Incentivise pool cost reduction

Currently Nu pays 6% - 9% per month interest to LPCs to provide liquidity, and pays 1% for pool managers.

There doesn’t seem to be more incentive to reduce interest cost except for shareholders (which all pool managers are) altrruism. I think if we give incentive to people who can reduce liquidity interest cost, Nu will provide liquidity more efficiently.

Let’s look at the interest in more details, taking NBT/BTC pair -

The interest is for compensating exchange default risk, which is constant, and for BTC price risk.

The exchange default risk compensation can be estimated roughly. Suppose a typical exchange account loses all its fund every two years, due to hacks, exchange mismanagement, or other mishappenings, then every month it is a ~4% risk. Nu should compensate for this as a flat interest like it is being done now. Hopefully B&C will greatly reduce this.

As for the BTC price risk, it only happens when BTC price drops. Currently Nu is not paying this part optimally. This compensation can be in sufficient when BTC price drops in an accounting period. When BTC price goes up, LPCs are actually rewarded from the BTC they are holding.

Now there is little incentive for anyone to experiment to optimize the price risk part of compensation. Pool managers earn a fixed fee, and being a small group [may not have the expertise to try futures trading and options for reasons discussed before]1.

Nu should allow other people who have the expertise to sell an “insurance” against BTC price drop to Nu. The insurance can be realized using futures trading and options mentioned above. To make the insurance work Nu needs to change its flat interest rate against price risk. I haven’t thought of all the possibilities of how to do this. For example –

Nu could set a target of $100k NBT/BTC liquidity for an accounting period, buy insurance for the target against BTC price drop measured at the end of the period, pay pools a flat reward as the fiat pairs, and return the principals to LPCs at the end of the accounting window (i.e. LPCs don’t take any losss or gains of the fund they put in). Nu would use the insurance to pay for any exchange rate losses happened to the LPCs’ funds up to the target amount.

In this scheme there is no risk to LPCs or onus on pool managers. To reduce counterparty risk of the insurance provider, there can be multiple insurance custodians splitting the target.

The risk Nu takes will then be limited. Currently its open end up to 100% of NBT/BTC liquidity.


I very much like the idea, because it makes liquidity providing much more calculable.
The fluctuating BTC price is very hard to put into return on invest calculations for liquidity providing.

This is a good idea, but creates additional dependencies - on the people or the corporation that offer the insurance.

What about this idea to lower the risk of BTC fluctuation - is this just silly?

If you change USD above to NBT, isn’t it the same operation, just with 20% of original buy side liquidity? The problem comes when someone comes to sell NBT and buy BTC of 30% of your original liquidity, you can’t fill the order because all you have is 20%.

That’s why the funds need to be automatically converted based on thresholds.
The result is that only a percentage of the funds are prone to BTC fluctuation.
Converting back and forth can be quite cheap at CCEDK.
There’s a promotion with only 0.001% fee for BTC/USD till October and maybe the commission free trading plan is still active:

1 Like

Conversion is easy on CCEDK, but you “lose” 1-3% because of the rate they offer. Don’t get me wrong - I’ve used it, but I calculated the risk/reward first.

Convert from where? If you don’t have BTC, you need to buy BTC with what you have. Who are you going to buy from? You are supposed to be the go-to person when buying BTC with NBT or USD.

From those offering trades on the BTC/USD pair.
Of course the concept requires a liquid BTC/USD pair to be available which hedgers just don’t want to use - they might prefer to withdraw NBT easily and fast from the exchange.
You keep a part of the funds in USD to eliminate BTC fluctuation.
Once the NBT buy volume gets low, funds get exchanged from USD to BTC via the BTC/USD pair.

Now I get it.

Yes. A liquid BTC/USD pair on one exchange can be the backend for NBT/BTC on many exchanges.

I’m glad that it seems to make sense to you as well :smile:
By design this would work better with a centralized funds management like NuLagoon’s, but I bet it can be done with the ALPs as well.
I proposed that idea once, but I don’t know whether @henry had a look at it.
He could use it to strengthen NuLagoon’s position in the liquidity market :wink:

This concept works really well on a market like cryptsy. Put up BTC buy orders with your NBT. When people sell you their BTC, you sell the BTC to someone on the BTC/USD market, then put that USD up as buy liquidity on the other pool. This would require a smarter bot that only puts up enough liquidity on the NBT/BTC pair at offsets that allow profit off of orders on the BTC/USD market that currently exist. The consequence would be a large BTC/NBT buy wall and a large NBT/USD buy wall. The result for the network is having all the buy side liquidity in USD, but still compensating the sell side liquidity for being on a BTC pair. This is optimal for liquidity provider profits, which would hopefully drive LP rates down in the long run.

However, I don’t know if it’s worth it to shareholders to devote any kind of funding toward designing such a smart trading bot.

This would totally work on bter too. The big tolerance on the btc pool makes this totally feasible.