There are roughly 700k NBT in the wild. And roughly the buy and sell side liquidities are 10% of that. I find very interesting that holders are fine with the fact that Nu can only immediately (from T1~T3) buy back 10% of their holdings in case they want to exchange nubits for bitcoins immediately.
I think this is possible because holders have enough confidence in the peg, Nu’s ability to maintain the peg under any circumstances. Also, I am wondering where those nubits are held right now.
But the main question to me is: how much percentage of NuBits in circulation should the buy side liquidity (over T1~T3) sustain constantly?
This is a hard question to answer. Ultimately, peg maintenance is not about instantly buying back every NBT being sold for less than $1 as much as it is to ensure a general concept that NBT is worth $1. If any customer says that they have trouble selling their NBT for a reasonable price, we need to seriously listen to them. Therefore, the liquidity tiers are not necessarily about being able to buy back every NBT, only the NBT that are being sold. This distinction is vital, as it allows us to separate NBT like those stored for use by B&C and Pool Operators that will be released with regularity based on a centralized contract.
Tier 1 is used to generate confidence in the NBT price and to give higher tiers an indicator for market activity. The size need only be big enough to give observers a clear indication of which direction the peg is leaning. As such, it is mechanically chosen for each individual market instead of being a percentage of NBT in circulation. As Nu grows this will naturally grow because shareholders will feel more willing to spend money and expand to new markets.
Tier 2 is used to recover and refresh the peg. This tier is still abstract to me, there’s a point to be made here about MoD’s exit and entry gateways being mostly T2. Anyway, I think the size of this tier is determined by causality more than being something we can control.
Tier 3 is something we could dare give a number to, but we have no mechanisms to truly control this. I’d suggest we should have something like 10% of the NBT marketcap in this Tier, controlled by trusted custodians. However, my trusted custodian proposal doesn’t look like it’s going to pass, so I’m not sure how shareholders might remedy this.
Don’t forget that Tier 4 already has 15%, and many people have been talking about additional mechanisms that may increase this (using distributed reserves or making a PPC reserve)
The question is not only how big the buy and sell sides should be in relation to NBT in circulation - which is a hard question to answer, like @Nagalim already said.
It’s associated with the question: how much buy and sell side liquidity does Nu want to afford?
Regarding Tier 1
With the coming fixed compensation reward scheme I can imagine having pools that have a target for buy and sell side and can adjust the compensation within some limits to reach that target.
If NSR holders want to have more liquidity, they just need to pay more NBT and have the targets for pools raised.
I can also imagine a future in which the buy and the sell side don’t have equal sizes.
The sell side might be smaller than the buy side and supported by gateways like the NBT entry gateway I operate on Poloniex. I consider the buy side more important for how users perceive the quality of NBT.
Regarding Tier 2
I consider that tier a transit tier. Tier 2 can have different flavours. Orders on the books, but outside the range for which compensation is paid, are a kind of tier 2 just like funds idle in the exchange account. Tier 2 is used to connect Tier 3 with Tier 1.
Regarding Tier 3
Without the type of custodianship@Nagalim proposed, there will only be very indirect control over Tier 3 funds and their volume.
Tier 3 is one of the tiers that requires some attention, at the latest once the Tier 4 with FLOT is well-established.
I believe there’s still too much friction between Tier 4 and the lower tiers and that’s one of the reasons why my gateways on Poloniex have been used more than once although they were meant for emergencies.
One possibility is using NuLagoon tube but I have a hard time negotiating to waive the exchange fees for FLOT.
FLOT can also use a similar mechanism, that is to build scripts that trigger rubber-stamp signing on very specific circumstances. For example, when money is sent from a known NuLagoon address under low liquidity conditions.
That is because nubits are backed be nushares which has 5:1 capitalization. Anyone wants to sell a nubit for less than $1 will be taken advantage of by someone who would buy this cheap nubit, wait until possible price dip is ended by liquidity operations at one of the tiers, and sell the nubit for $1 for low risk profit.
This is indeed a crucial distinction.
Now the question is how much percentage of nubits in circulation is sold for bitcoins every day?
Nu primary business model is based on that distinction. Nu does not have to buy back every nubits in circulation. Therefore Nu does not have to hold in reserves the totality of the counter-value in bitcoin or usd of NuBits’ sales.
Therefore Nu can distribute as dividends a portion of the NuBits sales.
Nu primary business is in the peg maintenance.
The goal is to make it a very profitable business.
Is there really 750K available - or is a large chunck still in reserve???
Now the question is how much percentage of nubits in circulation is sold for bitcoins every day?
Nu primary business model is based on that distinction. Nu does not have to buy back every nubits in circulation. Therefore Nu does not have to hold in reserves the totality of the counter-value in bitcoin or usd of NuBits’ sales.
Nu primary business is in the peg maintenance.
The goal is to make it a very profitable business.
That sums up Nu in my opinion and makes it different from all the rest. Nu is about the peg.
I can’t wait to see some other Nu products in circulation.
Without improved flow between the tiers and buffers at the right places, Nu will face scalability problems.
More gateways like the ones I run on Poloniex, T3 custodians or an addition to FLOT which is dealing with smaller amounts and requires fewer signatures to execute transactions can help here.
Or maybe a combination of all (and ideas that still need to be developed).
To be an effective T3 - without a lot of active work - we need a good set of software like what NuLagoon has. I keep asking… Anyway, I applaud @Nagalim for offering to be a T3, I probably could be one too. I’m just not sure of the time commitment. I cannot always be at the comp at work to allow for the exchange.
What’s it take to run a gateway? Just a waiting NuBot???
Short answer: one exchange account per NuBot instance, a custodial address to broadcast liquidity information, a RPC connection to a Nu wallet to do so.
Poloniex is for sure one of Nu’s important markets.
LPs who operate on other exchanges might balance using Poloniex.
In that case not every single exchange would require a gateway.
But this is speaking of a future in which gateways are used on regulary basis.
Having another operator at Poloniex wouldn’t be bad, because it would provide redundancy.
You could consider a proposal for a set of gateways you operate for a fee. A combination of monthly costs and a commission for transactions might be appropriate.
This seems to be a worse deal for Nu than the gateways I operate for free at best effort.
But I realize that I distort competition with that offer. I really meant the gateways to be for emergenices as I wanted to have a way to support walls if need be.
I would gladly keep them as backup and only for cases in which the “normal gateway provider” fails - as soon as there are regular gateways.
Maybe such gateways can be used in clever combination with T3 custodians and a subset of FLOT that has multisig addresses with fewer funds that require fewer signatures to execute transactions.