I was thinking about Nu earlier and I was thinking about how the model could be improved. I can’t say my thoughts have any merit but I’ll provide them anyway.
I’ve read that Nu is supposed to be a zero reserve system. I think this is a wrong way to look at things. In recent times I think people have come to think of Nubits as being backed by NuShares, so Nushares acts as a Nubits reserve. With this in mind, perhaps the design of Nu has missed the point all along. The way it has been designed made it difficult to protect the peg with NuShares. If it were to be done again perhaps the focus should be on the relationship between NuBits and NuShares.
Also it appears to me that park rates have had little success. All they have done is provide a source of Nubits inflation that can exacerbate problems further down the line. The marketing efforts to promote park rates appeared too ineffective.
Let me suggest a new system
For the purpose of the post I’ll give the name UltraShares (US) and UltraCoins (UC).
An exchange mechanism can be created between UC and US, so that UC is backed up by US. Shareholders would provide or delegate agents to provide the network with the current price of US. UC can be exchanged for US at the US price and vice versa. When UC are exchanged for US, the UC is destroyed and vice versa. This would ensure that 1 dollar worth (or whatever the currency prices are denominated in) of US can be exchanged with exactly 1 UC, less any fee, thus maintaining a peg. Multiple coins could be created denominated in different currencies.
This is maintainable as long as the value of US is maintained. To simplify this, the US/UC reserve ratio (in terms of market cap) can be monitored. If the value of US goes down then the reserve ratio goes down, and if it goes up, the reserve ratio goes up. To protect against market volatility, the reserve ratio should be high to start with, and may be adjusted if market conditions allow for it but should always be high enough to protect against sudden loss of reserves.
If multiple coins denominated in different currencies are issued, then the total value of all those coins should be used to determine the reserve ratio.
Maintaining Reserve Ratios
The task of maintaining the peg can be simplified to maintaining the reserve ratio. A threshold could be put in place for when the ratio is considered high enough (for instance a 4x ratio). When the ratio becomes high enough it can be reduced by issuing new UC, the proceeds of which can be used for share buybacks. New UC should only be issued when reserves are high enough. This could be enforced at the protocol level by preventing issuance when the reserves are below the agreed threshold.
When the ratio becomes too low things can be trickier. I do not suggest using park rates in attempt to promote demand, as this may not bring about enough demand to overcome the guaranteed inflation that it imposes, and such demand may be too temporary for a long term solution. There is no profit opportunity to shareholders with park rates either. Park rates should remain out of the protocol all together.
By making the reserve ratio high enough it should be possible to weather the reduced reserve ratio long enough for the situation to reverse. In the long term fees will act as a deflationary force, taking UCs out of circulation. As this is not a short term solution, reserve ratios should have a high enough tolerance. Raising fees too high would reduce demand for UC and may cause long-term reputation issues, so fees should be balanced.
By slowly reducing UC in circulation with fees, this provides profits to the shareholders by creating eventual opportunity to issue new UC, by increasing the reserve ratio. Therefore the business model would involve taking as many UC out of circulation via fees as possible. This would also help protect against falling reserve ratios. Once again, this does not mean high fees should be used as that will hurt demand. But it would likely be wise to implement proportional fees. A minimum fee could be calculated according to the size of transactions, but otherwise a percentage fee is applied. I understand this was being planned for Nu 3.0, though it hasn’t been included yet? The expression could be:
fee = max(feePerKb * bytes / 1000, amount * proportionalFee)
Where amount could be calculated as:
amount = inputAmount - outputAmountSentToInputAddresses
So this way a sender can prove change by simply sending change back to an input address, and change can avoid being charged a fee. This is already established with avatar mode. Anyone that wants higher privacy by making it harder to determine change outputs would need to pay a higher fee.
A percentage fee would provide profits that are more proportional to transaction volumes. UC would need to be marketed as a tool of exchange and not as a store of value. Another reason to avoid park rates.
Profit to shareholders in the system would be obtainable through higher demand and through fees. Sustainable profits would come through fees whereas demand is unpredictable and cannot be guaranteed to always rise like in a ponzi scheme.
- Remove park rates
- Provide exchange mechanism between shares and pegged coins
- Keep a high reserve ratio
- Focus on using fees to reduce coins in circulation
- Balance fees to ensure demand remains strong for the coins
- Promote trade in coins
- Discourage savings and storage of coins
- Only issue new coins when reserve is high enough
Are there any other views on this? The reserve ratio would need to be well above 100% in my opinion, and ideally several multiples higher until a suitable reserve level could be determined. NuShares did have a higher market cap than NuBits and could have been used to support the peg more effectively, but the system does not include a direct exchange mechanism which would have helped. Also NuShares did once have a market cap over twice NuBits. Maybe however the ratio should be higher than that.