This is a first draft of a history of Nu. It’s designed to show off the evolution of the network since launch and catch up interested people or potential shareholders with our current progress.
The Peershares Template
On September 28th, 2013, Jordan Lee introduced his plan to develop Peershares, which was a template that could be used to build highly customized distributed autonomous organizations (DAOs) and corporations (DACs). In its most simple state, Peershares can be issued by businesses in order to raise funding and track share ownership in a decentralized way. Any profit made by the company can then be distributed back to shareholders in the form of any cryptocurrency. Each Peershares implementation would use its own independent blockchain secured cheaply and easily using Peercoin’s proof-of-stake and shares can be transferred and held just like any other cryptocurrency unit.
The World’s First Stable Digital Currency
On January 23rd, 2014 Jordan Lee announced that he had obtained around $500k funding from an investor and entrepreneur to develop a highly customized implementation of Peershares. Jordan hired several members of the Peercoin community and began work on this implementation immediately. The details of this major project remained unknown for eight months while Jordan and his team continued development. Finally on September 23rd, 2014 NuBits was unveiled as the world’s first price stable digital currency. As detailed in Jordan Lee’s whitepaper, the Nu Network is capable of issuing digital tokens that are pegged to real world currencies like the Dollar, Euro or Yuan. NuBits, the initial currency unit on the network is pegged to the Dollar.
Price volatility is one of the largest barriers to mainstream adoption of cryptocurrency and Nu solved this issue by separating the network into currency units and shares. Jordan believes that the critical flaw of both Bitcoin and Peercoin is that they use the same fungible unit for share and currency functions. In his view, shares must have the capacity to appreciate and reflect changes in the perceived value of the network while currency must remain stable regardless to be effective. It is impossible to accommodate these diverse pricing needs in a single unit.
While NuBits is the stable currency, NuShares represent ownership in the network and allow shareholders the ability to vote on decisions that will impact the future of the network. When Nu first launched, shareholders could vote on a variety of things. Consensus on major decisions was quickly reached by voting on motions. Shareholders had the responsibility of choosing trustworthy individuals to be custodians for the network. They did this by voting for a custodial address and a specific amount of NuBits to be granted to them. The custodian would then use a highly customized market maker bot called NuBot on exchanges to place large buy and sell walls above and below $1 in order to fix the price. If demand increased, new NuBits were granted to the custodian by shareholders to place sell walls and prevent the price from rising above $1. If demand decreased, shareholders would vote to set interest rates for parking. The parking mechanism synthetically increased demand by temporarily lowering the available supply of NuBits. When shareholders voted for higher interest rates, people would buy NuBits and withdraw them from exchanges to park for a certain length of time in order to collect the interest given as a reward. The parking interest ultimately had the effect of growing the money supply, but it was an effective tool at increasing demand when it was most needed to protect the peg.
First Liquidity Provider Custodians
On September 10th, 2014 before the public unveiling of Nu, Kiara Tamm (KTm) introduced her proposal to operate a NuBits grant and become a liquidity provider custodian (LPC). The proposal called for the creation of 1.8 million NuBits. The primary reason that this request included such a sizable amount of NuBits was because it was the seed amount intended to bootstrap the initial NuBits markets. The size of the grant would allow for deep liquidity, which would be put to use stabilizing the peg. The proposal was structured to continuously cycle liquidity from the sell side to the buy side and back again, and over time slowly removing portions of the grant to be converted to Peercoin and distributed to shareholders as revenue from the network. Through motion votes, dividends could also be redirected into other projects that needed funding. On September 26th, 2014 Jamie Miller (jmiller) submitted a similar proposal to become an additional LPC, requesting a grant amount of 200k NuBits. Both Kiara and Jamie were officially confirmed by shareholder vote and became Nu’s first liquidity provider custodians.
The Unsustainability of Parking
Shortly after Nu launched and the public had the time to read the whitepaper and come to an understanding about how the system worked, criticism was levied at the parking mechanism and a lot of discussions about it took place. [1, 2] The main criticism was that the parking mechanism would make the NuBits peg unsustainable in the long-term. With increasing demand, the simple solution was NuBits inflation to suppress the price. With decreasing demand however, critics pointed out that offering parking interest to temporarily take NuBits out of circulation had the same effect as adding more to the supply. So in both cases of increasing and decreasing demand, the solution was the same, to inflate the supply of NuBits. Critics pointed out that there was no mechanism for reducing the supply of NuBits in times of decreasing demand and that continually inflating the supply with parking interest would cause the peg to grow unsustainable and fail in the future. To these critics, it seemed as if NuBits was a product designed with an expiration date, a tool to be used now, but discarded once it started showing signs of weakness.
Possible Solutions to Reducing the Supply of NuBits
Recognizing this as a potential flaw in the design, NuShareholders began discussing different ways to solve the problem. The most popular solution involved introducing a mechanism to permanently reduce the supply of NuBits by burning them. [1, 2, 3] A motion was also passed to introduce variable transaction fees into the protocol. This would allow shareholders to set the transaction fee through voting. All transaction fees would be destroyed, helping to reduce the supply of NuBits. Jordan Lee finally introduced a draft motion to implement a burning mechanism for NuBits, but it was clear that the implementation still needed further work before it was ready, so it was delayed.
First Strategic Reserve Team
On October 10th, 2014 Jordan Lee introduced a motion to create a strategic reserve of 4 million NuBits. This reserve was created as a failsafe to the protect the peg in the event that demand suddenly and dramatically increased and shareholders were not able to act fast enough to increase sell side liquidity.
Price Stable Android Wallet
On October 11th, 2014 Cybnate posted her vision for NuNet, an Android wallet with ShapeShift functionality. Users that sent Bitcoin or Peercoin to this wallet would have their coins immediately converted to NuBits to protect their value against price volatility. When paying a merchant however, it would not be necessary for that merchant to accept NuBits. The Android wallet would immediately convert the NuBits in the wallet back into Bitcoin or Peercoin upon payment to the merchant. She had previously introduced a draft proposal to create a standard Android wallet for NuBits. [1, 2] The final proposal was passed by shareholders and v1.0 of the Android wallet was delivered on January 14th, 2015. After having successfully delivered the Android wallet, she proposed plans for v2.0 development, which included the ShapeShift functionality she envisioned in her original thread. This updated proposal was passed by shareholders on March 1st, 2015 and development of ShapeShift integration is currently ongoing.
Evolution of Liquidity Operations
On November 12th, 2014 Jordan Lee introduced a motion to guide the evolution and development of liquidity operations for Nu. The motion essentially reduces the risk of loss by splitting the liquidity provided into 6 different tiers. Tier 1 features a small amount of liquidity that is immediately available on the exchange order book. Tier 2 liquidity sits on exchanges, but is not placed on order books and can be promoted to the order book (tier 1) in seconds. Tier 3 liquidity sits off exchange and is held by liquidity providers in wallets not exposed to counterparty risk or the risk of NuBot malfunction. It can be promoted to tier 2 when needed in minutes. Tier 4 liquidity can be provided by custodians not dedicated to liquidity operations. An example might be funds set aside for operational and development expenses, but can be used to support the critical function of liquidity provision as needed. When these funds are used for liquidity, they are exchanged from one type of asset to another, but are still available for their original purpose, such as development. Tier 5 liquidity presents itself in the form of park rates to temporarily reduce supply and increase buy side demand. This liquidity is available in days and the cost takes the form of interest paid. Tier 6 liquidty takes the form of custodial grants for sell side (NuBits inflation) and currency burning for buy side. This liquidity takes a week or more to bring to market, but has zero maintenance costs.
The Intermediary Currency
In the same thread, Jordan laid out his vision on how we will bring about mainstream adoption of NuBits. [1, 2, 3, 4, 5, 6] Besides information about the 6 liquidity tiers, Jordan’s motion also called on NuBot developers to work toward integrating order book mirroring. He believes this will bring about significant advantages for Nubits. Here are several direct quotes from Jordan:
“We can provide the best liquidity for every coin on every exchange. We can aggregate all the liquidity for any particular coin and offer it on multiple exchanges. In order to tap into this liquidity, people will need to buy NuBits. Providing liquidity has worked for us so far, but we can take it much further. Take Dogecoin for example, whose liquidity is fragmented between BTC38, Bter and Cryptsy among others. With the system I have outlined, a custodian with accounts at BTC38, Bter and Cryptsy can offer as much liquidity as all three exchanges combined, on any and every exchange they operate. This liquidity will be irresistable to traders. All they have to do to access it is buy NuBits. So they will. Talk of phasing this out in favor of our non-existent USD market is presumptive at best. Where is the demand for USD/NBT going to come from? No one is saying because no one knows. What we do know is the market has rewarded us for liquidity provision. Therefore, I argue for doing more of what has made us successful, not less.”
Jordan went on to say that NuBits aren’t in a position to become the currency used by the average person at this time, rather we must gain that position for NuBits by first becoming the intermediary currency used in the cryptoasset trading market. Only by creating that role for NuBits will we have the liquidity, credibility and trust we need to drive mainstream acceptance. Here is another quote from Jordan clarifying this goal: “Let’s say I have some Dell stock and I want to exchange it for Google stock. There isn’t any liquidity in that pair, so I trade my Dell stock for a currency, such as US dollars, and then use the dollars to buy my Google stock. In the cryptocurrency world today, that intermediate currency is Bitcoin. If I want to exchange my Dogecoin for Litecoin, I first exchange to Bitcoin. With the plan I have outlined here, we can easily exceed the liquidity offered by Bitcoin for these scenarios. Better yet, our currency is stable, so someone wishing to trade Dogecoin for Litecoin doesn’t have to also expose themselves to Bitcoin if they use NuBits as the intermediary. Our goal should be to make NuBits play the same role in the crypto world that US dollars play in the US stock market.”
NuBot developer Desrever has decided on a parametric model as an intermediate step to order book mirroring. He sees the road to this goal as iterative and explorative and the parametric model as a good starting point.
High Volumes, Open Sourcing & Dividends
On November 14th, 2014 NuBits daily trading volume eclipsed $1 million and was ranked in the top 3 along with Bitcoin and Litecoin. By this point, NuBits would frequently trade in the millions of dollars, even surpassing Litecoin at one point as second overall in worldwide trading volume. [1, 2, 3] Also on the 14th, Ben started a discussion to draft an open source license for Nu. [1, 2, 3] The open source motion eventually passed, but not until February 20th, 2015. On November 20th, 2014 Kiara distributed the Nu Network’s first Peercoin dividend. A total of 68,306 PPC were purchased and distributed to 481 unique addresses.
100% USD Reserves Offer Zero Benefit Toward Peg Stability
Around November and December 2014, shareholders started to ask questions about what type of reserve they should maintain for NuBits. [1, 2]. Since Kiara had already distributed a small portion of her 1.8 million NuBit custodial grant, plus the fact that some of the grant had been eroded away with the volatility of supporting crypto/NuBit pairs, many shareholders believed we were now operating under a fractional reserve system, meaning NuBits were now less than 100% backed by the primary reserve held by Kiara. This meant there were no longer enough funds held by custodians to purchase back all the NuBits in circulation. Questions and discussion about what our reserve should be went on for a couple months.
Finally, a member named Benjamin posted his economic analysis of the NuBits system and another paper explaining that a 100% USD reserve offered zero benefit for peg stability. His argument was that in normal circumstances, in the event of insolvency, bank shareholders are legally obligated to liquidate the bank’s tangible assets and use the revenue to repay depositors, however the same punishment cannot be enforced in a decentralized system. Since shareholders are not bound by law to repurchase NuBits, shareholders could allow the peg to break even if they have the financial capacity to support it. Here is a direct quote by Benjamin…
“In my view, we should only expect NuBits repurchases to occur when repurchases align with shareholders’ economic interests. Rather than vote for repurchases, shareholders could just as easily vote to abandon a 100% reserve system and distribute reserve funds as shareholder dividends. If we allow shareholders to vote on the use of reserve funds and assume that they vote according to self interest, the argument that a 100% reserve offers support for the peg falls apart. If supporting the peg requires shareholders to deplete reserves, then rational shareholders will allow the peg to collapse. Conversely, if shareholders can support the peg without depleting reserves, then rational shareholders will choose to support the peg. The implication is that value held in reserves does not provide any support for the peg whatsoever”
He goes on to explain that maintaining a reserve is costly and that NuBits are backed by NuShares alone, regardless of reserve holdings.
Zero Reserve, Zero Counterparty Risk
It turned out that Jordan Lee agreed with this and much of his philosophy on Nu was already in alignment with Benjamin’s reasoning. On January 15th, 2015 Jordan posted the following explaining his view on a reserve and what backed NuBits:
"Various members of our community and other communities have at times spoken about reserves and fractional reserve in relation to our network. Some seem to think that 100% reserves are desirable and equate to solvency, while others (including myself) wish to avoid the use of reserves altogether to avoid counterparty risk. Some view reserves as the backing for NuBits, while others see NuShares as the only possible backing for NuBits.
Benjamin contends that reserves cannot be reliably used to back NuBits. I agree. This view implies that solvency and fractional reserve cannot be assessed by the size of any reserve. If there is no reserve, the notion of “fractional reserve” doesn’t even make sense in the context of our network. However, a related concept is the ratio of assets to liabilities as Benjamin pointed out, where NuShares are network assets and currencies issued are liabilities. If the NuShare market cap is 8 million NBT and there are 1 million NBT in circulation, the asset to liability ratio is 8, not counting any reserves that exist. This is a highly solvent state that doesn’t resemble anything like fractional reserve.
It is clear the original design of Nu as articulated in my whitepaper is a network that avoids the use of reserves entirely to eliminate counterparty risk. When a LPC provides their own funding for liquidity operations, they are implementing this zero reserve model. Shortly before our September release it became clear that NuBot would need to support primarily NBT/crypto pairs instead of just NBT/USD. This was difficult to implement quickly, which means it had some bugs initially and this approach introduces some extra risks which were not well understood and could not be accurately measured at the time. As a result, KTm and Jamie began using shareholder funds to provide liquidity, which may be regarded as reserves in some contexts. It has been my intention all along that this would be a temporary situation as we would transition back to the original design of LPCs providing their own funds consistent with the zero reserve and zero counterparty risk model. Indeed all custodians besides Jamie and KTm are providing their funds and the transition is well underway."
NuShare Custodians & NuBits Burning
On January 10th, 2015 Sigmike (a core developer for NuBits and Peercoin) explained in a new thread that Jordan asked him to reintroduce the subject of currency burning and work on a supporting motion to be voted on. Many different ways of implementing a currency burning system were discussed. In the end though, shareholders opted for a simple solution and one that tied NuBits and NuShares even closer together. A motion was quickly passed that would alter the custodian system to permit NuShare custodians. In the event the supply of NuBits needed to be permanently reduced, shareholders would vote to grant a trusted custodian a specific amount of NuShares. These NuShares would then be sold and the proceeds would be used to purchase NuBits and burn them, effectively reducing the supply.
The Era of Data Feeds Has Begun
On January 18th, 2015 v0.5.3 of the Nu client was released. This release was important because it introduced data feeds. Just from the length of this history text alone, you can tell that being a NuShareholder is a big responsibility and that lots of time is needed in order to stay up to date on current events and motions that need to be voted on. This text pretty much only covers the major events in Nu’s history, so it’s hard to get an idea of the day to day responsibilities. For those shareholders who didn’t have enough time available to them to keep up on the news, this new feature allowed them to subscribe to a data feed that was hosted by another shareholder. Subscribing to a data feed would allow your Nu client to match the voting of the shareholder you were subscribing to. For example, if you were going away on vacation or just didn’t have enough time to follow along and there was another shareholder that you usually agreed with, you could just subscribe to that person’s feed and all your votes would be taken care of automatically, ensuring the network was getting the necessary amount of votes to pass important motions or grants. This is very important because if Nu has too many irresponsible shareholders who don’t place votes, it could paralyze the network. Data feeds help in preventing an event like this from happening.