DR - Distributed reserves

Yes, eventually having a way to store USD might lead to other usages.

NU hold BTC , and others short BTC at USD market. maybe a good idea.

Continuing the discussion from here

@Dhume do you think that allowing buy side liquidity go way bigger (like 150k, vs 70k sell), and not enforcing the 40% on the sell side like this, would solve DR collateral risk completely? That modification should not create any problem.

Are you referring to the scenario where DR is funded by “new” money entering Nu (so external USD flowing in) or the scenario where we are talking about stray Nubits are already out in the wild (so a decline in outstanding Nubits) being burned to accommodate DR?

Both, because T4 will ultimately kick in in the event of a liquidity unbalance further than 40%, thus risking collateral not being able to be converted back to USD into the buy wall.

Alright, well my take on it is that stepping away from enforcing a 40% would help in the case of new money flowing in. Since that new money is now being buffered in T1 instead of being rebalanced by T4 and thus ending up as excess funds (since we now have a contract instead of reserve funds) and being spend.

In the case of outstanding Nubits funding DR and thus being burned the situation stays the same. Since we then have an excess of funds in T4 since part of those reserved funds are now replaced with the DR “contract” and thus promoting us to use anything over 15% for buybacks and other goals.

A better solution in my opinion is changing our reserve structure. So we want a 15% hard reserve, why not try and add an additional 10% reserve on top of that in the form of DR contracts. Since DR contracts are very cheap (0,5% annually right?) they would be very suited for this. If they default no biggie, we have a 1% profit (the collateral) and still 15% reserved in other means to maintain the peg. Of course tweaking the numbers like a 10% hard reserve and a 10% DR reserve would work as well. It’s a matter of preference.

The nature of DR means it’s very cheap for Nu and even comes with a potential profit in case a default occurs, but it comes with higher likelihood of defaulting. Which is okay for a first line of peg reserve but less suited for a do or die reserve.

I don’t follow, in that case T4 is reduced/converted to DR because of the BTC payment in step 2.

Edit: Ok I think I got what you are trying to say: Burning NBT reduces circulating NBT and thus reduces T4 15% equivalent creating an excess because the 15% is now less money.
That should not happen because those burned NBT collateral should be accounted together with circulating NBT, even thought they are not, so the 15% of T4 does not change.

My apologies my comment is not always valid, its only valid if the “outstanding” nubits are not used in T 1-3. So in case they are Nubits held in a private wallet not doing anything this should not affect tier 1-3. In this case the contractor is payed back for his burned Nubits with BTC currently in T4, this leads to a decline of T4 funds held by Nu in favor of a contract between Nu and the contractor.

There is a small effect on T4 requirement since this is a decline in outstanding nubits due to the burning and thus requiring a slight reduction in the 15% we require in T4 (this effect is small but makes examples far more complicating so I’ve ignored it :wink: )

If the Nubits are currently held by someone involved in Liquidity provision in tier 1-3, this will remove Nubits from the sell side and thus create a similar imbalance as when they are bought from this sell side and burned, however now the imbalance is only a reduction in sell side funds not an increase in buy side BTC (since they are not bought from the sell side but removed by the contractor).

Edit: [quote=“ttutdxh, post:41, topic:3163, full:true”]Edit: Ok I think I got what you are trying to say: Burning NBT reduces circulating NBT and thus reduces T4 15% equivalent creating an excess because the 15% is now less money.
That should not happen because those burned NBT collateral should be accounted together with circulating NBT, even thought they are not, so the 15% of T4 does not change.[/quote]

Ok, but that changes a lot since then it’s like @mhps said and they are not actually “burned” or at least they are still being counted in the money supply.

So letting buy side run free solves the model for you?

Well it creates a sort of buffer that is desirable and makes DR more attractive. The only problem is that comes at a tradeoff of having less sell side liquidity at hand. Unless we increase total liquidity across exchanges, but this of course would cost us more interest.

Letting buy side grow instead of rebalancing with T4 means we can buffer the burned Nubit in our buy side walls, however this is naturally limited to how much the buy side can hold until the imbalance becomes to impractical. Aka a 10k sell side with 190k buy side would be problematic. But I like the idea, but unless we want to pay additional interest over additional liquidity there is a limiting factor.

The tradeoff only happens in the case it is “new” money, so it is new demand, not a problem at all.

No also in case the one taking the contract is currently a liquidity provider for Nu with Nubits. His Nubits then are taken out of the sell wall, thus having less sell side liquidity at hand.

That is out of the scope of DR!

Hm…it’s just that DR is incredibly complex having interactions on almost all levels. From “stale” outstanding Nubits all the way through tier 1 - 4 and back again.

With that reasoning any profit opportunity in the world risks lowering our liquidity!

This is actually the case, if there are easier more secured and profitable opportunities presented to liquidity providers I’m sure they will take their funds elsewhere :wink:

DR is far more secure and liquidity provision is far more profitable. I don’t think it offering both would be a problem, they fit completely different investment profiles.

I agree, but we can’t prevent for example DR contractors using their BTC to reinvest them in Liquidity provision. In which case they essentially get double interest over the same liquidity, that is if we never call upon DR and they get defaulted.

There are a lot of details that need to be well defined in DR but also make it very complex.

That is the beauty of it. They can do it, but they are basically adding more money lost over their liquidity provision risks, in form of the DR collateral not received back.

In either case Nu is not affected. Collateral already in our system. That theoretical exchange default risk in liquidity provision is there anyway. It is not like doing DR would worse the liquidity drop in that situation.

We can have a lot of these “potential downsides that in the end are not” discussions, but only a complete dynamic mathematical model can show the real deal. This is a problem we have been having with liquidity/buybacks/reserve formulas for a long time and that is at the hearth of Nu sustainability.

I am considering developing such a dynamic mathematical model, to have somewhere we can apply those formulas/proposals and understand the different outcomes globally. But that would be hard work and I would ask compensation for it.

I don’t know if shareholders currently share this concern right now, but it will be ultimately necessary if we want to evolve and improve, else we are essentially shooting in the dark with every new proposal.

This form of collateral can’t be used to support the “last 15%” of tier 4, so won’t be an ultimate solution. But it can be used to reduce risks, in the short to long term, for the residue amount above 15%. Though I still prefer a higher collateral like 5%-10%.