[Proposal] Solution to the problems of Asymmetrical control in NuBits

[Indigoman]

The problem was discussed on :
1- Question about selling pressure aka the buy wall
2- Asymmetrical control in NuBits and the problem it creates

Proposed solution first mentioned:
1- Asymmetrical control in NuBits and the problem it creates

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Problem :

Nubits can be created out of thin air when demand exceeds supply to maintain the peg to $1. Therefore the total supply of Nubits in the market increases. When the supply of Nubits increases beyond the demand, the parking mechanism simulates a lower total supply of the Nubits by holding the parked Nubits outside of the market and paying the parker an interest on their support of the network. This all works nicely on the short term. However, the shortage of supply is merely a simulation that functions based on the premise that demand for Nubits will increase by the time the funds get unparked. Because the funds will get unparked at a certain point in time in the future, the total supply of Nubits has not truly been reduced. The problem wouldn’t have been fixed but the system rather postponed dealing with the matter hoping that the market will pick up on NBT demand. To make matters even worse, the parked Nubits will gain interest in the form of more Nubits which means that the total supply of NBT in the market will not just hold but rather increase when the Nubits get unparked. This vicious cycle will create an inflation within the Nubit markets to a point that peg will not be maintained due to the infinite supply without means of reduction. The only way to truly fix the issue of infinite supply is to create a counter force that reduces supply. The parking mechanism simulates that on the short term but fails to achieve it on the long term. For it to work on the long term, a true reduction of supply needs to be implemented ( i.e parkers would have to destroy their Nubits). However, how can we solve this problem using parking without simply telling parkers to burn off their money cause it’s good for the network as this goes against their personal interest?.. Keep reading to find out.

Examining current setup:

Lets examine the current setup. When Nubits demand increases beyond supply and the peg starts to shift upwards, Nushares holders create new Nubits out of thin air to increase the supply and balance it with demand. The sales of the newly created Nubits get divided on Nushares holders. Therefore, it’s the Nushares holders that benefit from the success of the market because their investment in Nushares represents their gambling on the future of the network and if the demand increases beyond the supply they have in essence won the bet. Also, when the demand declines, Nubit holders park their coins to simulate a shortage of Nubits supply to have demand increased beyond supply and therefore increase the value of each Nubit. They get rewarded in a from of interset with more Nubits. In essence, the parkers are also gambling on the success of the netwrok just like Nushares holders. They’re betting that when their coins get unparked and they receive that added interest, the coin would still hold the peg and they would get real value out of the interest they are paid. In essence, both Nushares holders and Nubits parkers are betting on the success of the network. This shared betting on the success of the network between Nushares holders and parkers is the core of this proposal.

Premises the solution is based upon:

1. The responsibility of holding the peg when the supply exceeds the demand should be put on the parties that are benefiting from it when the demand exceeds the supply, the Nushares holders. It should be done in a manner where the responsibility is equally distributed among all shareholders.

2. When supply exceeds demand, the peg can only be truly maintained by a TRUE reduction of the total supply.

3. Nushares holders and Parkers have the common ground of betting on the success of the network by benefiting from the success financially and losing financially on its failure. (as described above)

4. Nushares are available for public trading and a valuation of NBT/NSR can be determined based on a free market.

Proposed solution ( a protocol change ):

Change the parking mechanism (possibly changing its name all together but for the sake of this proposal i’ll use the term Parking). When the supply exceeds the demand, parkers will destroy some Nubits in return for newly generated Nushares at an exchange rate equals to %(100 + interest) of the NBT/NSR exchange rate at the time of the parking. The exchange is time gated to be released at the the time of unparking just like the current setup for timing in unparking parked funds. For the system to work, parking would only be allowed during times when supply exceeds demand to prevent an excessive creation of new Nushares. Interest rate would still be voted on by Nushares holders in the same manner it’s currently setup with.

Implications of the solution:

1. Nubits will function as a true currency. It will defer any form of speculation to the Nushares network as they will increase in value when the network is healthy and decrease in value when the network is failing. This is a true separation of currency and shares as described by the Nubits white paper.

2. Nushare holders lose some value in their shares due to the newly created shares and hence they take the financial responsibility of holding the peg when supply exceeds demand just like they would benefit and gain value when the peg is held by demand exceeding supply. The responsibility is distributed fairly to Nushares holders since all shares would lose in value just like the distribution of the divedands and the increase of value of Nushares is distributed fairly when demand exceeds supply.

3. Parkers are still betting on the success of the network in the form of getting ownership in the network as a reward for their dedication to hold the peg.

4. A true reduction in the supply of Nubits is achieved in a manner that doesn’t require burning of money.

Concerns:

Big question:
Why would Nushares holders vote on a higher interest rate that would dilute shares, which may be perceived against their own short term personal interest ?

Answer:
Because the constant stream of divedands that they receive from the the case when demand exceeds supply would come to a halt when the supply exceeds the demand. They wouldn’t be receiving any divedands until the problem is resolved and the supply is decreased. Therefore, it is in their personal interest to incentivize people to park their NBT and decrease the total supply to allow for increased demand in Nubits and in consequence, a return to their shares in the form of divedands.

Alternative similar solution:

Parking remains the same way it’s currently setup but only the interest rate is paid in the form of NSR. I believe the first solution is the guaranteed way of balancing the supply and demand but this other option might be considered though i haven’t analyzed it further.
That’s the end of the proposal .

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I welcome a discussion of the merits of this proposal. Feel free to disect it and present any flaws I’ve missed. Please keep emotions out the discussion and keep it objective and constructive

[Cybnate]

Thanks for writing this down as many have already been playing with this idea.

Both the parking in exchange for NuShares and the alternative with only having interest paid in NuShares have merit in their own ways. I think it puts the incentives on the right players at the right time to be able to sustain the dollar peg in the long term.

The immediate burning of NBT for NuShares will clearly have a stronger and more direct effect on the supply. Still have to think whether that is better or not. And to make both work properly NuShares would have to be freely trade-able to set a market price.

I still think this is a longer-term issue as it is likely that the demand for NBT will grow for a while assuming all goes well. I think the current parking mechanism is adequate to counter for moderate changes in short-term demand assuming on average grow will likely continue for a while.

Just my thoughts.

[sigmike]

parkers will destroy some Nubits in return for newly generated Nushares at an exchange rate equals to %(100 + interest) of the NBT/NSR exchange rate at the time of the parking

The NBT/NSR exchange rate is not known by the protocol. One way to make it known is to make shareholders vote for an exchange rate. They could use feeds for that.

[tomjoad]

Brilliant. If properly structured, this is the solution to “the money supply can’t deflate” criticism.

What I like about this solution is that it puts the risk on the “speculators” from Day 1. Currently in the Price Stability section of the website it says in regards to NuBit demand decline: “As this outcome approaches, NuBits will shift from the hands of ordinary businesses and people into the hands of speculators tolerant of high risk in exchange for possible high rewards.”

Indigoman’s solution puts the risk of speculation into the proper camp from the onset.

One positive aspect of this solution is that it encourages minimal or zero-level interest rates from NSR holders, who presumably do not wish to dilute their holdings. This will help prevent over-inflation of NuBits supply. When the time comes that supply exceeds demand, I think it would be rational for NSR holders to offer interest rates that slightly dilute their holdings, rather than risking a complete market collapse if confidence is permanently eroded in the peg.

Indigoman quoted:

For the system to work, parking would only be allowed during times when supply exceeds demand to prevent an excessive creation of new Nushares.

but I think the true solution isn’t so prescriptive. In periods when demand exceeds supply, NSR holders have no
incentive to dilute their holdings with interest rates that lead to NSR creation.

One final point, is that in the current system, if demand declines for a year or two I think it’s quite likely panic might set in and a mass sell-off of NuBits occurs. Many are not as confident in the ability of the system to handle “multi-year dips in demand” as Jordan Lee is. With Indigoman’s proposed system, a multi-year demand dip might not affect NuShareholders as much, because they still derive utility from ownership of the stock (namely, the ability to vote for solutions to the business). A NuBit holder has no incentive to hold NuBits in a severe demand decline, but a NuShareholder does – for the promise of having the ability to vote for solutions to revitalize the system. EDIT: Also, NuShareholders gain access to the existing Nu infrastructure - websites, social media accounts, branding properties…all things with real value even if NuBits is collapsing.

Excellent idea Indigoman, I hope the community thinks through this issue in-depth.

[jonza]

The problem definitely needs solving, but I have some questions on this proposal.

It may be true that most current NuBits owners, as part of the community experimenting with this, believe in the growth of NuBits. However let’s think longer term. If NuBits is an accepted or mainstream currency in the future, it will be because people trust it, and find it convenient to use. Will these future users want to rely on continued future growth in demand to earn their current return from holding the currency?

What happens when that growth is perceived to be saturated? In that case, when demand slackens, no interest rate will be high enough (as the return depends on growth), and Nushares are diluted to zero in the attempt to keep a peg, which will fail anyway.

Finally I don’t believe future users will appreciate getting paid in something that depends on such growth. Would these new shareholders even care to contribute wisely to the management of NuShares or NuBits? Or is it best to leave NuBits and NuShares ownership disentangled?

Thanks

[tomjoad]

What happens when that growth is perceived to be saturated? In that case, when demand slackens, no interest rate will be high enough (as the return depends on growth), and Nushares are diluted to zero in the attempt to keep a peg, which will fail anyway.

There are so many opportunities in the future to expand what NuShareholders are “in the business of”. Right now, they’re in the business of selling NuBits and maintaining a $1.00 US peg. NuShares will have value because of expected future dividends. However, that could change:

Maybe in the future new pegged currencies will be introduced, to the Yuan, Euro, etc.

Maybe in the future a new type of pegged currency will be introduced that is tied to a basket of goods.

Maybe in the future technological advances allow NuShareholders to offer a new currency that is superior to what we can conceive of today.

Heck, maybe in the future if Nu is adopted worldwide, the new revenue stream for NuShareholders is selling advertising space in the wallet. For most businesses, getting the eyeballs is the biggest problem. If Nu succeeds at drawing those eyeballs, I don’t think there will ever be a lack of something to sell or offer. It will just be up to the imagination of shareholders to figure out what is best “for the business”.

[jonza]

I accept your point on this, the Nu business could be many things in the future. So I guess the idea is that NuShares will be attractive to the early NuBits community, and later NuShares provide a more diversified business exposure. Still, do you think future NuBits holders will want exposure to that? To me its a bit like fiat USD depositors in a bank being asked to earn shares in the bank stock as the way to earn interest, when really I just want USD. I don’t want equity risk, and I don’t really care to make shareholder votes etc. Or do you think the proposed idea of earning NuShares itself could just be a stepping-stone solution to something else?

[jonza]

There is another dynamic to consider with this approach, which could lead to a major instability. Suppose we eventually reach a state where NBT users feel the growth of the ecosystem is either unsustainable, declining, stalled or moving to decline. At this point, under the current mechanism of rewarding parking in NBT we wind up with a system collapse, as the perpetually growing supply of NBT completely offsets any perceived gain from parking. However the proposed mechanism of rewarding in Nushares would result in the same end-state, not only because most NBT owners at that point have little interest in equity (see my comment above), but also because Nushares equity would lose significant value from loss of future NBT sale prospects as well as increasing dilution, completely negating any perceived value of parking. This would reinforce the negative loop.

Up till that point, it could be a virtuous cycle as most NBT owners are fans of the ecosystem and would like to participate in growth through Nushares. This attracts more NBT users and is for some time self-fulfilling. However it might turn into a game of musical chairs as more and more people become concerned about the potential of a turning point (which merely requires a turning point in confidence).

What this would need is some sort of escape valve.

[concavecircle]

I wrote about this in the other thread, but I think the most important thing about keeping buy side liquidity is having money on reserve to buy Nubits back with. Certainly there would be a wide variety of ways to do this once Nubits is popular (if it’s popular) such as advertising which was mentioned, but if proceeds from new Nubits sales are going to be used then there needs to be some other income source keeping the reserve ratio up. I suggested a 0.5% spread, which would result in an actual 0.9% spread after taking exchange fees into account. With a relatively high velocity of money 0.5% might even be unnecessarily high. Plus a small spread would greatly increase the risk for say someone who manages to borrow a ton of Nubits to sell short and try to crash the market.