[Passed] Proposal to create a strategic reserve of NuBits

JordanLee · October 10, 2014, 7:09am

The First Strategic Reserve Team or FSRT would like to propose the following multisignature custodial grant, the text of which (beginning with the letter N and ending with a period) has a RIPEMD-160 hash of :
477C951F2073CE098750F56D13C1D4CF20A4CF2B

Begin Proposal
NBT address: BhCnQrYrA5LZm871dtMQEXeU93gmqbhdrC
NBT amount: 4040000

The purpose of this grant is to create a strategic reserve of NuBits. There are only two circumstances under which the FSRT would transfer the funds granted:

If the sell side liquidity from other custodians becomes thin enough that there is a significant risk the NuBit peg will be lost before additional custodial grants can be passed.
If shareholders instruct the FSRT to transfer the funds via the passage of a motion.

If the first circumstance above becomes a reality the FSRT will have need to exercise its discretion about how the funds are used. The FSRT is inclined to release them to an established custodian who pledges to use them to recycle the funds as an LPC, but the FSRT does not promise to do this so that they have the appropriate liberty to respond to an unforeseen situation. It is possible they might distribute them as dividends or use the proceeds for some other purpose in the interest of shareholders. In any case, the primary goal will be to provide emergency liquidity to facilitate the maintenance of the price peg.

If the second circumstance above becomes a reality the FSRT will do its utmost to implement the contents of the shareholder motion. This scenario may occur as a result of a member of the FSRT resigning, which would make it necessary to choose a new team member and transfer the funds to a new multisig address that excludes the previous team member’s key and includes the new team member’s key. In that case commission would not be taken. It will only be taken when the funds pass out of the control of the FSRT.

The address above (BhCnQrYrA5LZm871dtMQEXeU93gmqbhdrC) is a multisignature address, so shareholders will be protected from corrupt use of the funds by the fact that a majority of the team must sign any transfer of funds.

The individuals composing the FSRT will not change without shareholders being notified. This means if the FSRT asks for a second custodial grant shareholders can be certain it is composed of the same people who are managing this grant proposal. Members of the team are not being publicly identified to safeguard their personal safety.

The members of the team will receive a combined total of 1% commission for their services, to be paid when funds are transferred according to the terms of this proposal. This means the strategic reserve will consist of 4,000,000 NBT and the commission will be 40,000 NBT.
End Proposal

I, Jordan Lee, believe each of the team members to be as reliable and trustworthy as anyone could be. I believe their interests are aligned with the interests of shareholders. I believe these individuals using multisignature transactions provides the best chance shareholders have at the present time to ensure this large quantity of NuBits is handled in a way consistent with shareholder interests. I still cannot guarantee their future actions, however.

Even if this grant is passed, shareholders should not regard the short term liquidity needs of the network to have been met. The strategic reserve is intended as a backup plan. It has the notable disadvantage that shareholders do not get to specify exactly how the funds will be used, because it is designed to be used to provide a fast emergency response to lack of liquidity where there is not sufficient time to discern the will of shareholders. Therefore, it is important that additional custodians step forward with specific proposals for the use of granted NuBits. This should be regarded as an urgent matter given that our daily trading volume has quickly risen well into the hundreds of thousands of NuBits and could rise even higher soon, making it necessary to bring a significant quantity of additional NuBits to market very soon. This strategic reserve fund is not the ideal way to bring that liquidity.

We have learned in the last two weeks that being an LPC is a very time consuming task at the present time. While we intend to continue developing NuBot so that is no longer the case, it seems apparent that KTm and Jamie did not ask for sufficient compensation levels (2% of the grant amount). I believe shareholders would respond favorably to proposals asking for significantly more compensation, and I encourage community members to submit proposals asking for higher levels of compensation for shareholder funded LPC operations, even as we begin our transition to self funded LPC operations.

desrever · October 10, 2014, 9:02am

Hi Jordan,
I am glad we reached a point where we can already have a team managing a reserve thanks to multisig.

Just to be absolutely clear, is this a motion or a custodial grant? Its pretty clear since its posted in the “custodial grant proposal”, but then the RIPEMD made me think that this comes also with a motion attached.

I confess I was about to enter a motion vote for that RIPEMD, but then I stopped and came here to ask. Please make it cristal clear just to be sure we don’t waste votes.

As in the other custodial grant proposal, you could edit the above message and add a quoted text which will result highlighted such as :

EDIT: it would be awesome if you can prove that no-one is in posses of a private key that can unlock funds alone. Maybe you should let a shareholder that is not a member of FSRT generate such address by following a very specific protocol.

Or maybe I just woke up .

Cybnate · October 10, 2014, 9:38am

It has to be a custodial grant. There is no way I know of to create NuBits with a motion. The grant is asking for 4,040,000 NuBits. I agree with desrever that it would be good to establish a bit of protocol about the transfer and managing of the funds. I would also like to hear the number of people involved with the multisig. With only 3 or 4 it is easier to make a ‘bad’ deal with the others than as we have e.g. 10 people involved. And even though they are anonymous it would be good to have at least one, preferably two anonymous representatives of this group which shareholders can hold accountable to some extent if things go to custard. Back to my old adagio, there should be something at stake. I think, the least we can do is to have one or more people should put their credentials/account at stake in the NuBits forum.

@JordanLee can we assume that it is yourself as you are already vouching for the team?

masterOfDisaster · October 10, 2014, 11:11am

This valid concern from @desrever:

has been addressed in the proposal:

But I think that this needs to be answered:

I understand the need for this kind of emergency fund.
I understand that certain situations require quick action and a standard custodial grant could be too slow to keep the peg.
I also understand that @Cybnate feels uncomfortable with not knowing the members of this FSRT. But I think that might be the price that needs to be paid for having this kind of backup.
Really knowing them could make them the target of attacks.
Not really knowing them but pretending to do that merely serves as a fig leaf to ease one’s mind…
This is more or less like a standard custodial proposal and hence requires some trust in the honesty of those who are granted the control over the NBT.

If @JordanLee trusts them, I can follow that lead (I hope I made clear that I don’t do that blindly).

There are very specific scenarios outlined in which the funds can be accessed and transferred.
My understanding of these scenarios is:

In the first instance they are used for keeping the peg which would be initiated by the FSRT.
In case they are not needed for that any longer they can be transferred via shareholder motion.

As long as we don’t have more custodians and more NBT under their control, I think this kind of FSRT is far-sighted to help protect the core design feature of NuBits: a stable and reliable peg.

Chronos · October 10, 2014, 3:57pm

The high volume has partly be due to malfunctioning NuBots. Could we get some hard data on this claim of urgency? What percentage of the current grants have been sold, and what is the projected date at which we will need more sell-side support, based on current sales rates?

Also, note that there is low risk of the peg rising above $1, even if custodial sell walls fail, because many NBT holders will likely step in to provide selling pressure, in anticipation of the next custodial grant.

masterOfDisaster · October 10, 2014, 4:25pm

If the peg is in danger to get lost it requires a custodial vote. That requires a proposal and a vote.
Say there already is a proposal, the peg is in danger to get lost and the voting for the peg starts immediately. Even if each and every minter did vote for the proposal, it did take the next 5001 blocks to let this vote pass.

At a medium block space of 1 minute this is 5001 minutes or 83 hours 20 minutes.
Close to 3.5 days.

This is a kind of lower end for the time that needs to pass before anything can be done and is based on some assumptions that are not realistic.
I expect it to take some more days, because you need to

find a custodian
wait for the proposal
wait for the vote of the shareholders (and don’t expect all to vote at instant for the proposal!)

I doubt that NBT holders would step in to keep the peg; they would more likely sell to price above $1 because the know they can buy back at $1.

Chronos · October 10, 2014, 4:28pm

Your entire post is exactly correct, in my view. The various competition to sell at price above $1 could keep the price in check. Example: I want to sell at $1.05, but you sell at $1.03, so the price fails to reach $1.05. Seeing this, I sell at $1.02 in order to lock in some profits. When many participants are doing this, it holds the price down. Also, relatively few people would want to buy at prices over $1, because of the guaranteed losses, so a natural equilibrium is reached.

Looking forward to the projections about when this might occur.

tomjoad · October 10, 2014, 4:40pm

I think I agree with you for the most part, but my understanding is that this reserve is for an unexpectedly large increase in demand.

If system demand increased from 100 NBT to 105 NBT, and our supply was 100 NBT, yeah this fund isn’t needed.

If system demand increased from 100 NBT to 500 NBT, and our supply was still 100 NBT, I don’t think a $1.00 peg will be maintained in the short-term. This sort of mass influx of demand could happen for any number of reasons - maybe Andreas decides to tweet about NuBits when re-watching his Senate comments for example.

I would vote for this proposal if we hear who is on this team. The custodial fee is lower than actively-managed ones like KTm’s, and isn’t paid until its used, so I don’t see a downside to having the fund if it is secured by trustworthy people. It’s a good insurance policy on our “We’re always $1.00 US” claims.

Ben · October 10, 2014, 5:12pm

This is probably just a semantic argument, but I wanted add a clarifying comment to your statement.

It isn’t possible to defer payment of the fee. It’s paid immediately when the grant passes. Now, the elected custodians for this grant can abstain from moving those funds (and can proveably show that this is the case through the block chain), but it will still affect the money supply immediately.

tomjoad · October 10, 2014, 5:16pm

Right, thank you for clarifying. I think that fact makes it even more important that team members are identified. There aren’t many people the network should trust with a 40,000 NBT blank check.

Chronos · October 10, 2014, 5:29pm

It’s actually a 4-million-dollar check. The fee is mixed in with the funds, and the trustworthiness of the recipient(s) enforces the separation.

masterOfDisaster · October 10, 2014, 9:08pm

This could happen.
But here’s another scenario:
the peg is in danger to get lost because of a demand for NBT that is so high that it can’t be supplied by the funds that were granted.
The reason for the demand is not subject to this scenario but for easier understanding one might assume that a crashing BTC price (due to some real reason other than pump&dump activities) caused this demand.
People might prefer losing some percent (compared to losing even more holding BTC or trading BTC for another volatile coin) when buying NBT for over $1. They might prefer biting the bullet and buy NBT for $1.05, $1.15, $1.30 or even more. Trading the BTC for USD would in some cases be an alternative, but not if the traders want to cash out or move the money to other exchanges easily and quickly. For the latter reason NBT is perfect, although it is not yet widely adopted by exchanges.

In that scenario the price of 1 NBT could easily rise (far) above the peg once the demand for NBT was way higher than the supply that is still mainly provided by the custodians, because the total supply of NBT outside the hands of custodians is even more limited than the supply provided by custodians. And this might stay true for some time.

That’s the reason I feel comfortable for having this proposal. I’d prefer to call it insurance (rather than a (blank) check) that can buffer the next 4 million NBT hoping that this buys enough time to get a custodian vote through.
I don’t feel comfortable with signing any blank checks. But this is no blank check. The grant is to be created for a reason. If I did assume that the grant would be embezzled, I couldn’t solicit voting for this proposal. But I couldn’t solicit voting for any other custodian proposal, either.

If you give someone control you need to trust this person up to a certain degree.

I can only speak for myself, but I trust @JordanLee and his judgement and I feel the need for this kind of insurance named strategic reserve.

I mean, if someone would want to make a scam there would be easier ways that allow ripping off more money with less effort in a shorter time. I might be wrong, but my common sense tells me that everything is fine.

My intention is not to oppress a controversial discussion of this matter by implicitly saying people who voice their concerns don’t trust @JordanLee!
I think it is very important to discuss these things openly and to hear different opinions.
I just wanted to voice my opinion

Cybnate · October 11, 2014, 12:00am

Just to clarify my thoughts, I do trust Jordan to a great extent. It is more difficult to trust the people who he/she trusts. I would appreciate to have at least anonymous aliases in the forum as we did with the custodial grants. Also having an understanding of the number of people involved in the multisig grant would provide me with more confidence.

I appreciate that given the nature of this fund it is hard to do this trustless (as in driven by rules in protocol) and swift responding on relevant events.

We might need to start thinking about protocols to do this though as I don’t think it is sustainable when more less informed shareholders join us.

For now, as I think there is a need to establish this emergency fund and there are no better options at this stage, I will vote in favour of this anyway.

mhps · October 11, 2014, 3:51am

I think we need to clarify the performance of the peg we promise.

The daily trading volume is $45M for bitcoin and $6M for litecoin now. If 10% of them want to get into Nubits as a safe harbor in a medium market crash, the NBT4M reserve will be consumed in less than a day. In a major crash such as the one last February, daily volume was about $100M, $4M were traded in a matter of minutes in BTCUSD. It could have been BTCNBT if Nubits were there. We would need enough reserve to avoid a scenario of price breaks the peg upward -> perception that there won’t be enough NBT -> panic buy -> price going parabolic -> over bought -> correction -> sell off -> possible price breaks the peg downward … How much reserve is enough? I see to clear figure. This leads me to think that promising absolute peg is bound to cost us in credibility. We have to consider that NBT price on third party exchanges (e.g. allcoins and poloniex) do break the peg often as there is no bots. So the price IS floating anyway.

So I think we should first set a realistic expectation of pegging performance, and improve it as NBT reserve increases. For example we can set expectation (basically a public disclaimer) that with bots the peg is on all the time when the LPC reserve (basically what KTm and Jamie have now) is available, the peg can be lost for no more than XXmin when the Strategic Reserve is available, the peg can be lost for no more than Y days to replenish the Strategic Reserve as shareholders vote.

Under that framework, we can take time to adjust the number of tiers and fund of reserves. I think we should have at least two tiers of Strategic Reserve, one is able to act within 1 hour, controlled by 4 persons, controling $2-4 M, and another tier of $20 M, able to act within 8 hours, controlled by 8-10 persons. When we gain more confidence in the setup, we can adjust the numbers.

There should be some action plan/procedures and transparency for these reserve. The proceeds for selling reserved NBT should mostly remain within the control of the reserve so that when the market swings to the sell side, the reserve has the ammo.

masterOfDisaster · October 11, 2014, 12:54pm

Warning: essay incoming. Although I think it might be worth reading it, here’s something:
[tl;dr]
The strategic reserve creates a risk for losing a large amount of NBT.
Not having the strategic reserve creates the risk for losing all (by losing the peg).
[/tl;dr]

I think this is a good suggestion to expand the flexibility for NuShares holders to react to different circumstances in appropriate ways:

And there will be lots more to do. Currently the discussion about custodians, park rates and motions is held in this forum here. I don’t want to imagine what happens if this forum gets ddosed in a time when action would be necessary. Even cloudfront protection can be broken.

Park rates can be adjusted individually without agreeing on a certain amount - the protocol evens the different “opinions” out.
But how to vote for a custodian if you don’t know the address?
How to vote for a motion if you don’t know the hash?

That is rather something for a separate topic, although it’s related to my pleading for having this kind of strategic reserve because the strategic reserve will be here for protecting what will on a large scale determine the base for success of NuBits: a stable peg.

I suggest taking the risk of granting a large amount of NBT to people that can be trusted (just because of their position and their role) if it creates the chance to react quickly in case of total mayhem. This will not provide ultimate protection, but additional layers of protection.
I think that the people that will be trusted with the grant might be from the ones who have much at stake, because I need to assume that they are holders of large amounts of NuShares. This is another reason for me to believe that - like @JordanLee said - their interests are aligned with the interests of shareholders; they are shareholders themselves!

Thank you @mhps for doing some math about the trading volume. This underlines what was so far only my gut instinct.
And I like your idea of having a two tier (or maybe even three tier) model to protect the peg very much. The increasing number of people that is needed to access higher tier levels of strategic reserve is a good idea, because it transports a kind of more complex consensus system to the control over the grant.
As much as I’d like to have control directly in the hands of the shareholders I understand the need to operate with delegates in special cases.

I understand your idea of giving a kind of service level agreement for the peg. But I think it will be hard to give reliable information about the time the peg can be kept if we don’t know by whom, when and why the peg might be in danger.
So we can try to make a more specific guess but in the end it sums up to:
Nu will push the envelope to keep the peg of NBT - even if it requires drastic action such as creating a strategic reserve (or whatever is to come).

Time is on our side. The longer NBT is successfully on the market and gains adoption the more NBT will be in circulation and the less important this strategic reserve will be for maintaining the peg in special situations.
But we need to pave the ground for NBT to get there. A multi tier strategic reserve is a great instrument to achieve that!

As far as I understand the grant can be devoted to other things my motion vote. So there’s not much to lose compared to a standard custodial grant, but there’s a lot to win: an insurance for the peg.
As the NuShares holders are in charge for keeping the peg I think it’s right to let them take the risk that is associated with the large amount of NBT that is put into the strategic reserve.

And I think the risk for creating the strategic reserve is on an acceptable level (considering the trust level and the motivation of the people that will have the keys for the multisig address) compared to the risk if not having something like the strategic reserve.

Although it repeats the tl;dr section I want to sum it all up to:
The strategic reserve creates a risk for losing a large amount of NBT.
Not having the strategic reserve creates the risk for losing all (by losing the peg).

Chronos · October 11, 2014, 4:22pm

It’s fallacious to equate volume with demand. For example, if I buy a BTC for $240, sell it for $260, buy it again for $255, then sell for $245, all in 24 hours, I created $1000 of volume with my money, even though it’s impossible to buy $1000 of NBT with that money.

You can’t lose all by losing the peg to the upside. “Oh, no, my NBT are worth too much! I guess I’ll… sell them? I guess I won’t buy more?” And the problem fixes itself, because the buy walls at $1 remain. You can lose some reputation and volume in this way, but the system returns to $1 eventually, not to $0 as could happen in the case of losing the peg to the downside. Custodial buy walls are strongest when the peg breaks out upwards, so that’s the moment when the risk to “lose all” is least.

This could even bring more publicity to NuBits, if spun the right way. Imagine the headlines: “NuBits fails by being too successful!”

Again, I’d be interested in custodial data on this. Has anyone been collecting getliquidityinfo over time, so we can see a graph of custodial liquidity and what size of relative shock would be needed deplete our reserves?

Also, as several people have mentioned, would Jordan be willing to make public the total number of multi-sig key holders?

masterOfDisaster · October 11, 2014, 5:02pm

I agree that losing the peg in the other direction, being unable to sell (from customer perspective) a NBT for $1 but for less would be much worse.

But I tend to disagree with your conclusion that you can’t lose all by losing the peg.

NuBits claims to provide a stable peg to the USD of 1:1.
It might not play much of a role why the peg was lost and that it was lost into an unproblematic direction (being above 1 USD per NBT).
It might be recognized as NuBits failed to keep the peg by those who don’t spend much time trying to understand what went wrong and why it wasn’t that bad at all.
Plus it will be displayed by competitors that NuBits failed to keep the peg.

It might be fallacious to equate volume with demand. But it’s fallacious to assume that there can’t be that much demand as well. Not long ago 30,000 BTC were sold. Imagine they had been sold for NBT instead of USD…

Not keeping the peg may cost enough reputation to ruin the whole experiment; this is my conclusion.

mhps · October 11, 2014, 5:24pm

That is true in general. Are there data to show demand change after major bitcoin crash?

Chronos · October 17, 2014, 11:12pm

This custodial grant proposal has passed.

cryptog · December 17, 2014, 2:26am

Isn’t 40,000 nbts a lot of money for just transferring some liquidity?