Idea for custodians to burn nubits to manage supply

[jonza]

There is a recognised problem (in a number of threads) that NBT supply can easily grow to meet demand, but there is not a symmetric mechanism for burning of NBT when demand falls. The current mechanism of parking temporarily removes supply but only exacerbates the increase in supply later, which is widely seen as a potential flaw.

Is it possible that custodians can also be delegated the power to buy NBT and burn it if supply exceeds demand, a symmetry to their ability to sell newly created supply if demand exceeds supply? To do this they would need to keep the funds raised from sales in a reserve (for buying and burning as required) rather than distributing it quickly to shareholders. Instead shareholders could receive a regular small percentage of this reserve over time for supporting the NBT peg. When required, part of the reserve would be used to burn NBT.

As a custodian might build quite a large pool by holding this back, there would need to be ways to ensure the honesty of the custodians with these funds (e.g. multi-sig, re-allocation to other custodians etc) and ensure they are held in a way as to not be too volatile.

Admittedly I raised this idea in another thread, here New mechanism to reduce NBT supply: NBT Burning, but that thread has not seen a response in a couple of days, so thought I would summarise the idea more succinctly.

[Indigoman]

That’s an interesting idea. I guess it’s feasible to instruct custodians to burn NBT with their reserve. However, I am not a big fan of the notion the custodians should hold such reserves in the first place. My reasoning is it’ll mean better control for the peg true but very very low reward for shares holders since they only get a fraction of what has been sold of NBT by custodians … There arise earl topics out there promoting the holding of a reserve on the custodial side to be used a buy support. In an ideal world that would work as it’d be a completely balanced system if for every sold NBT we had a reserve to buy it back … But the world isn’t ideal … other cryptos (BTC) fluctuates rapidly and. A reserve today for 1BTC might be worth less that it would be in a week … And since we’re holding a peg of $1 not 1BTC , the reserve would actually take a hit if the price of BTC falls rapidly since we won’t have enough BTC to hold the peg. Another issue is the centralization of control. The more and more I read about custodians duties and privileges, the more centralized I feel the system is going to be. Sure they are voted on by the public but custodians have no financial risk nor obligation that forces them to work in the best interest f the network. He k a custodian could just run away with free NBT from his grant and we wouldn’t be able to do anything nor would he be hurt even in reputation if he uses a pseudo name like most custodians are doing if you read the proposals being thrown on the forums these days.

The notion of custodians has been bugging me a lot and keeping me sleepless … I proposed control over the supply of NBT to be done completely in a decentralized fashion without the need of custodians and major trust we have to put in the hands of few. You cane read the proposal here : [Proposal] True decentralization. Nu to eliminate the need for human custodians

That propasal addresses how supply of NBT should be distributed to an open and free market Ina a manner that doesn’t require trusting third party . It suggests that the protocol would do handle the distribution of newly created NBT to entities that would gladly put themselves at a financial risk by ,in essence, “purchasing NBT from the network” and it would be in their best financial interest to sell it to the market and therefore increasing the supply of NBT in the open market. It is also done In a manner that provides a floor to where the price would fall to by assuming the purchasers are rational people that won’t be selling for a loss if they can make a profit.

That’s for a supply increase issue and the elimination of custodians as middlemen … As for the supply reduction , I’ve already put together a proposal for that here : [Proposal] Solution to the problems of Asymmetrical control in NuBits

I hope I didn’t come off as a know it all guy lol … I’m just sleepy and can’t sleep cause of thinking about the future of nubits … Would love to hear your thoughts on both topics if you have a chance to read them by the way

[Chronos]

A custodian who keeps their NBT off the market (or properly placed on the sell wall) has the same effect as a custodian who burns their NBT. I don’t think this really changes much.

[jonza]

Chronos, I don’t think it is the same impact. The maximum NBT a custodian can withhold from the market is the unsold portion of the newly created NBT. It cannot reduce supply beyond that baseline if needed, as shareholders have already taken a good chuck of the past sale proceeds. Being able to use the accumulated proceeds of past sales allows the entire new supply to be eradicated if that is what is required.

[jonza]

Indigoman, thanks for reply. Here are some contrasting views, although we are dealing with complex dynamics so I’m open to changing them.

It is impossible, especially at an early stage, to predict how much demand could fall at any point in the future and for how long. The only way to ensure the peg is to have an ability to remove as much supply as needed and for as long as required. Otherwise the buy-walls can always be depleted and the peg will break.

We agree that parking and paying interest in NBT will not achieve the desired protection. If the market perceives that spiralling interest rates become meaninglessly high, the system looks broken, they will eventually sell and break the peg.

Your idea of paying Nushares to burn NBT is interesting, but I think in the end if there is a demand shock for NBT (reflecting say that a smaller weight of capital has confidence in the ability to maintain the peg) then Nushares will not be attractive to the sellers either. They see NuShares as having limited growth, potential large dilution, and losses from the last attempt to maintain the peg (as they buy up NBT from their custodian reserves). This part of the market still sells NBT and breaks the peg.

What would instil confidence in my view is if the bulk of all sale proceeds were available to buy and burn NBT as required. This would be capable of reducing supply down to the level where the supply is less than the weight of the market maintaining confidence in the peg. I accept there would be volatility in the reserve, but its better than no reserve at all.

I think it is highly ambitious for shareholders to think they can keep most of the proceeds of NBT sales as you suggest. The value shareholders provide is building a system people can trust, not in selling a product that cannot be sustained. Paying a dividend from reserves each year is much more reasonable, similar to an insurer.

[Chronos]

@Jonza You’re right. I did not notice that your proposal included a reserve fund that would enable extra purchasing power for NBT burning.

To do this they would need to keep the funds raised from sales in a reserve

Hm, but isn’t this functionally equivalent to keeping funds raised from sales on the buy side of the peg at all times?

[jonza]

I agree that it is equivalent if (i) nearly all proceeds are retained for this purpose, rather than being passed to shareholders as a dividend, and (ii) it can be guaranteed that when the buy orders are hit the NBT purchased will never hit the sell queue below the peg - which is the current policy but hard to enforce.

Consider for (i) that NBT has grown to a supply of 5bn at some point. Under the current approach, Kiara Tamm (and similarly other custodians) pays out 10% of sales per period as dividends. After a fairly short number of periods, most of the new supply has been paid out as dividends. So at some point down the track Kiara’s buy wall is limited to a fraction of the outstanding supply. I guess the essence of what I’m saying is much more needs to be retained in reserve. (Of course the protections around those reserves are more important the bigger they are.)

In fact, the ultimate would be if shareholders were not paid at all from NBT sales (the entire amount kept in reserve), and only paid from value added in the system as it expands (creating coins from nothing is not really a value-add). As one example, all profits from the bid-ask spread on maintaining the peg could be distributed. This is understandably far less palatable to many shareholders with a shorter term view. Because of volatility in the reserve it still does not guarantee the peg unless held in fiat USD (the underlying), but its the maximum robustness that can be achieved.

In the end it is the judgment call of shareholders as to how robust they feel they need the system to be attract newcomers as well as to maintain the peg through market extremes. The above merely represents my judgment, which clearly lies at the end of highest robustness possible to avoid future disappointment.

[masterOfDisaster]

In fact, the ultimate would be if shareholders were not paid at all from NBT sales (the entire amount kept in reserve), and only paid from value added in the system as it expands (creating coins from nothing is not really a value-add). As one example, all profits from the bid-ask spread on maintaining the peg could be distributed. This is understandably far less palatable to many shareholders with a shorter term view.

This is exactly what I hope the way of Nu will be.
Nu can’t afford to operate the NuBits on fractional reserve. This would undermine the trust in a system that is not backed by law, force, military. Nu needs a sustainable concept.
Paying dividends from real revenue (and not from creating NuBits out of thin air) is what is required to develop a system that is in economical ways sustainable!

[mhps]

In the end it is the judgment call of shareholders as to how robust they feel they need the system to be attract newcomers as well as to maintain the peg through market extremes.

The ultimate risk is human weakness, especially when voting power is decentralized and the for-profit crowd become the majority share holders.

[Chronos]

they would need to keep the funds raised from sales in a reserve

I think I’m generally skeptical of any solutions that involve a centralized reserve fund, if there are other options. It’s simply too vulnerable to theft, misuse, accidental loss, confiscation, etc.

Along those lines, I’m always interested in ideas for mechanisms that completely eliminate the need for custodians.

[masterOfDisaster]

I think I’m generally skeptical of any solutions that involve a centralized reserve fund, if there are other options. It’s simply too vulnerable to theft, misuse, accidental loss, confiscation, etc.

That’s indeed one problem that needs to be solved when trying to keep one USD available for each NBT that has been sold. Nevertheless I cherish the idea of being able to stand a bank run.
But maybe I focus on the wrong aspect or the wrong time of NuBits’ existence.
The level of trust that NuBits need to be accepted might not depend on the ability to buy each NBT back. It should be sufficient to buy those NuBits back that people want to change back to USD. And that ratio should be far below 100% as long as NuBits is not obsolete.

The longer I think about that the more I come to the conclusion that it might be not necessary to have a reserve fund with 1 USD for each NBT that has been emitted.

[tomjoad]

The longer I think about that the more I come to the conclusion that it might be not necessary to have a reserve fund with 1 USD for each NBT that has been emitted.

There are several schools of thought being discussed here.

What many people above are proposing is a duplication of the profit structure used by rewards-points companies like Air Miles. In those businesses, points are “sold” to customers, and then “redeemed” by a certain percentage of customers. For many of these businesses, the bulk of profit comes from loss/unused points.

So for example if Air Miles “sells” 100 points to customers, but only 60 are redeemed (the other 40 are ignored, forgotten about, or lost), Air Miles banks the profit on those 40 unused points.

This example is overly simplistic of course, but it gives an interesting philosophical parallel. What I’m hearing from some people above is that we should only be converting NuBits that will never be redeemed (the “loss” or shrinkage) to dividends to ensure 100% coverage of NBT. And perhaps looking at other alternative revenue streams like transaction fees.

The flip-side, and the current system view that I subscribe to is exactly how MoD pondered:

The level of trust that NuBits need to be accepted might not depend on the ability to buy each NBT back. It should be sufficient to buy those NuBits back that people want to change back to USD. And that ratio should be far below 100% as long as NuBits is not obsolete.

This is how Jordan envisions the system handling static or increasing aggregate demand. Because there is no real reason to speculate on the value of an individual NuBit (it should always be $1.00 US), it’s unlikely a “run on the bank” will occur in the absence of a major crisis - think NuBits being declared illegal, or a massive coding flaw is discovered. And in the event a superior competitor comes along with an innovation that can’t be voted and included into Nu, speculators will largely take the brunt of the damage. This design is slightly riskier, but far more decentralized.

[jonza]

This is how Jordan envisions the system handling static or increasing aggregate demand. Because there is no real reason to speculate on the value of an individual NuBit (it should always be $1.00 US), it’s unlikely a “run on the bank” will occur in the absence of a major crisis - think NuBits being declared illegal, or a massive coding flaw is discovered. And in the event a superior competitor comes along with an innovation that can’t be voted and included into Nu, speculators will largely take the brunt of the damage. This design is slightly riskier, but far more decentralized.

Despite my argument for greater robustness, I can empathise with this view. In addition, cryptos do have value in their own right without any asset or reserve backing, that is derived from its value in use. So maybe you are right that it is possible to operate on fractional backing for potentially a long time as long as the demand trend is static or rising, though it is a calculated risk.

A policy of permanently reserving some sale proceeds may still be required at some stage down the track. I believe the reserves available for buy-side liquidity, as a percentage of total outstanding supply, must head asymptotically toward zero as NBT sale proceeds are distributed, unless at some stage a certain portion of all future NBT sales is held in permanent reserve. If this were not done at some point, the buy walls would look increasingly thin in comparison to outstanding supply.

I still worry the end-game would be harsh for the final holders (with a potentially sudden and severe loss of value), when relative usefulness declines and demand falls. Perhaps a more controlled exit solution will be found well before then. It makes me cautious about whether to use NuBits though, because I don’t know where the end-game is.