker product into our network would give that competing network legitimacy, which is counter to NuShareholder interests.

This shows that the custodian has a powerful financial interest to ruin the NuBits peg through speculative attack. Benjamin wrote about the possibility of speculative attacks on a much larger scale here: Speculative Attack on Nubits

If I owe the Nu network 10,000 NBT and don’t own NuShares, I will do everything in my power to devalue NBT prior to paying back my loan. This could include negative PR campaigns, hacking our website, or performing a speculative attack. We should not give custodians incentive to harm our network.

Our T4 reserves could be better-diversified through investment in other cryptoassets like LTC, PPC, ETH, etc., but pure BTC in a multi-sig fund is still desirable to paying one person to hold USD in my opinion.

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That premise is true for every 10,000 NBT potential buyer. Is not related to the method itself.
You owe USD value, you can also buy and burn NSR, pay in BTC, NSR, LTC, PPC, ETH, etc. Basically whatever FLOT is willing to take. Burned is preferred to a payment to FLOT, but we can do both.

They already have the incentive when they have their hands full of buy side liquidity

I think you didn’t understood what this method proposes, and the risk of paying “one” person with this method (ideally they would be a few).
That person/s already paid his debt, and then some as a collateral. Nu have all the money.

So lending Nubits is out of the question for Nu network?

You will have a hell of a time explaining to the tax authority that buying NBT to burn and cashing USD out is connected.

Anyway it’s an interesting idea to do two things together 1) get rid of volatility risk of BTCs in T4 and 2) have a decentrralised mechanism to buy NBT to burn.

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You don’t need to go into details, how is this different than putting in money in the exchange and taking out BTC, then putting in BTC and taking out money? That is basically what you are doing, but in a complex way.

You also don’t explain ShapeShift transfers, I bet they are equally complex under the hood.

The onus is on you to explain that complex thing to tax offcial who may well be totally ignorant about cryptocurrencies.

Because the exchanges and shapeshift with their interfaces shield the complexity for you as a user. You don’t have the benefit if you roll your own.

That way I not only 10 kUSD value for Nu, but lend Nu 1 kUSD.
It would be very convenient to do that on a NBT/USD pair to reduce the complex buying and burning NBT, receiving BTC, trading them, etc. solution to:

  • create a smart contract with Nu
  • buy 1 kNBT at an exchange, send it to FLOT T4 sell side address
  • receive 1 kNBT + interest back later

Not so different from parking after all, but more complex…

I agree that bitUSD is much less adopted than NBT. I don’t know whether I’d call it a broken product. One could say that BTC is a broken product as well and that’s the reason why we need to search for alternatives.
BTC has a huge market depth, but no stability.
bitUSD has little volume, but a better stability than BTC (hopefully! without volume hard to assess that).

I fear that one can’t be argued with - at least I don’t know how.

I think lending and leveraged trading will be very important once B&C Exchange is operational.
Isn’t this proposal paving the ground for it?