NBT lending with the support of BCE

I was just thinking about something that might be possible once B&C Exchange is complete.
As we often talked about, one of Nu’s business models might be lending.
A customer might want to lend NBT to fund something. A contract between Nu and this customer is created, granting this customer NBT for an amount of time x for a fee of annually y%. At the end of the contract the lent NBT get paid back including the fee.

How to collect securities and handle them was so far one of the bigger issues. Nu would simply not like to lend NBT that are never paid back and have no securities for that.

Fast forward into the future; scenario:
B&C Exchange is created (not only the blockchain, but important transaction messages as well :wink: ).
Nu offers lending.
Nu takes BTC, BKS or something else (NSR, but that is a special case) as security!
A contract is made, a security deposit is sent to a multi signature NSR address and the customer receives NBT.
If they don’t get paid back, the security deposit get seized and sold.
I think the standard custodian approach can be used for that. Only I’m not sure about how to handle the multi signature security deposit address - how to remote control it in case the contract ends and they need to be sent back of seized?
The more I think about that, the more I get confused.
I think a technical discussion is as necessary as a philosophical and an economical one :slight_smile:

Why would customers do that? And why would Nu do that?

Customers of that business model could simply sell the security deposit and have the money they need without that fancy contract stuff using a decentralized exchange.
But they would lose their security deposit doing that.
Maybe they don’t want to sell the security deposit but still want to be liquid?

Nu should be interested in that because it earns Nu money.
The fee is an income.
And transforming security deposit temporarily to NBT is something intriguing.

I haven’t thought much about the risks and drawbacks. But first I wanted to know how that sounds overall.
Last year I was writing about credit custodians, custodians who would operate Nu’s loan business.
A lot has happened since then.
Nu is in even better position to start loan business.
With B&C Exchange it might not only be less complicated, but possible at all!

Using NSR as security deposit is a special case, because NBT and NSR are tied to each other :wink:

One risk that applies only to NSR as security deposit spawns from the “parked” NSR: they don’t mint (and they must not mint!).
They don’t secure the blockchain.
They increase the risk of a >50% attack (I know that a >50% sounds silly, but I think that risk needs to be avoided, because it poses attack vectors).
So there need to be thresholds for the total percentage of NSR that can be used for that.
But even with that threshold it can start the whole loan business.

A risk in general is the risk of the security deposit losing value. At a certain point it’s cheaper for the customer not to pay the NBT back and get the security deposit seized. More than the current value of the lent NBT as security deposit is required to mitigate this risk.
If it’s still not enough, because the value of the deposit drops far, it would be Nu’s loss.
In fact the customer is in a situation he can only win:

  • if the value of the deposited funds drops big time, the customer is better off keeping the NBT
  • if the value of the deposited funds rises big time, the customer can get it back by giving back the NBT

That needs to be reflected in the ratio between the security deposit and the lent NBT.
To give an extreme example: maybe it’s necessary to require 10000 USD in BTC as security deposit to get a loan of 5000 NBT. The ratio would then be 2 and I doubt that will attract many customers

Doing that with NSR as security deposit doesn’t even require B&C Exchange: the NSR that are received as security deposit are burned and created by a grant once the contract is completed (and given back if the NBT are sent back or auctioned (depending on the liquidity situation) if the NBT are not sent back).
I don’t know how to automate that. With a “smart contract” comes to my mind, but that is just another way to still say the same :wink:

Collateral. If you pay for your bank loan with money, what’s the point of the loan? We need something worth something to the debter that isn’t worth anything to other people. Time locked funds fits this limitation, for sure, but why would someone do this?

How about leverage on B&C? Nu loans nbt to B&C traders, but it can never leave the B&C signers control (or whatever, I still don’t really get how B&C works. Whatever is the equivalent of deposited funds). They time lock say 50 nbt and get a 150nbt loan. If the amount they own in B&C goes down to 100 nbt, they get margin called and they are forced to lose all funds including their time lock to pay the loan back. Otherwise, they enjoy extra leverage on their bids.

We can charge 0.5% of the initial deposit or something for this priviledge.

The other concept is one of trust. This is actually how the liquidity pools work, as they are something of a loan based on the trustworthiness of the pool operator. The issue here is that it is incredibly hard to quantify trust. I certainly felt this when I was asking for my first and second NuPond grant, but not so much anymore.

The idea is that if the person has a bigger project or revenue source on the line, they will not default on the loans. But then again, they may as well just artificially inflate and deflate that main revenue source to adhere to their desires for a loan. If a watchful eye is kept on a project’s budget, however, it may be that the only way they could get a little extra money is to come right out and ask for it as a loan. As they have a much bigger project budget on the line, this would not be an issue. I had considered doing this for a while: asking for something like a 100 NBT loan for 3 months which I would burn back as 101 NBT (4% interest). I would have incentive to pay back the loan because I am getting paid more than that by the month for my NuPond operation and I would not want to jeopardize my standing of good faith.

Think of it like a casino where players are only betting against each other, not the house.

Case 1:
Jayden walks into the casino and gives $200 to the teller. He receives 600 chips. The house watches him and if he goes down to 401 chips they take his chips and kick him out. Otherwise, when he cashes out his chips the teller subtracts 401 chips from his total and pays him the remainder for 1 chip : $1. Either way, the house makes $1 off his $200 initial investment.

Case 2:
Anika is a blackjack dealer. She gets paid $200/day and likes to gamble in her off-time. At night, she comes in and pays the teller $0.5 for 100 chips, which they give her. She plays and loses them all (poor Anika :frowning:). The next day, they garnish her wages for $100. If she quits her job, the casino takes a loss but now Anika is out on the street. She would need to recreate her standing with a new casino to do it again, which takes time and effort. She has to consider if the time and effort is really worth the $100, a small fraction of what she would have earned had she kept her job.

I agree with @nagalim that “real” loaning is hard to quantify. We need to see how to move toward that in smaller steps, and at this point we want to “loan” for transactions that we have some control over. In case of businesses that operate like B&C we can offer a two-way proof-of-burn agreement.

In a “fair” way for both chains, say a user holds NBT and wants to buy 100 BKC. Maybe will burn (or deposit?) 100 NBT to an NBT address, and B&C generates 99.9 BKC for him. In reverse, if the user burns 100 BKC, he gets 99.9 NBT in return. This in effect forces a 0.1% spread at a protocol level so helps burning outstanding NBT, without requiring custodians.

Note that if there’s more influx of funds from B&C we will still be issuing more NBT than we can burn, but at least now Nu has to “pay” $0.999 for each NBT.

There is still a game of trust between the two chains. One can see “burning” as a very short-term loan that neither chain has a strong incentive to default in a simple way - or they risk losing the trust of the user.

There are many other dynamics here that I will not type out here right now, but I think basically the side that has the higher leverage will be able to negotiate a smaller profit for the other - say if NBT is dominating then NSR holders can afford to ask BKC to grant more than 99.9 BKC to anyone burning 100 NBT.

I’ve been considering a fork (call it “NuChips” for now) that deals solely with crypto casinos (on/off chain) and has a built-in blockchain dice game. An option to purchase NuChips is to burn NBT, and when people want to redeem NuChips they can burn NuBits, and vice versa. In return for an exclusive agreement with NuBits, the NuChips network will offer to pay a tax. By the way, it’s all hypothetical at the moment, but if any one is up for a discussion on this I’m free to talk.

I think many more blockchains with services built-in at a protocol level that can be run in this way. The amount of profit that Nu can earn depends on its bargaining power, which again lies on our social capital. We can bootstrap that social capital by building them ourselves and tying them closely to Nu, which can hopefully be seen for B&C.

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If we use the dual side auctions, the free market should find that BKC:NBT ratio for us (most likely close to 1:1, but never perfect). The seed would act as a natural limitation on volumes (we don’t want someone converting tons and tons of BKC to NBT for the same ratio and vice versa, their actions should push the price one way or another as it does in the dual side auctions). I know y’all are sick of hearing about the auctions, but it really blows basic burn protocols with fixed rates out of the water.

The other thing is that a person could just trade on the open BKC/NBT market if they want to convert. We should probably peg that market in the beginning at least. Still, these are methods of converting money at a fee, not loaning money with interest.

Creating a system of leverage for B&C seems like a clear win for whoever is doing the loaning.

Are you suggesting Nu could keep an eye on the progress of every project which Nu has lended money to? If three people borrowed money to do international trade, to raise pigs, and to develop gadgets, do you expect Nu can afford to periodically go to the trader’s warehouse in Istanbul, the pig farm in Agentina, and the dev’s workshop and sales dep in Shenzhen to evaluate whether each borrower is well on his way to pay back?

Are they raising pigs using B&C exchange?

Maybe I don’t understand BCE, but I thought there was something akin to having your funds on the exchange using multisig.

Yah, I probably don’t understand BCE.

B&C is essentially an order matching system with a multisig-enabled escrow service for fund transfer. If you are only referring to lending to do trading on B&C, that is a very narrow way to see Nu’s lending potential. The discussion has to answer the question how normal businesses can borrow from Nu.


I agree lending to normal business would be the absolute honeypot. However, use of nbt for leveraged trading on BCE is a really convenient short term use case. Is it possible to loan NBT with the sole intent of leveraged trading on B&C using the escrow service somehow?

If you want to refocus the discussion to fully flexible loans, feel free. I just don’t have any good ideas for a method of collateral.

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I am thinking along with this

It’s much easier to deal with PEGs who has established online business than retail borrowers. Specifcally to this discussion Nu could take the PEG’s BTC reserve as leveraged collaterial in B&C. At one time I looked there were 7700BTC in reserve.

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The ‘E’ in PEG is exchange. Are you saying that all our liquidity pools are a form of loans?

I’m not sure I understand this. Is Nu taking out a loan from B&C using the PEG’s btc as collateral? If Nu defaults, why would the PEG want to pay its bill?

Those exchanges call themselves exchanges but it’s in the sense of currency exchanges – you go their to buy a currency at a posted price.

You misunderstood. It’s about Nu provide operation liquidity by lending NBT to PEGs.

So in what way is Nu using the PEG’s BTC reserve? Sorry, if you help spell it out for me I hope to prove a useful ally. Perhaps there are additional services we can provide aside from decentralized fund provision.

By the way, another reason not to support large scale NBT lending is that it’s a risk to the peg. Like how Soros would borrow large amounts of some currency just to crash it.

Sorry for not being clear. this thread tallked about difficulty to find a form of collateral suitable for being used on B&C.

Since many PEGs who deal with BTC has reserves in BTC (like cold wallets), Nu could lend PEGs NBT, taking their reserve as collaterals.

For example, a payment gateway wants to expand business and has 200 BTC dead money in its reserve. The gateway comes to Nu to borrow 300,000 NBT for its NBT sell/buy business for a given term. Nu takes 100 BTC (10:1 leverage) of the gateway’s reserve money, and lends the gateway 300k NBT by putting printed 300k NBT into a multisig NBT address controlled by B&C signers.

The gateways is allowed to withdraw from these addresses. However B&C signers will only allow withdrawal if the combined balance of the two addresses will not decrease from 300k NBT by 100BTC. If a transfer is made to decrease combined balance below the allowed amount, Nu will take possession of the loan and the collateral. This effectively only allows the gateway to trade between these two addresses.

The gateway will use the 300k NBT as its operational reserve to sell/buy NBT with BTC, using these two addresses as hot wallets. The gateway does its part to run promotion, expand customer base, discover market – off the B&C blockchain, without bring risk to and using resources from B&C – and set whatever buy/sell price according to demand, with 10 times liquidity it had before.

When the term is over, the 300k NBt loan is returned to Nu with a pre-set interest. The collateral is returned to the gateway’s own address. The 300k NBT is burnt.

Note that the gateway could offer more currency pairs than NBT/BTC. It could offer NBT/USD and BTC/USD at the same time, and use its internal liquidity satisfy balance requirement in the two addresses.

Ok, I see. Let me attempt to poke holes in it.

This is not dead money, this is its reserve. If someone sells a bunch of a currency for BTC, they need these BTC to give to them. They don’t want them locked up by Nu, so not having them locked has a worth.

As long as the price of 100 BTC does not change a drastic amount, the gateway would not be affected by having a 200k NBT limit, or a 100k NBT limit; it can’t withdraw more than the 100 BTC is worth anyway.

This brings me to my conclusion: why would a gateway ever do this when it can just sell the BTC for the most NBT it can get, then buy the BTC back later? The only answer would be that it thinks the price of BTC is going up and it doesn’t want to miss out.

Also, what stops the PEG from using the loaned NBT to buy BTC, thereby pushing up the price of BTC so they get loaned more NBT so they can buy more BTC and so on until they have more BTC than the collateral, then defaulting?

Whether we are loaning to PEGs or retail borrowers, the limitations of collateral are the same.

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It’s a matter of technical details. The contract between the gateway and Nu can be such that the Gateway is allowed to pull part of its collateral at any time as long as the loan, with interest, can be withdrawn prportionally by Nu at the same time. This can be done automatically. Reserve being reserve is because it is rarely used and mostly dead money.

Yes it can. Customers can buy up to 300k NBT from the gateway with BTC. For example every transaction buys 3000 NBT and put 10 BTC in. This is allowed to happen as long as the BTC is saved in the address controlled by B&C so that the total asset controlled by B&C is no less than 300k nbt - 100 btc in these address (i.e. the gateway is in black) at any moment.

BTC/NBT price fluctuation also affects the total asset. The gateway should be aware of this risk and not to cross the death zone. PEGs being in the currency business are well aware of exchange rate risk.

You are talking about speculators not PEGs. PEGs make money by spread. If every sales of NBT has to be followed by an immediate BTC sales (to buy NBT back to maintain NBT liquidity) then there is no money to be made. You can understand PEGs as arbitrageurs seeking tx opportunity from the real world, from people who need money to buy things, to remit, and maybe carry trade or doing their own lending whatever. That is why the more liquidity a PEGs has, the more it can tollerate fluctuations and let natural buy/sell cancle out. PEGs with little liquidity will run out cash soon. That is why getting loaned a lot of liquidity is attractive.

When you buy BTC you will have to put the BTC to the multisig address Nu controls minus the collateral amount (100BTC in the example above). When you “get loaned more NBT” you must hand in BTC collateral to Nu, which at most is 100BTC. Upon doing this the address of the first contract has no ability to withdraw. I don’t think you gain anything at all.

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I guess the most feasible form of decentralized lending so far is margin trading. I think that can be implemented all within BCE, without any work from Nubits. So the problem is whether Nu can get a share of profits, even while margin trading can be made solely into a BCE feature.

Here I suppose a rough mechanism that BCE handles margin trading. There is a buy order of 1000 NBT with 10 BTC, i.e. 100 NBT per BTC; Alice has 500 NBT and wants to borrow 500 NBT to dump on the buy wall.

  1. First there needs to be enough NBT deposits in BCE reserved to facilitate margin trading.
  2. BCE takes 500 NBT from Alice, simply consumes the buy order using 1000 NBT and puts 10 BTC under Alice’s name.
  3. Alice will not be able to withdraw the 10 BTC before paying 500 NBT to BCE.
  4. Alice is free to place orders with the 10 BTC, except she can not sell BTC at less than 50 NBT each.
  5. Before Alice pays back 500 NBT, BCE can dump the BTC on the buy wall if BTC drops to 50 NBT each.

Assume that BCE collects fees from Alice that covers its risks and expenses. 1 - 4 are quite well-defined but 5 is not. I’ll shape it out in the following.

If the contract allows BCE to dump the BTC at an expiry time, the best BCE can do is to buy a put option with the same expiry date - that is, it has a contract between a user Bob, who has to buy 10 BTC with 500 NBT when BCE asks so. Otherwise, BCE faces volatility risk - if BTC drops too quickly it might only be able to recover less than 500 NBT from the dump.

This means BCE has to implement put options, which we assume exists (it’s easier than a margin contract for BCE, because it shifts risks to the option seller). Ideally a user steps up and offers a put option - that can be a Nu TLLP. If done properly it does not expose the liquidity provider to more risk than volatility and locked deposit until the option expires, while BCE has to pay a premium for the option. So this can be a way that BCE subsidizes Nu liquidity provision.