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.
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!
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.
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.
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.
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.
I think this has technical obstacles to overcome.
- The system has no mechanism to un-time-lock the PPC when needed
- 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.
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.
Jordan, with all due respect, I think your post is incorrect, in particular, these parts:
Imagine this scenario:
- Only a small handful of people, say 50, believe the peg will hold at $1 = 1 NBT.
- 1 million NBT exists in the market.
- 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:
- The price of NBT begins to fall, as the non-believers sell their “worthless” NBT into the market.
- At the price of 1 NBT = $0.05, the 50 supporters can buy all 1’000’000 NBT with their $50’000 of capital.
- 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.
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)
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.
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?
Thought experiment: 49 other people just parked their NBT and earned ten thousand percent. Would you like to:
- Park your NBT as well, and get back worthless NBT when it comes unparked (supply would be enormous at that time)
- 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.
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
There is one fundamental difference in view: Jordan believes that the peg jumps from $1 to $0 at the “endgame”, and stays there. I believe it can float between these values for quite a long time, and perhaps even re-establish a peg at a lower level.
I could be wrong. We will see!
Hibero, yes, that kind of hard fork could work. Such a “NBT haircut” is functionally equivalent to a re-peg, though. It’s only a nominal change of value, while underlying value stays the same.
Hopefully, this won’t be needed for a long time, because if it seems imminent, the peg could lose trust and fail quickly.
I don’t understand suggestions of changing the protocol. Surely, changing a protocol is an admission of failure (like rolling back a block chain)?
I would think that if NuBits lost it’s peg, it would be a failure. At least in what it’s original goal was, to be pegged to $1. That is only the dollar and it may be pegged to many things at that point. So it wouldn’t be a complete failure as long as it learned. Changing the protocol would also need to include changes that make it more resistant to a similar thing happening again in the future. I am starting to agree with Jordan though. It may just go straight to $0. At that point in the distant future, there would surely be competitors that would have seen the problems and reacted to them before Nubits could (or just learned from NuBits mistakes and fixed them after NuBit’s demise).
This acknowledgement that NuBits will eventually die resolves a problem for me. Up until now, NuBits has appeared (to me) to be an attempt at perpetual motion
I now understand NuBits to be a tool for a purpose - the stablisation of crypto. All tools blunt eventually, but as long as NuBits lives, perhaps for a hundred years or more, we will have stability in crypto - which is what the world needs
Therefore, as I see it, the way forward is not to deny or be troubled about NuBits’ inevitable end, but to maximise its life:
The NuEcoSystem engenders natural market mechanisms which will prolong NuBits for the very long-term
Tools provided to NuShareholders will prolong NuBits for the very long-term
When, at a future point, NuBits begins to slide, market signals (rising interest rates for parking) will replace regular users with speculators - this protects the future public
NuBits will go full circle - starting in 2014 as a speculative investment, then becoming accepted and providing stability, before returning to being a speculative tool. Acceptance of final failure is what gives NuBits credibility
Ok, I may have no idea what I’m talking about here, but bear with me…
Some of you are talking about NuBits living for a hundred years or more. Bitcoin has gained exposure for cryptocurrencies, but its not being adopted like it should because of its volatility. As long as NuBits performs its function as a peg, that should help drive mainstream adoption. Given a certain amount of time, the entire world could adopt a payment system like this as long as the peg is reliable.
If we have mass adoption of NuBits around the world, that would bring up Peercoin along with it, since it’s vital to the system. This means that NuBits and Peercoin would be flooded with an amount of liquidity that Bitcoin only dreams of. After a certain length of time (Years, maybe decades) Peercoin would be stable in price because of its liquidity provided by mass adoption and can then be used as a transactional currency just as well as NuBits can, as long as it uses off-chain networks to get around the fee. Therefore, NuBits ends up acting as a stepping stone for Peercoin mass adoption and liquidity.
Does any of this make sense or am I smoking something?
It will be available on the full website on September 23rd, along with lots of other info and FAQs. Still in the final stages of editing.