Time to bring more NuBits to market because the 40% threshold for balancing liquidity has been exceeded.
I am increasingly worried about the peg breaking to the upside in the coming days. We have mostly focused on buy side support in the past, but the situation has changed so that sell side is our weak spot now. Volume is very high and crypto is very volatile right now, which means the level of demand could change a great deal very quickly. FSRT is still working out the issues that remain for it to actually become operational for the first time.
It has been mentioned that relying on non-multisig funds like what I am asking for in my latest custodial grant is a step backwards. It certainly isn’t a step forward in the sophistication of our liquidity operations, but it is actually status quo because multisig has still never been used. Let’s remember that our customers are probably not as interested in fancy sell side liquidity operations as they are in simply finding correctly priced liquidity when they want to buy or sell NuBits. They don’t care how it gets there.
I am just about out of NuBits that I can bring to market. This may be the last liquidity injection I can fund. Hopefully FSRT can become active soon, but we need to have multiple backups for something as important as keeping the peg. Therefore, I urge shareholders to pass my requested grant of 100,000 NBT. There is a real chance that sell side liquidity will become disorderly in the coming days. We have a number of extreme measures available, but they are not cheap and graceful like passing my grant. For instance, it comes to mind that B&C Exchange is a very large holder of NuBits, which might be used to suppress the price in a desperate situation. If I refused to use them to keep the peg and it was lost, I would surely be criticised. If I did use them I would have to dictate terms of a loan from B&C to Nu or some ad hoc financial arrangement. Surely some Nu or B&C shareholders would find something objectionable about the action and complain I wasn’t authorised to do that. But there won’t be time to pass a motion about it. I am quite aware I don’t want to be in that situation and that it is sure to bring controversy whichever course of action I chose. I am hoping to avoid the entire situation by having my grant passed.
So, I am issuing a warning to shareholders that there is a clear and imminent chance of our sell side liquidity becoming disorderly that ought to be addressed immediately.
We have the opposite problem. There are not enough NuBits in circulation to meet the demand, therefore we need to increase the supply so we can replenish the sell side before it runs out. It’s a good problem to have, because it means there is demand for our product, but we need to act before we run out of NuBits to sell. Doing nothing would risk breaking the peg to the upside.
So how can we increase the supply (sorry, I’m still kind of confused on the new burning mechanism that was added)? Do we grant more to custodians to sell like we did when NuBits were created, or did we change that to something else? Also, how is this a zero-reserve system if we are about to grant more NuBits to act as a reserve to support the peg?
If the sell side is low, then it means there is too much demand and not enough supply. We would need to vote to create more NuBits. If the buy side is low then it means there is not enough demand and the supply may need to be reduced.
In the case of low demand, we would first try raising parking interest rates. If that remains ineffective, then that means we need to permanently reduce the supply, and we can do that by printing new shares, selling them and using the proceeds to buy back and burn NuBits.
We have the first problem though and need to print NuBits. We would not have a reserve because the custodian we grant them to would sell the NuBits on the market and then distribute the proceeds in a number of different ways decided by shareholders (dividends, share buybacks, development, marketing, etc…)
If the custodian sold the NuBits and continued to hold the proceeds of the sale on-exchange (Bitcoin, etc…) for when people eventually trade their NuBits back in, then we would have a reserve, but that’s not the case here as far as I know. Nu is reserveless. We instead offer a reward for liquidity providers to place buy and sell walls, so we don’t have to maintain a reserve ourselves.
Because I love being pedantic, I think Nu is primarily a complicated system of reserves. We are trying to make our reserves as decentralized as possible, but this grant and in fact all of T4 and T6 as currently implemented and for the foreseeable future are very much reserves.
A non-reserve system has not really been approached in the crypto community. I think I am correct in saying an implementation of seeded nu auctions at the blockchain level would be the first attempt at a non-reserve method of peg maintenance. Bitusd and tether are most definitely reserve based systems. Nu comes close by trying to control supply, but ultimately we rely on reserves to keep the peg so that shareholders have time to control the supply directly via the block chain.
Can @JordanLee put it on record where the urgent need of new Nubits showed? Was it here? That transient dip of the sell side is like ~ 1% compared with the low ask side we see often often.
Wiith a chronic low buy side, if we put too much Nubits on the market we will make the situation worse, and soon have to take the liquidity in by parking or burning.
If we start to see both buy and sell sides swinging exceeding certain threshold (I don’t see it yet.) then shouldn’t we first increase the on-wall fraction of all Nubits in circulation (589k) by increasing LP target?
We should also prepare for a NBT demand spike if the BTC bull run ends abruptly. We have low sell-side liquidity during a time where BTC is going up, which is traditionally our lower-demand state. I think Bitcoin’s price jump strongly suggests there are new users discovering cryptocurrency, and we should be prepared if they decide they like NBT as a hedging tool.
Not having a good explanation for recent BTC rally I tend to think we are seeing the old movie again – and we know how it ends. But Nu is different this time – it has gone a long way in the last year. We learned that we shouldn’t count on shareholder paid custodians, we should make liquidity tiered. Now this grant request just cuts through all these – print money to let custodians sell at Tier 1.
We have other tools – Tier2 and 3 have $40k (in ask), which is 60% of our total Tier 1 liquidity. We could operate on pool-level to increase target and increase fixed cost ops. If sell side is persistently low and pool-level ops isn;t enough, then increasing NBT supply is called for.
I fully agree. My take is:
under current circumstances the right place to start is tier 1, but not by injecting from tier 4 or 6; tier 2 and 3 should be used instead, because there’s still plenty of funds.
The means to do that is to increase the compensation for providing sell side liquidity on tier 1.