Indigoman is to be credited with originally presenting the idea of burning currency in exchange for NuShares. This change is consistent with the original intent of the network's design: to separate the risk asset from the transactional asset.
Exchanging currency for NuShares represents a major improvement to our currency product. It will invalidate the criticism some have voiced that our system will make currency holders bag holders.
The following is the proposed text of a shareholder motion followed by some commentary about it and explanation of it.
******Begin draft motion******
Shareholders will vote for burn rates. A burn rate vote will consist of an 8 bit currency code and a quantity of one hundred thousandths (1/100,000) of a NuShare satoshi represented by an uint32. This way shareholders can vote that as little as 1 NuShare be granted for each 100,000 units of currency. Conversely, they can vote to grant as many as 42,294 NuShares per unit of currency. For instance, a currency code equivalent to B and a quantity of 1 means 1 NuBit equals a hundred thousandth of a NuShare. The median share day weighted vote over the last 10,000 blocks will be the rate that is recorded in the block (there will be one rate for each currency where the median vote is not null or zero). When a user chooses to burn currency in exchange for NuShares, they will receive the rate recorded in the blockchain 60 blocks deep, which will offer some certainly about burn rates in the very short term.
A currency burning mechanism is already included in the current protocol in the form of transaction fees. To simplify the protocol change, currency will be burned as though it were a transaction fee. When an excess transaction fee is paid, a protocol change will permit an output of NuShares of equal or smaller quantity. The correct NSR quantity limit will be determined using the burn rate currently in effect. For instance, if the burn rate in effect is equivalent to 100 NSR satoshis per NBT satoshi, and there was an input of 10000 NBT satoshis, then there are 9900 NBT satoshis available to burn and convert after the standard transaction fee. If there are no NBT outputs, then an NSR output of up to 100 * 9900 or 990,000 NSR satoshis would be permitted. If there is an output of 5000 NBT satoshis then the NSR output would have a maximum allowable size of 490,000 NSR satoshis. To ensure the transaction will be accepted, the client will be coded to use the lowest burn rate in effect in the next ten blocks.
The mint reward will be adjusted according to the total number of NuShares in the network. Specifically, each time the supply of NuShares reaches 50% and 100% of its orginal base (1 billion), the mint reward will also increase by 50% and 100%. For example, when NSR supply reaches 1.5 billion, the reward should be 60 NSR. At 2 billion, 80 NSR, at 3 billion, 120 NSR, at 4 billion, 160 NSR, and so on.
******End draft motion******
There are two harded coded NuShare values in the system whose meaning will change as a result of introducing uncertainty about the number of NuShares that will exist in the future. These are the mint reward (currently 40 NSR) and the minimum required in each output to be eligible for minting (currently 10,000 NSR). The purpose of the output size minimum is to enforce the 7 day period where an output is ineligible to mint after minting. Originally, my thinking was that as technology developed to make minting easier and safer, the reward slowly dropping as a percentage of the outstanding NuShares was appropriate. However, with the future supply of NuShares becoming subject to substantial uncertainty, a proportional adjustment is appropriate. A rise in the minimum output size eligible for minting is disruptive. If it were raised from its current value of 10,000 NSR then the vast majority of outputs currently minting would be ineligible for minting. Therefore I propose we leave this unchanged. At present, an output of size 10,000 takes about 5 weeks to mint a block. It is likely to be around 10 weeks when all shares are distributed. This time will rise as additional NuShares are created, but it will also permit smaller shareholders to participate. If this output size minimum were raised proportionately with the supply of NuShares there is a risk that due to loss of NuShares (misplaced private keys), that there would be fewer and fewer outputs capable of minting, which has some negative security implications. This output size minimum is the method for enforcing the 7 day period minting ineligibility after transfer or minting. While this would be degraded if many more NuShares were created, I don't think the security implications are significant, particularly where an output would take longer on average to mint anyway.
There is no known way for burn rate votes to adjust as quickly as the market rate of NuShares. Fast adjustments in rates carry the risk of a small percentage of shareholders setting the rate in a way that does not represent the interests of shareholders generally, because it is much easier for a minority of shareholders to control the vote for a small number of blocks than a large number of blocks. This means the rate will generally be over or under the market rate at any given time. When the shareholder rate offered is below the market rate, no one will burn, expecting shareholders to offer a higher rate soon. When the rate offered by shareholders is higher than the market rate, it offers an arbitrage opportunity. Arbitraguers will gain value by burning currency, receiving NuShares, and selling the NuShares at the superior exchange rate. This will have the effect of reducing the NuShare price to the exchange rate offered by shareholders. This implies that it will be difficult for shareholders to control the amount of currency burned, as the quantity burned will be proportionate to the opportunity for arbitrage. It therefore appears advisable that shareholders only offer burn rates when the decision has been made to retire a currency, or to retire a large percentage of a particular currency. The amount burned will be somewhat unpredictable. Due to these uncertainties, inefficiencies and the relatively long time required to vote for a burn rate, interest rates are expected to continue to be the primary tool for maintaining currency pegs on the support side. There is a very good chance years will pass before a burn rate is voted for. The most likely scenario for currency burning would be when a supported national currency is abandoned or hyperinflates.