The following describes how a gateway with a build-in 90% USD reserve (and with reduced exchange risks) works.
- Nu sends 10000 Nubits to the sell side of the gateway
- The gateway sells Nubits to customers and accumulates bitcoin on the buy side order book
- Once the buyside has more than 1000+B NBT worth of BTC, it converts B NBT of BTC to the USD token on the exchange. B is a settable parameter.
- Once the buyside has less than 1000-B NBT worth of BTC, it converts B NBT of the USD tokens to BTC and puts it on the buy side.
- In an equilibrium state there will be 1000 NBT liquidity on each side on average. The maximum volume of sustained trading in one direction is 10000 NBT.
Way to lower exchange default risk by using multiple exchanges
- If the gateway accumulates more than 3000+R NBT of USD tokens, it converts it to BTC, sends the BTC to another exchange where the BTC is converted to USD on that exchange, with minimum delay in order to minimize volatility loss of using BTC. R is a settable parameter. Other coins can be used for transfering if risk is lower.
- If its USD reserve is less than 3000-R Nubits, it does the reverse and have USD reserve on the other exchange sent back similarly.
- Only T1 fund on the buy side (1000 NBT in above example) is ever exposed to BTC volatility risk for extended time. 10% of total fund in the example.
- Exchange risk is lower depending on how many backup exchanges are used.
- Except for possible technical problems, it is almost deploy-and-forget. No constant attention from FLOT is needed. Reserve only needs t be replenished after BTC volatility exposure on the buy-side has consumed most reserve, which for a 10% exposure should take years according to current data.
- multiple gateways can run on the same exchange, reducing custodian run off risk (assuming no collateral)
- USD tokens issued by exchanges don’t need to have high KYC/AML requirement to buy/sell, as long as you don’t withdraw/deposit, usually. So the redtape problem isn’t severe.
- Needs to trust the gateway operator. We already do that with current gateways however.
- Lower BTC volatility exposure ratio means higher exchange risk, for the same liquidity provided.
- Automation needs development.