Interpretation of the liquidity tiers, a waterfall model, triggers, metrics and actions

[masterOfDisaster]

What’s the incentive for a custodian to report their T3 funds?

To receive a compensation.

What guarantee do we have that those funds will actually end up being used in a peg break scenario?

No guarantee, but the incentive for the T3 custodians to put funds in the shrinking walls to earn more reward (in percent) for their funds (only true for fixed compensation).
This makes a peg break scenario less likely. They have an incentive to fill T1 early.

If those funds have no way of being accessed directly, but only at the custodian’s whim, how can we even call them T3?

The direct control over funds in the decentralized liquidity operations model ends at T4. T1-3 can only be steered by providing incentives.

I propose a different kind of T3 custodian, one that uses Nu’s funds so they have every incentive to report and follow through in peg breaks, over in the T3 custodian thread.

That’s a viable solution, but leads away from the (completely) decentralized liquidity operations model.
At another place I’ve already written that some small steps away from the decentralized liquidity operations model might be good:

[Discussion] about the size of buy and sell side / T1-3 (T4)

Maybe the complete decentralization of T1-3 liquidity is not the optimum and a clever combination of decentralized and centralized liquidity providing in the end is cheaper for Nu.

[Nagalim]

If you’re compensating custodians for reporting T3 then you’re running some kind of ALP-type operation. So what prevents Satoshi from submitting his kajillion btc as buy side T3, with absolutely no intention of ever bringing them to market. Are we going to pay him for holding his own btc in his own wallet and having nothing to do with Nu?

[masterOfDisaster]

If you’re compensating custodians for reporting T3 then you’re running some kind of ALP-type operation.

Without any compensation, you won’t find people doing it.

So what prevents Satoshi from submitting his kajillion btc as buy side T3

The terms of the grant limit the amount of BTC or NBT.
T3 sell side custodians would be limited anyway.

Are we going to pay him for holding his own btc in his own wallet and having nothing to do with Nu?

Nu pays elected T3 custodians based on terms. People who get elected are aware of the T1 compensation. They will happily move funds from T3 to T1 if the compensation is sufficient

[Nagalim]

Without any compensation, you won’t find people doing it.

A contract that includes a profit mechanism that is dependent on reporting also works (like what I’m proposing, in which T3 custodians are paid based on how many funds they sell or buy). If we pay based on the risk, holding funds in a wallet off exchange has 0 risk, so we should be awarding nothing. If we pay based on the work done, reporting can be made automatic and simple, so a basic operator fee would be all that would be required. But then, what motivates anyone to lose their anonymity by actually putting any funds in the reported wallets? Clearly, the best thing I could do would be to report a ton of wallets that all have like $1 of funds in them and collect a ton of operator fees. So the shareholders will be responsible for holding the custodians accountable for not having enough money in their wallets. I just think that’s going to be exhausting for shareholders.

They will happily move funds from T3 to T1 if the compensation is sufficient

Maybe. Exchange risk is pretty big. Ignoring opportunity cost, I’d happily hold a large amount of NBT in a wallet somewhere if Nu is paying me LP rates, especially if I never have to risk bringing it to exchange. That’s like 100x better than parking because I can use the money whenever I want.

[mhps]

So what prevents Satoshi from submitting his kajillion btc as buy side T3, with absolutely no intention of ever bringing them to market. Are we going to pay him for holding his own btc in his own wallet and having nothing to do with Nu?

how about a T3 custodian must put the fund in a 2x2 multisig address which he/she and another party have to both sign and both pledge that will only transfer fund to a T1/2 address. T3 Liquidity is reported from the multisig address. The T3 custodian can’t spend the T3 fund on anything else. To make it pointless not to ever use T3 fund, compensation to T3 is only paid when it is transfered to a T1/2 address. The amount is proportional to how long the fund is in the T3 address and the transfered amount.

[Nagalim]

This is great, each T3 custodian gets a watchdog. Let me think about it some more, but this seems like a solution.

[Nagalim]

@mhps It seems to me we don’t even need the watchdog. All we need is the T3 to blackball themselves as a recipient of the funds. As anyone can fake an account, that means the T3 custodian is given a list of addresses corresponding to other trusted community members such that the custodian and that community member are unlikely to collude. Then, all Nu has to do is look through the custodian’s Txn history (written on the blockchain) and make sure all receiving addresses are valid T1 custodians. Then they pay them based on the time the liquidity was provided for after the fact.

Others, please try to attack this. Pretend you are the T3 custodian with malicious intent, how would you fraud Nu?

[zoro]

How can you ensure validity of T1 ALP custodians?

[Nagalim]

Well, any MLPs are clearly good (MoD or henry). Then the shareholders can elect some others like you. The main idea is to just make sure the T3 custodian and the T1 custodian aren’t working together.

[zoro]

So i cannot be T3 and T1 custodian at the same time?

[Nagalim]

You can, but you cannot make Txns with yourself from T3 to T1. The reason for this is a little convoluted. Basically, the T3 custodian has incentive to favor themselves and blackball all others if we let them trade with themselves. If the T3 custodian is not allowed to transact with anyone they can collude with, they are forced to treat all valid T1 recipients as equals.

[mhps]

the T3 custodian has incentive to favor themselves and blackball all others if we let them trade with themselves

I don’t see why this is a problem. If a T3 custodian gives himself T3 funds to put on his T1 bot and do all the reporting, and nu knows the fund is used to support the peg, everything is fine to me.

[Nagalim]

What if the T3 custodian deals with no one but themselves, they send the money to themselves and put it up on T1 just long enough to get Nu to pay for the weeks of T3 service, then they take the money off T1 and walk away, getting paid exorbitant rates for like a day of actual liquidity support.

We would need to contractualize the T1 service as well if we let them blackball everyone but themselves. The whole thing works way better and simpler if you force the T3 custodian to follow a white list that they are not on. It keeps them from colluding.

[mhps]

put it up on T1 just long enough to get Nu to pay for the weeks of T3 service, then they take the money off T1 and walk away,

Then the question is how to fairly calculate T3’s reward period. What you said could happen to any T1 LPs. How/when do you think fund should flow back to T3 from T1-2? How about reward T3 for the pereiod when its fund is in T1-2? How about making T3 a loan from T3 owners to T1-3 LPs? Maybe they can settle on a price themselves?

[Nagalim]

All your suggestions cause us to need to audit not only T3 but also T1 and T2. This greatly adds to the complexity.

This could not happen to just any T1 LP because no other T1 LP is motivated by the T3 reward other than the T3 custodian. If a T3 custodian sells to an independent T1 custodian, that T1 custodian has no reason at all not to put up the funds and get the T1 pool rewards. If the T3 custodian sells to a colluding T1 custodian, that T1 custodian has every incentive to fool the shareholders into thinking the T3 custodian did their job, then walking away and splitting the money with them.

We could also think of ways to fully audit T1 custodians, but it would require some heavy use of API keys on the part of the pool operator to try to identify their individual providers. I’d really rather just do the simple T3 audit (everything on the blockchain) and provide the custodian with a whitelist.

[mhps]

If the T3 custodian sells to a colluding T1 custodian, that T1 custodian has every incentive to fool the shareholders into thinking the T3 custodian did their job, then walking away and splitting the money with them.

What about following the POS model, when nu needs t1 liquidity, do a lottery on avilable t3 fund. the probability to win is proportional to everyone’s fund-times-days, reward the lucky custodian proportionally to f.t.d used.

[Nagalim]

Ok, interesting. What if the T3 custodian declines to participate until they are chosen as both T1 and T3? Do they sacrifice their f.t.d? This is a possible solution.

[masterOfDisaster]

What if the T3 custodian declines to participate until they are chosen as both T1 and T3?

I don’t see why anybody would require to be formally elected as T1 custodian.
The incentive for being T3 custodian is to balance the T1 orders with the T3 funds and to increase the compensation rate (per invested money) for the money that’s invested at T1.

In my view there are at least two types of T3 custodians

• an elected T1 custodian operating a NuBot on an exchange (MLP) who broadcasts liquidity
• or a participant in an ALP (preferrably with fixed compensation, because that increases the incentive to create orders at sides that ran low)

[Nagalim]

I see it as there being three types of T3 custodians:

1. MLPs that run and report all three tiers (NuLagoon). The veracity of the T3 reports is upheld because they are bundled contractually with T1. T1 can be verified directly, so T3 is verified by proxy.

2. Trusted T3 custodians that are extended credit. These custodians are paid via their own spread at a constant rate/txn. They are kept honest by the profitability of their own contract, which they share in.

3. Self-funded T3 custodians. These are most desired as decentralized and cheap liquidity that scales well. However, the reward scheme must be complex as T3 cannot be directly verified. @mhps’s concept of fund days destroyed may be a good method for keeping T3 honest.

[mhps]

Maybe they can settle on a price themselves?

it will be all sorted out if T1 pays for T3 from T1’s profit. Then Nu doesn’t pay T3 directly. Nu only raises fixed reward fee when T1 liquidity is needed and let more fund come out of the woodworks.