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.
