[Draft] Motion to increase the control by Nu over NuLagoon buy/sell side

[masterOfDisaster]

Continuing the discussion from [Voting] Motion to lower compensation for NuLagoon sell side:

[quote=“masterOfDisaster, post:32, topic:2699, full:true”]
I would prefer continuing the discussion here instead of creating another motion.
But as it now no longer is a draft and instead hashed and up for voting, there might be no other option left - unless the NSR holders are fine with this motion.[…][/quote]

Like pointed out in @JordanLee’s motion I think the discussion was not far enough for a motion to be created.

I like the simplicity of @JordanLee’s motion and hope that we find a similarly simple change of the current compensation model but with better balanced interests and outcomes.
I think that limiting the sell side compensation to a certain percentage per day is neither fair for NuLagoon nor in the best interest of Nu.
I hope that @henry or another NuLagoon representative will be active in the discussion as some of the ideas might be easier or harder to be implemented on NuLagoon.
It wouldn’t be helpful to find a solution that doesn’t work with NuLagoon.
I consider NuLagoon a partner of Nu; a business partner, but still a partner. Some parts of of the contract will be reworked, but both Nu and NuLagoon should be able to live with the results.

I expect the compensation of LP to be in an early stage. A lot will happen. The compensation will go down.
Fixed payout ALP will help determine the compensation rate people demand for providing liquidity.
After that information is available the overall compensation for NuLagoon can be negotiated again.

For this motion I’d rather see the change of Nu and NuLagoon’s business beyond a reduction of compensation; it would be good to change it to a more effective means of steering liquidity - which will cause a reduction of compensation only if the liquidity situation is beyond thresholds.
I have SMART criteria in mind while writing this.

Following are some of the ideas from the other motion for starters and to continue the discussion here and (hopefully) find a better motion.
If I overlook an idea or you have a new idea, feel free to post it here.

[Withdrawn] Motion to lower compensation for NuLagoon sell side

How would you feel about fixed cost? I.e. always guarantee a certain total payout per month on each side like 1,500 nbt to sell and 1,500 nbt to buy such that no one can say we incentivize one over the other yet we still pay more to people providing less redundancy and less to those providing more? This is a concept we’re also discussing with ALP so you aren’t alone.

[Withdrawn] Motion to lower compensation for NuLagoon sell side

To provide an incentive to balance the buy and sell side I’d favour capping the compensation on one or either side.What about paying only compensation up to, say 55%, of the total pool volume per side?If the sell side is at 60% of the total pool volume, the buy side is obviously at 40%. The 40% get fully compensated and the 60% sell side only up to 55%.This reduces the overall compensation of the pool and in the effect the management fee as it’s a share of the compensation.This creates a direct incentive for the operator to balance (to increase the own compensation) and an indirect incentive, because balancing increases the reward for LP at the pool (possibly leading to more volume and more compensation).

[Withdrawn] Motion to lower compensation for NuLagoon sell side

Pay a flat amount total symmetrically to each side distributed evenly amongst LPs on that side. So if you give out $1 to each side and there’s 100 nbt on one side and 200 nbt on the other, the heavy side gets 0.5% while the light side receives 1%. (Fixed cost)

[Withdrawn] Motion to lower compensation for NuLagoon sell side

Have a target amount for buy and sell separately up to which a fixed rate is paid. When liquidity on one side goes above target, enact fixed cost on just that side.

[Withdrawn] Motion to lower compensation for NuLagoon sell side

Some kind of dutch auction mechanism. However, I think this will be impractical to implement.

[Withdrawn] Motion to lower compensation for NuLagoon sell side

Make the operator reward linked to how balanced the peg is. Give some leeway for arbitrage and so on, but if one side ever crosses say 75% of the total liquidity we dock operator reward by 25%, then 50% at 90% unbalanced.

[Withdrawn] Motion to lower compensation for NuLagoon sell side

if sell or buy side alone exceed 75% of the total liquidity provided in a 1 month period, the monthly reward will be limited to 4,000 nbt instead of the allotted 5,000. If a single side exceeds 90% of the total liquidity only 3,000 nbt will be awarded to NuLagoon for the full month of operation.

[woodstockmerkle]

Make the operator reward linked to how balanced the peg is. Give some leeway for arbitrage and so on, but if one side ever crosses say 75% of the total liquidity we dock operator reward by 25%, then 50% at 90% unbalanced.

This idea resonates the strongest with me.

What ways could this be abused by the LP or by the market?

[Nagalim]

The operator could easily pass the costs on to the participants. The effect ends up very similar to the last one, where we restrict the pay to the pool directly. If shareholders can prevent the operator from passing on the costs effectively then it’s worth looking in to.

[woodstockmerkle]

So there’s a subtlety in here that I did not catch in my first read – whether (in the last 2 ideas in the first post) the compensation is docked per-LP or across all LP’s.

If it’s per-LP, then if a LP gets out of whack there is an incentive for an individual who is participating in that LP to withdraw their funds from one LP and move it to another that is more balanced, and will ostensibly receive a higher reward.

I think that would be a stabilizing force, but at the same time I wonder if there would be unintended consequences – if there was a run on an unbalanced LP (“run on the bank”), and the LP itself had to liquidate and/or trade with other LP’s to meet withdrawal demands.

[henry]

I feel it is necessary to have some more basic discussion on the goal of balancing liquidity.

There are 6 tier of liquidity, according to @JordanLee 's desgin.

Finalized evolution of liquidity operations

The following is the finalized version of the motion I am advancing to guide development of our liquidity operations. The motion hash you need to enter into your client to vote for it is: 65CB60D096508A7FA9ECC2017B38BC3AFEB5663D *****Begin motion***** Liquidity operations should have the following tiers. The first tier is available to the market immediately, but is at higher risk of loss than the other tiers. Subsequent tiers have the disadvantage of not being immediately available but featu…

1. Can we set the balancing goal at 50% each side for all the LPs?

I am afraid no. Because the balancing operation doesn’t affect the total NBT/BTC in liquidity operation at all. Assuming there 2 LP in the market, If LP1 has 50k buy and 50k sell, LP2 has 30k buy and 70k sell. They operate independently. LP2 have to sell 20k NBT to the market to achieve his balancing goal at 50% each side. LP1 has to buy those 20k NBT to maintain the peg in the market, then LP1’s liquidity wall become 30k buy/ 70k sell, now its his turn to take balancing action. LP1 and LP2 will stuck in an endless loop, causing huge fake trading volume and very high trading cost for LPs.

2. Can we set the balancing goal at 50% each side for Tier12? and How?

Yes. in most cases, we can. By using tier 3. In the example above, LP2 does’t sell 20k NBT to market, instead he transfer 40k NBT to tier3, then LP1 has 50k buy/ 50k sell, LP2 has 30k buy/ 30k sell. tier 12 is perfectly balanced. If one month later someone has 40k NBT unparked and he decided to sell them for BTC, LP1 take 10k, LP2 take 30k, LP2 transfer 60k more NBT to tier3. then LP1 has 40k buy/ 60k sell, LP2 has 0 buy/ 0 sell. LP1 will have no way to balance his liquidity now. In this case even introduce tier3 we can not balance fund in tier1,2.

3. Can we set the balancing goal at 50% each side for fund deposit?

How about forget about tracking fund movement as time goes by. We just provide incentive to let pool participants provide equal size of NBT/BTC when they initially provide fund.

I am afraid that won’t work neither. Because participants is free to convert their fund between BTC and NBT. In the example above, if someone want to participate LP2 with NBT and find the compensation is higher for BTC, he will sell NBT for BTC before participation, that sell will causing the unbalance for LP1 or LP2 itself, and need further action and cost to take care of.

4. Is there a better idea?

In our opinion, to perfectly balance liquidity between tier 123 is costly and difficult, because it doesn’t touch the core problem. The core problem is to let NBTs enter and quit the circulation. We should put more of our effort to exploit the use of tier 6 - grant and burning. @Benjamin even proposed that we could maintain basic peg rely on tier 6 alone.

Some Suggestions To Eliminate Peg Maintenance Expenditures

Hello, I thought I would chime in with some suggestions. I will briefly describe a possible revamp of the peg maintenance system and then explain its potential advantages. System: 1) In each PoS block, Nushares record a binary vote about the current Nubits/USD exchange rate on external markets. 1 if the price of Nubits is > 1 USD or 0 if the price of Nubits is < 1 USD. 2) Every 24 hours (approximated in terms of blocks), an auction of Nubits and Nushares is conducted within the block ch…

[Cybnate]

Is there a better idea?

In our opinion, to perfectly balance liquidity between tier 123 is costly and difficult, because it doesn’t touch the core problem. The core problem is to let NBTs enter and quit the circulation. We should put more of our effort to exploit the use of tier 6 - grant and burning. @Benjamin even proposed that we could maintain basic peg rely on tier 6 alone.

Thanks for detailing this out. I agree with the complexity and cost of balancing liquidity at tier 1 to 3. Even the relatively centralised operations in tier 4 and 5 are a risk which makes me uncomfortable even though those funds will be held by a number of Shareholders in the future instead of one.

I think it has been proposed before, but I would support a proposal to swap tier 6 with tier 4 or maybe even tier 3. This will require some set of rules ideally in automated operation where NBT and NSR will be swapped according to the demand for NBT. Nagalim’s auction software (in combination with burns and grants) could be a good start but will need some refinements and business rules to absorb short term shocks to the system. Tier 4 and 5 still exist but are just a second/third line of defence (good for discussion in another thread) after the grant and burning tier.

I would highly prefer that over the motion in the original post in the other thread.

[Nagalim]

@henry you are talking about the switching problem, which I brought up at the beginning of the discussion. It has been discussed many times before.

LP 1 has 40 buy and 60 sell and has no incentive to prefer one over the other. LP 2 has 70 buy and 30 sell with incentive to balance. LP 2 will clearly buy 20 from LP 1 to balance. That’s what happened with NuLagoon. Shareholders will think LP1 sucks at doing their job and LP 2 is doing great. And they’d be right.

Now we turn on balancing incentive for LP 1. LP 2 tries to buy from LP 1 and LP 1 also tries to balance off LP 2. They start switching with each other and burn some funds to the exchange. They both wise up quickly to the switching problem and settle with equal funds of 55/45 each. Now, it’s super obvious to shareholders that they need to do a small share buyback of quantity 5. The shareholders are happy with both LPs and sunshine and roses all around.

@henry why are you pushing so hard for case 1? Case 2 is clearly better.

We can minimize global switching using tier 6 seeded auctions and spread-after-fees, but the entire point of liquidity provision is to provide a short term buffer for a balanced peg.

This has been playing out wonderfully with ALP. MLP can do it too using very similar mechanisms. If NuLagoon does not respond to our requests, we will be forced to implement punishments for an unbalanced pool to force balancing incentives that @henry should really be putting in place himself voluntarily with thought and gusto.

How about this:

Pay maximum rates when NuLagoon has the same liquidity ratio of buy:sell as that reported by the network via custodial addresses. The farther away from that ratio to either side, the less you pay out. Have a minimum rate for a 0% or 100% ratio. That way, the incentive is to balance NuLagoon with respect to all other pools. If there is a bug in someone’s report, the worst thing that will happen is NuLagoon will pay the minimum for a bit of time until the manager (henry) catches on and adjusts whatever needs to be adjusted (conceivably paying backpay). This is a very rare occurance anyway. Most of the time, it would just work as hoped and balance the network.

I may try this very thing with ALP fixed cost.

[cryptog]

This has been playing out wonderfully with ALP. MLP can do it too using very similar mechanisms.

Why NuLagoon is currently not willing to implement similar mechanisms then?

[Nagalim]

Henry is waiting for the network to have over 50% buy support before NuLagoon starts selling nbt because of a concept of the bigger picture for Nu. However, if shareholders continue to ride the peg and never really allow buy side to overtake sell side (as they are right to do) then NuLagoon is continuously filled with ask nbt. I am saying that that is a misunderstanding of the purpose of liquidity provision and any number of economic mechanisms can aid in balancing a pool with respect to the network.

[henry]

They both wise up quickly to the switching problem and settle with equal funds of 55/45 each.

Can you elaborate on this?

[Nagalim]

Let’s pretend we have a pair with 0 buy and 1000 sell. We are offering 5 nbt to anyone willing to supply even 1 nbt buy side while also paying 5 nbt to all people on sell side put together.

Now LP 1 comes along and puts up buy liquidity. LP 2 wants the buy side liquidity, so sells onto LP 1 to take the nbt. LP 1 then sells back and LP 2 sells and so on, burning up the funds in what I refer to as the ‘switching problem’. Eventually, LP 1 realizes the solution and places nbt buy support 1% below the maximum compensated spread. LP 2 still sells because he thinks he can make more from the pool than he loses. LP 1 immediately sells for profit and does it again. LP 2 stops messing around or loses money. This begins to stabilize the peg.

Eventually, LP 2 wises up and balances his funds via arbitrage instead of losing tons of funds to the exchange playing games.

If the network is unbalanced, arbitrage won’t be possible and nsr holders will institute park rates, share auctions and maybe some tier 4. If it’s unbalanced the other way a simple ppc distribution, share buyback or expensive development would be in order.

[masterOfDisaster]

Now we turn on balancing incentive for LP 1. LP 2 tries to buy from LP 1 and LP 1 also tries to balance off LP 2. They start switching with each other and burn some funds to the exchange

Thank you for bringing this up. I was thinking about the issue as well when I was trying to figure out parameters of my draft for running NuBot on hitBTC.
I intend to start providing liquidity in a more or less balanced way and plan to tie it to the contract to balance it from time to time.
I’m not going to hijack this thread for the discussion about that; a draft version of the hitBTC NuBot stuff will follow.
But the thing is: say NuLagoon does balancing each accounting day. I do balancing the day after or before or at another point of time. All we’d do is move the unbalanced funds to each other.

Without being able to do business with Nu to balance the sides (by seeded auctions or something else) there will be no chance to balance the sides network wide if they are beyond certain thresholds.
That is something for another thread I think.

This motion should try to aim at giving NuLagoon an incentive to keep the balance between buy and sell side at some level.
Some ALP operations have a bigger reward for the buy side.
I consider the buy side more important than the sell side. I’m going to take that into consideration later. Others might see that differently.

At the moment NuLagoon is receiving money from Nu up to a fixed amount. It’s not important whether the money is on buy or sell side.
Status quo is:
NuLagoon receives up to 5,000 NBT for compensating LPs and covering operation costs. For LPs it’s not important whether they deposit NBT or BTC at NuLagoon. NBT and BTC are treated equally.

Is it possible to compensate buy and sell side differently?
e.g. NuLagoon receives up to 2,100 NBT for compensating LPs and covering operation costs on sell side and 2,900 NBT for compensating LPs and covering operation costs on buy side.

Can that do the trick easier than making the compensation dependent on the ratio between buy and sell side?
Do we create new problems with that?

…a way to interact with Nu on tier 4 level still is required…

[Nagalim]

Fixing a ratio of how much of the payment goes to sell and how much to buy is a fixed cost model, so there are some inherent complications there. Currently, NuLagoon is accepting something like 4,000 nbt for sell side liquidity and 1,000 nbt buy side from the Nu network each month. Just doing a 50/50 split might be a powerful first step.

We should attempt to track the global Nu Network balance point and pay incentives toward that, but also pay more when the network as a whole is balanced. It can get complicated, but I think fixed reward with no target is not the best choice if the pool doesn’t attempt to track the balance point themselves. We need to stimulate seeking out the correct buy/sell ratio to satisfy the network for MLPs and ALPs alike.

[henry]

Dear all,

We would like to declare that NuLagoon is fully open-minded to improve its operations. Just let us know how NuShareholders prefer us to manage Tier 3 fund.

Option 1: Tier3 is used to support Tier 12 as much as possible. Fund in tier3 will be transferred to tier 12 when tier 12 is unbalanced, regardless fund in tier3 is balanced or not.

Option 2: Tier3 should be balanced just as the way Tier 12 does. To avoid “switch problem”, the balance target should track the overall buy/sell liquidity ratio, instead of fix at 50% each side. In my previous example, the balance target is 55%/45%.

Currently, we are at option1, based on the definition and our understanding of liquidity tiers. But we have no problem to switch to option 2 at all as long as there is a consensus that it’s better.

Thank you.

NuLagoon

[Nagalim]

This is the ideal solution, where the manager simply tracks the ratio and satisfies the network using other pools that may be out of balance with respect to the total network ratio. Thank you for being open minded. Do you need a motion passed to that effect? If so, would you prefer to write it yourself?

[henry]

Sure. We can write a motion. Do I need to create a new topic?

[Draft] Motion to regulate rules of fund management in NuLagoon

Following the discussion in the thread:

[Draft] Motion to increase the control by Nu over NuLagoon buy/sell side

Continuing the discussion from [Voting] Motion to lower compensation for NuLagoon sell side: Like pointed out in @JordanLee's motion I think the discussion was not far enough for a motion to be created. I like the simplicity of @JordanLee's motion and hope that we find a similarly simple change of the current compensation model but with better balanced interests and outcomes. I think that limiting the sell side compensation to a certain percentage per day is neither fair for NuLagoon nor …

We present this motion to NuShareholders. By voting in favor of this motion, you are letting NuLagoon know that the following rules of fund management serve the need of NuNetwork better.

1.  The funds placed at Tier 1 will be 10% of the total fund or more.
   

2.  The funds placed at Tier 1 and Tier 2 will be 20% of the total fund or more.
   

3.  The balancing target for both funds on exchanges (Tier1 and Tier2) and off exchanges (Tier3) is the network-wide buy/sell liquidity ratio.
   

4.  When funds is unbalanced by 10% or more (abs(NuLagoon buy / (NuLagoon buy + NuLagoon sell) – Network buy / (Network buy + Network sell)) > 10% ), funds will get moved in to/out from exchanges to achieve the balancing target, no less than twice a week.
   

Thank you.

NuLagoon manage team

[cryptog]

When funds is unbalanced by 10% or more (abs(NuLagoon buy / (NuLagoon buy + NuLagoon sell) – Network buy / (Network buy + Network sell)) > 10% ), funds will get moved in to/out from exchanges to achieve the balancing target, no less than twice a week.

So if NuLagoon represents the majority of the overall liquidity, NuLagoon would never get balanced in case it is in an unbalanced state. But Nu should not depend on NuLagoon entirely.
Right now we have 73k in buy and 90k in sell overall
NuLagoon represents: 15k in buy and 50k in sell more or less.
so NuLagoon represents 20% of overall buy liquidity and 55% of overall sell liquidity.
Given the fact that the network can free nubits rapidly, Nu has a satisfactory dependency on NuLagoon and therefore the rebalancing formula is meaningful in the current situation.
I would be in favor of such a motion.