DR - Distributed reserves

[Dhume]

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

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 )

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.

[ttutdxh]

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

[Dhume]

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.

[ttutdxh]

The only problem is that comes at a tradeoff of having less sell side liquidity at hand.

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

[Dhume]

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.

[ttutdxh]

That is out of the scope of DR!

[Dhume]

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.

[ttutdxh]

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

[Dhume]

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

[ttutdxh]

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.

[Dhume]

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.

[ttutdxh]

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.

[dysconnect]

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%.

[Dhume]

Higher collateral would come at a higher cost in the form of contractors requiring more interest from Nu though. With the current situation I would really like say a 10% reserve similar to Nusafe that is in USD and value stable an additional 5% reserve in BTC (since Nusafe similar reserves come with an monthly interest rate). And an additional 10% reserve in DR, this last reserve would be “cheap” in terms of interest and gives Nu a net profit when contractors default and is still backed by the 15% reserve in Nusafe/BTC. This would give us a total 25% reserve relative to outstanding Nubits.

I think for the current Nu situation this would be the best model.

[ttutdxh]

@dysconnect comment is exactly what I am talking about with “potential downsides that in the end are not”. We have already discussed why that is not the case, yet the “potential downside” is brought again with conflicting premises:

When that contractor in this scenario:

in case the one taking the contract is currently a liquidity provider for Nu with Nubits.

“reinvest” the money, it transitions to this other one:

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

Contractor have $50k USD, buys 50k NBT in the open market and burns them, demand is $50k bigger, circulating NBT are the same, that eats sell side. Buy side is $50k USD bigger than sell side. Fast forward Nu needs $10k, nothing happens because Nu never needs $10k in the first place, since buy wall is $50k bigger.

so the issue we are talking about:

This form of collateral can’t be used to support the “last 15%” of tier 4, so won’t be an ultimate solution.

never even exists in the first place, cause at that point we don’t have to support anything with the 15%.

This mathematical model I am talking about would help avoiding this, the 60+ redundant posts in NuSafe discussion, among others like DR, revenue allocation, T4 funds management…

[Dhume]

The problem is that we are expecting to have that 50k in Tier 4 reserve not on the buy side on exchanges. When the buy side gets eaten we’re under the assumption that we still have 50k in tier 4 not realizing its actually already used on the exchange. So when 50k buy side buffer is gone, and additional decline happens suddenly we’re faced with contractor default and no reserve.

[ttutdxh]

And again, “potential downsides that in the end are not” that have already being discussed.

When the buy side gets eaten we’re under the assumption that we still have 50k in tier 4 not realizing its actually already used on the exchange.

There is no difference having BTC in T4 as having BTC in buy side.

So when 50k buy side buffer is gone, and additional decline happens suddenly we’re faced with contractor default and no reserve.

When that 50k buy side buffer is gone, we have had a dump of 50k, thus having had 50k in T4 as BTC would have been used to pay for that dump and cancelled each other. So with that premise of 50k dump we are broke with 50k in T4 and with 50k in DR.

We don’t even have/need to recover the collateral. The 50k dump have been saved by that collateral in form of buy side. We lost 50k of collateral, we won 50k not spended from T4.

Summarizing, if we can’t recover the collateral dumping it into the buy side, we don’t need to recover the collateral.

[Dhume]

[quote=“ttutdxh, post:58, topic:3163, full:true”]
There is no difference having BTC in T4 as having BTC in buy side.[/quote]
There is, the T4 reserve (especially the 15% part) is supposed to be a backup reserve, thus when buy side swindles it can be balanced and T4 restocked with NSR sales.

When that 50k buy side buffer is gone, we have had a dump of 50k, thus having had 50k in the buy side would have been used to pay for that dump and cancelled each other. So with that premise of 50k dump we are broke with 50k in T4 and with 50k in DR.

This is true, that is why when contractor defaults there is no loss but a net profit for Nu. The only problem is that this is akin to putting our T4 reserve actively on T1 buyside. Normally we would restock T4 with NSR sale if it gets eaten by balancing with T1, in the DR there is no “loss” of funds when contractor defaults but an unexpected decline in T4 reserve. That is why it’s not suited as a true “emergency” reserve (which the 15% reserve is supposed to be).

[dysconnect]

You can’t assume that the buy side is larger by 50k for the entire duration of the contracts. It is a very long period of cash flows that you have to model. I also think that 1 NBT in the wild for 1 USD in tier 4 buy side is a bad trade unless in specific circumstances.

The entire liquidity structure has a lot of robustness to begin with (which comes at costs), to account for the unknowns and unquantified. We cut costs by finding ways to remove a few buffers at a time.

Now if you really want to cut into the 15% by this untested mechanism, you are removing more than a few blocks in a game of Jenga. Moving slowly has its own risks and costs, but I don’t think there has been analyses and modelling comprehensive enough for moving more quickly.

[ttutdxh]

I don’t think there has been analyses and modelling comprehensive enough for moving more quickly.

That is why I propose the mathematical model. That risk is true for any proposal, as simple as it may seem.
Would you support a grant for the development of that model?

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@Dhume We can assume that we need to start the NSR sale when that buy side buffer is lower than the DR reserves. It is common sense. The DR reserves that now are buy side buffer are less than 15%, so T4 effectively has less than 15%

Edit: The first step when the 15% is reached would be ask DR contractors to buy from sell side, burn and proof. And if that is defaulted start with the NSR sale, as we only have the <15% buffer now.