I’ve re-read the whitepaper. In this post I’ll try my best to stick to the whitepaper nomenclature.
“In the case of sell side custodians, the liquidity they provide is secondary to another goal such as funding core development, marketing NBT or distributing Peercoin dividends… the trading bot would place a sell order… at a price of 1.0021… we want dual side sell orders to be executed first, so their funds can be returned to providing buy” (nubits whitepaper)
It implies that the development will only be funded and shareholders would only receive dividends, if the dual side custodians exhaust its NBT supply and have nothing more to sell. As long as the dual custodian can satisfy demand, no profit will be realized for shareholders and core development will not be funded.
In a sense shareholders have a short-term incentive and the tools (voting power to not distribute new NBT to custodians) to make sure that dual side custodians are not well capitalized, though long-term they would be hurt should the peg fail. (even though most people holding NBT would at first not think of making a premium as a problem).
I do think it makes more sense then the opposite; had the profit been realized before dual side custodian had liquidated the NBT, the profit realized would be coming from the pockets of the custodian and not the organic market.
What all of this boils down to is essentially that buy side pressure on peercoins, will be created as an effect of the organic demand for NBTs overtaking the dual side custodians supply. I.e. instead of the purchasing power flowing into NBT, the excess will be channeled into peercoins instead.
As long as the organic demand for peercoins increases, I can’t see how this could fail. But what about contraction in demand? Historically speaking, bank runs are not that uncommon. The latest QE programs we’ve had have been about the state doing exactly this; bailing out the system. They are doing it on the expense of tax payers.
In NuBits there are no tax payers, the shareholders will be paying for it and they will do it only if they think they will make more money by staving of a temporary crisis, so that they can make more money of the system later.
What is the risk of this happening? Perhaps it would be possible to gauge by looking at the price of NuShares trading on the market. If shareholders suspect a collapse of the peg, they will be selling.
The thing that kind of lingers in my mind, is this thing about NBT’s never being destroyed. If there is an infinite floating supply of NBT, the shareholders would have to sit on a reserve of another asset, of kind of equal worth (at least enough to give confidence to market that there is enough backing behind NBT to stabilize to keep the peg). I’m not worried about the supply that isn’t floating it’s the floating supply that I’m worried about. While parked NBTs removes some supply, down the lines it will exacerbate the problem if the interest on parked money is higher then the organic growth of the demand. In the end I suspect it will in a very real sense it will be the dual side custodians that will be “backing the floating supply of NBT’s” and in extension of this, it will come down to the faith and resources of the shareholders.
If premium on parked NBTs would go up (yield curve would rise) and is the contraction great enough, dual side custodians will demand more money in return for its services from the shareholders.
I can see how all of this still would work out ok, if the shareholders had saved their peercoins (or sold them for USD). Because then there would be kind of a symmetry between the supply of NBT and the profit generated during the expansion phase. In a sense, there might come a time where shareholders would have to “bail out the system” by injecting their own capital (perhaps previously generated profit) back into the system.
So I guess the questions is, how greedy will shareholders be? Will they understand that if the interest is high across the entire yield curve, they might one day have to foot the bill for it down the line?
The tragedy of the commons comes to mind. Still I believe more in the IQ of crowd sourcing then in a few guys with beards and a woman, on the pay roll of big banking.
However I do think that shareholders have to appreciate the gravity of the situation and the importance of their vote. How will we be able to ensure this, if NuShare are being traded on exchanges?
Is my reasoning flawed?