I thought I would chime in with some suggestions. I will briefly describe a possible revamp of the peg maintenance system and then explain its potential advantages.
In each PoS block, Nushares record a binary vote about the current Nubits/USD exchange rate on external markets.
1 if the price of Nubits is > 1 USD or
0 if the price of Nubits is < 1 USD.
Every 24 hours (approximated in terms of blocks), an auction of Nubits and Nushares is conducted within the block chain.
2a) Users wishing to Sell Nushares and Buy Nubits send their nushares to a designated auction address (1SellNSR) prior to closure of the auction.
2b) Users wishing to Sell Nubits and Buy Nushares send their nubits to a designated address (1SellNBT) prior to closure of the auction
3c) Each daily auction is seeded with a value of either Nubits or Nushares equivalent in value to 1% of the outstanding Nubits Supply.
3ci) If the majority of PoS blocks 24 hours prior to the auction indicate a NBT price > 1 USD, then the auction is seeded with Nubits.
3cii) If the majority of PoS blocks 24 hours prior to the auction indicate a NBT price < 1 USD, then the auction is seeded with Nushares. The number of seeded Nushares is determined by the median closing price of the last 14 daily auctions.
- When the auction closes the following things happen:
a) The pool of sold and seeded (if any) nushares is divided proportionally across sold and seeded (if any) nubits.
b) The pool of sold and seeded (if any) nubits is divided proportionally across sold and seeded (if any) nushares.
c) If nushares were seeded, sold nubits accruing to these nushares are burnt. This would decrease the outstanding nubits supply by 1% and increase the outstanding nushares supply from circulation
d) If nubits were seeded, sold nushares accruing to these nubits are burnt. This would increase the outstanding nubits supply by 1% and decrease the outstanding nushares supply.
Note: The auction’ s closing price of Nushares in terms of nubits is equal to (Sold + Seeded Nubits) / (Sold + Seeded Nushares).
Note 2: Suppose a seller would like to sell NSR if their price is greater than 2 NBT and buy NSR if their price is less than 2 NBT. He can guarentee this by sending 2 NBT and 1 NSR to the auction. If the NSR price is greater than 2 NBT, he will reduce his NSR holdings and accumulate NBT. If the NSR price is less than 2 NBT, he will reduce his NBT holdings and accumulate NSR. If the NSR price is equal to 2 NBT, then his NBT and NSR holdings will remain unchanged.
DISCLAIMER: There are some minor gaming possibilities here. These can be addressed relatively easily, but I don’t want to get into the details at this point.
HOW DOES THIS MAINTAIN A PEG?
If people want to buy NBT right away, they will be willing to purchase them on exchanges for slightly more than 1 USD, say 1.01 USD. If the supply of NUBITS is currently insufficient, then the price of NBTs will tend to sell at a premium over 1 USD on exchanges. The auction system responds to this price pressure by releasing more NBTs into circulation. This depresses the price back to 1 USD.
If people want to sell NBT right away, they will be willing to purchase them on exchanges for slightly less than 1 USD, say 0.99 USD. If the supply of NUBITS is currently excessive, then the price of NBTs will tend to sell at a discount relative to 1 USD on exchanges. The auction system responds to this price pressure by removing NBTs from circulation. This increases the price back to 1 USD.
Market makers will arbitrage small fluctuations in the NBT price to take advantage of price changes. This will prevent large deviations in the NBT price from 1 USD. However, like today, the NBT price will still fluctuate within a narrow band. There is no need to manage this directly as in the custodial system, market incentives will take care of it.
ADVANTAGES OF THE SYSTEM:
Peg maintenance is automated in the code. There is no need to expend resources to maintain the peg. This will stop the system from bleeding money.
A liquid market for NBT and NSR is guaranteed to exist. Due to the seeding system, the daily volume of NBTs available for sale/purchase in the blockchain will always be at least 1% of the outstanding supply. Guarenteed liquidity in the NBT/NSR market greatly enhances the effectiveness of the burning system. Assured liquidity will attract market participants.
Burning occurs continuously rather than in a clunky, ad-hoc fashion. Continuous gradual sales minimizes losses of shareholder value due to illiquidity in the NSR/NBT market.
The system eliminates custodial risk (e.g. losses due to hacked exchanges).
The system is completely decentralized. This reduces legal risks. (there are no ‘money transmitters’ to go after if nubits attracts attention from the FEDS.)
Edit: Corrected some mistakes in the original post (i.e. I reversed a bunch of things, writing NBT where I should have written NSR, < instead of >, and NSR instead of NBT) This always happens to me with inequalities and ratios, etc.