UPDATE: New motion body
UPDATE: Newer motion body and modified introductory text
UPDATE: Even newer motion body
UPDATE: Motion hash determined after minor amendments.
When I began drafting this post, there was about 35k-36k NBT liquidity each on the buy side and the sell side.
Liquidity providers face considerable volatility risk and the possibility of exchange default. Shareholders pay a high price to mitigate these risks. Nu provides disproportionately deep liquidity at small spreads, which the network maintains at a non-trivial cost.
Some view this as a salient feature of our network that attracts adoption, and any costs of maintaining this state are hopefully seen as a loss-leader. This is however not well appreciated by the general cryptocurrency community, and our pledge of stability is mostly taken advantage of by speculators, for whom we shoulder the burden of BTC fluctuation without requiring just compensation.
I cannot help but argue that in fact we have been too eager to please, at the cost of shareholders and liquidity providers, to the detriment of the health of the network at this early stage of development, which may eventually undermine our mission of providing a stable, decentralized currency to the world.
I am aware of proposed features such as the parametric order book to reduce the volatility risk of liquidity providers, scheduled to be implemented with NuBot 0.3.2. The aims of this motion are not formally covered by such proposals, where compensation schemes have not been established. This motion is also an initial step towards the regulation of liquidity operations, allowing shareholders to formally agree upon standards expected of the quality of Nu liquidity, offering predictability for parties within or external to the Nu community.
I propose to mandate, in effect, minimum and maximum values of permitted spreads for all liquidity operations. I intend this motion to be an incremental fix with a low technical burden for ongoing operations, and consistent with upcoming planned changes to core software. The motion, though having a long wording, offers a simple provision, and in my opinion the change I propose is rather conservative. This motion may not lead to a very significant reduction of network costs, but is a cautious step towards the right direction.
Motion RIPEMD160 hash: 0ec0be7f113a0bf6ff603545a974cd6410458e00
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For all liquidity operations that are paid for with custodian grants, operators shall ensure liquidity providers are not discouraged to provide liquidity up to a specified minimum offset from the target peg of 1 USD = 1 NBT, which we call the guaranteed offset.
With a guaranteed offset of x, NBT asks made within the range of 1 to 1 + x USD, as well as bids made within the range of 1 - x to 1 USD, shall be compensated at the same rate within each operation.
This motion also imposes lower and upper limits of the guaranteed offset.
For liquidity operations between NBT and BTC, the guaranteed offset shall be at least 0.005 plus the exchange fee rate, and at most 0.05 plus the exchange fee rate. For example, if the exchange fee is 0.2%, then the operator shall ensure that the guaranteed offset is at least 0.007 and at most 0.052.
For liquidity operations between NBT and USD, the guaranteed offset shall be at least 0.002 plus the exchange fee rate, and at most 0.02 plus the exchange fee rate.
For liquidity operations between NBT and fiat currencies other than USD, the guaranteed offset shall be at least 0.002 plus the exchange fee rate and at most 0.05 plus the exchange fee rate.
For liquidity operations between NBT and cryptocurrencies other than BTC, the lower and upper limits of the guaranteed offset shall be established through a motion before custodian grants can be given.
Operators shall inform shareholders of the intended value of the guaranteed offset, and participants are also given convenient options to take advantage of the guaranteed offset, such as by having relevant parameters and settings chosen by default.
For ongoing operations running on custodial funds granted before the passing of this motion, the guaranteed offset may be set to any value in the range of the lower limit to twice the lower limit, for each exchange, at the discretion of the operators, until making subsequent requests for custodial funds.
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