Question about selling pressure aka the buy wall

NuBits
#1

EDIT: The fix I’m proposing for the issues that I see and high-light in this topic, can be found here: NeuBits: The new NuBits ;-)

From what I understand there are, at least, two ways of inflating the supply of NBT. When there is buying pressure, new NBT can be created to satisfy the demand. When there is selling pressure, interest rates will go up and parked NBT can later on be unparked with a premium.

I don’t believe I’ve read anything about NBT being destroyed? This means that the supply will always inflate. (The whitepaper mentions something about shareholder being able to manage the supply, but doesn’t go into detail if an how NBT can be destroyed.)

Satisfying buying demand is quite forward I think. But I’ve got a question about how to handle selling pressure. From the whitepaper I learn that it isn’t enough to offer interest on parked NBT. Custodians for creating a buy wall, are most likely needed as well.

So, now we have an ever increasing supply of NBT looking for buyers. I imagine that in the beginning when the supply is small, the buyers will be able to mop-up the excess supply. However, as the supply increases more USD will be needed. Since the supply of NBT never stops inflating, the buyers will need to have an endless supply of USD. They probably don’t have that, thus the peg is no more.

But, the parking mechanisms comes to the rescue and removes more of the supply. Then again, since interest is offered on parked NBT, this only serves to exacerbate the problem.

I’m sure, I’m the one that has misunderstood something here. Where did I go wrong?

(Sorry if I didn’t study the whitepaper as hard as I should. I admit its pretty overwhelming, taking it all in at once. :slight_smile: )

Burning a specific amount of currency
Helping the initial buy pressure on NuBits
History of the Nu Network (Feedback Please)
[Proposal] Solution to the problems of Asymmetrical control in NuBits
Where is interest on parked NuBits paid from?
Asymmetrical control in NuBits and the problem it creates
Where Do Dividends & Network Revenue Come From?
#7

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?

#8

Towel, thanks for bringing this up. Your reasoning is grounded in reality.

I think shareholders will never foot the bill to bail out the system. They are not required to do so, and it would not be in their own best interest. They would rather sell their shares for even a little money than take a loss in a bailout.

In the very long term, since supply cannot decrease, it is my opinion that the peg will eventually slip, never to recover. At this time, the price could be re-pegged at 50% or 10% or 1% of the previous peg. (1 NBT = $0.10, for example.) In my mind, the only question is when this happens: 1 year, 10 years, or 100 years from now?

Interestingly, after a re-peg, the system could hypothetically live on for many more years before this happens again.

EDIT: Note that NBT can technically be “destroyed” by sending it to an address for which nobody has the private key. However, NuBits protocol currently provides no incentive for this to ever happen.

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#9

I can certainly see the peg working for some period of time, but can we be sure that l it work indefinitely? My thought lingers on this thing with an infinite supply of coins coming to market, continuously inflating the floating supply. If there was a way to mop-up the supply, I think the system would be strengthened. I gaming, this would be called a money sink (http://en.wikipedia.org/wiki/Mudflation#Economic_imbalance) in central banking we have repo. Perhaps learning more about http://en.wikipedia.org/wiki/Repurchase_agreement#United_States_Federal_Reserve_use_of_repos could be fruitful. I’m gonna look into this, because I really want NuBits to become super robust.

#10

Towel, NuBits has the first ever implementation of of such “burn” “freeze” function . We discussed this on another thread , but to reduce supply its sufficient parking NuBits for 99999 years

#11

Brilliant! But is this long enough? :wink:

However, the point remains, nobody is ever incentivized to maintain the peg by burning NBT.

#12

we can park that for 7.6 billion years when the sun should eat our planet making our efforts useless :smiley:

Hopefully humanity got somewhere else when it happens

#13

Just to be clear about my intentions about this thread. I am going to buy shares; the question is just how many. If I’m able to convince myself that NuBits is super robust I will be buying very many shares, if not I’m still buying at least some in case I’m wrong, for speculative purposes, because I want this project to succeed and because I’m kind of stupid so just because I think something doesn’t mean I’m right. Also the system might be improved and strengthened. I’m here not to bash anything, just to contribute to the discussion on how to improve on it further.

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#14

Hi Towel, your questions and ideas are very intelligent and as any novel technology there are and there will be several challenges to overcome. Your contribution is not only welcome but very appreciated!

#15

Okay, I’ve been thinking. I believe that this could be thought as a two stage process. Let me present the two stages here and potential threats.

Stage 1: Trial phase
I think it’s very likely that we will see a financial attack being launched against the system when its still pretty young. Someone with a whole lot of financial resources might want to try and short the asset, capitalizing from a broken peg. There isn’t much to loose for the attacker besides the interest paid on borrowed assets. The interest paid on borrowed assets, would only have to be better then the interest rate offered on parked money. Since the asset itself is pegged, the upside risk is pretty minimal. It could prove to be pretty cheap to do the attack in terms of the potential reward. I can’t help to see how someone with a whole lot of money, would at least attempt such an attack. If the system is able to cope with this attack, the confidence in the peg will be greatly increased.

Stage 2: Confidence game
I believe that the peg will hold, as long as people believe it will. Since the system will only come under duress when people loose confidence, I would like to argue that whether people will trust the peg to hold or not is a confidence game. The reason I think the peg could hold, is that there is basically not cost to run the system, but the system adds value to people (what value I will leave for now) and people will be willing to pay for this value and this purchasing power will strengthen the system. However, it will only strengthen the system if shareholders are willing to save enough of the reward (profit realized when price crosses above the ~1 threshold) so that they have enough collateral to be able to prove to the world that the system is solid and has enough packing to support the floating supply of NBT.

I don’t think parking NBTs for extended time is enough, because it is not the parked NBTs that is the problem. It is the floating supply that needs a backing. If shareholders can prove that they have enough wealth to back the peg, people will have confidence and don’t panic.

Proof-of-Collateral
Why not create a Proof-of-Collateral? Since NuShares can’t be used as collateral and since NBTs themselves certainly can’t be used, I suggest using peercoins as collateral.

Peercoins are already tied to the system and I believe it should be possible to create this proof, if only there was a TimeLock implemented.

I think this could make sense. When value is added to NuBits, the excess purchasing power is diverted to peercoins, bidding up the price, i.e. they become more valuable. This value could then be used as collateral.

Oh and yes. I just read the paper like yesterday and only pretend that I’m smart enough to come with suggestions such as this. Of course I’m only putting this out there, in hope I at least contribute a little bit of value to the discussions.

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#16

I don’t see a way for Proof-of-Collateral to work, because there is no requirement to provide collateral, and some shareholders would refuse. As I wrote earlier:

In a decentralized system, there are no taxpayers to bail out the banks.

#17

Yes, that’s why I’m suggesting a TimeLock. If there is a TimeLock on peercoins so they can not be spent by shareholder, but could be spent in times of need, there would be a provable collateral.

EDIT 1: Profit realized by the system, can be used to back it up. Note that the same NBT could (technically speaking, not that it has to, but it could) be sold many times for more then ~1 and generate more profit for the system, then premium paid on that NBT being parked.

EDIT 2: Oh and yes, the shareholders would have to comply because this would be part of the protocol. I.e. dividends paid out in peercoins would be TimeLocked so that they can not be spent for “some time” by shareholder. They will however be spendable by the system, if so required.

#18

I think this has technical obstacles to overcome.

  1. The system has no mechanism to un-time-lock the PPC when needed
  2. The system does not have the private keys to the distributed dividend addresses

However, it sounds the same as, “Don’t distribute some dividends. Let the funds support the peg instead.” This is already planned in the first dividend custodian proposal, wherein 90% of funds are recycled for the peg in the grant’s first stage.

This doesn’t solve the longer-term issue of the ever-expanding NBT supply.

#19

While the destruction of NuBits by the protocol will not have a significant effect on NuBit supply, I would like to note that NuBits are destroyed in the form of transaction fees .

The price support mechanism of offering interest for funds taken out of circulation is extremely robust. What is required for this mechanism to fail is unanimous consensus of all market participants that NuBit demand will certainly never increase above its previous peak. When this occurs, it means that NuBits are obsolete and they are not meeting a need. It doesn’t make sense to not use something today because it may become obsolete someday. As this 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.

When the peg is lost, it will go straight to zero. And, it doesn’t necessarily mean the failure of Nu, just of the individual currency.

To demonstrate the robustness of the peg, let’s imagine a future where NuBit demand is only 10% of its peak. It is obsolete and demand has been in decline for three years. Nearly everyone has given up on it. However, there are a handful of individuals who believe there is a 30% chance that NuBits will still have value in a year because they are shareholders and plan to implement a bold and daring plan to change the protocol to meet different needs than NuBits have in the past . These individuals would buy NuBits if there was 400% interest rate offered for one year. So it will be offered by shareholders and taken by the speculators, and the peg will stand at one USD. When this large sum of NuBits is created and unparked after one year, then the situation is much worse if demand has not picked up due to the success of their bold plan to redefine NuBits. Perhaps then even these shareholders and speculators will give up on it. In that case NuBits would not be worth less, they would be worth nothing. And not many people would care or be affected.

However, the system can handle even multi-year dips in demand gracefully and recover. All that is required is for some people to believe there is some chance that total demand will reach a new peak. This is a nominal peak, not inflation adjusted peak. So in a case where NuBit demand declined for three years and there was 13% inflation over those three years and an average of 4% annual interest was required to create sufficient demand for NuBits during those three years, then the amount of real value stored would not even have to quite reach its previous peak in order to push interest rates down to zero, signaling a healthy system.

Given rapidly rising levels of wealth in the world today combined with inflation of USD, the total proportion of global wealth held in NuBits can enter a widely acknowledged permanent decline, and as long as the decline rate is not too sharp, the system will still be sustainable.

In summary, the primary support mechanism is very robust and is not expected to fail partially, but rather completely after NuBits have passed from the hands of ordinary businesses and people to speculators willing to take great risk for great reward, having long signaled that it was in difficulty.

If NuBits are a success, then this scenario is far in the future. In the meantime it can do much to meet a wide variety of needs. Everything dies or goes away in the end, but that is hardly a good argument against living or using a technology you find empowering.

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#20

Jordan, with all due respect, I think your post is incorrect, in particular, these parts:

Imagine this scenario:

  1. Only a small handful of people, say 50, believe the peg will hold at $1 = 1 NBT.
  2. 1 million NBT exists in the market.
  3. The average net worth of the 50 people is $1’000, giving them a total working capital of $50’000.

Now we have trouble. All agents except for the 50 people sell their NBT in the open market, believing them worthless. This is 1’000’000 NBT of supply. The 50 people cannot sustain the $1 = 1 NBT price, no matter their belief. They simply lack the capital to buy up all the supply, since they can only buy $50’000 of NBT, at most. They may be incapable of coming up with enough money to prop up the price.

Now, this happens:

  1. The price of NBT begins to fall, as the non-believers sell their “worthless” NBT into the market.
  2. At the price of 1 NBT = $0.05, the 50 supporters can buy all 1’000’000 NBT with their $50’000 of capital.
  3. They do.

This is an overgeneralization, because markets are not perfect, but something similar can happen. Now, the value of 1 NBT is roughly $0.05. There are no other market actors willing to buy NBT, but the faith of the 50 keeps the price from falling to zero. A new peg might form at this price, sustaining the network. It may never again reach $1, but it may still have some value.

In conclusion, the fundamental claim is:

The challenge to this “it only takes a few believers” approach is that the believers must have sufficient capital and risk-tolerance to buy up all the NBT in circulation. They may fail on one or both fronts.

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#26

I would say that if there are no buyers, the faith of the 50 is redundant. Jordan refers to a “single market participant” maintaining the system by having belief. Perhaps Jordan means two market participants (a buyer and seller of NuBits)

#27

Markets aren’t perfect, so pretend my numbers are just estimates. Or, imagine that the 50 traders continue low-volume trade amongst themselves at $0.05/NBT, which they believe is fair value. :smile:

#28

If NuBits were 5 cents, and the 50 bought them, the NuShareholders could increase parking interest to, say, ten thousand per cent, to get the 50 to park their NuBits out of the available market. Then, wouldn’t the market price would rise to $1?

#29

Thought experiment: 49 other people just parked their NBT and earned ten thousand percent. Would you like to:

  1. Park your NBT as well, and get back worthless NBT when it comes unparked (supply would be enormous at that time)
  2. Sell now for full value

Some users would prefer (2), which is why the market price would not probably not rise back to $1. However, it may float somewhere between $0.05 and $1 for a while, which contradicts Jordan’s original assertion.

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#30

If I was one of the 50, and not persuaded by the 10,000%, the interest rate could be increased to 100,000%

Of course, by this stage of the game, things are moving at fantastic speed. One billion believers in NuBits might take months to decline to a hundred-million, but a further reduction to a hundred-thousand might take hours, and to 50 might take minutes. The parking interest might go from 10,000% to 1000,000% in less than a day

Perhaps Jordan is speaking conceptually. So long as there is one man or woman standing, NuBits will be one dollar - but this moment may in practice last a split second

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