Some Suggestions To Eliminate Peg Maintenance Expenditures

[Nagalim]

Thought experiment assumptions:
A) There is only one exchange with one nsr/nbt pair on it.
B) The tllp there has a 10 nbt dual side target and 0.1%/day compensation
C) Lucy is the only person who uses tllp, and she is providing dual side support of 10 nbt to each side.
D) Market demand for nsr is exactly $0.1.
E) Nu prints $0.1 nbt daily and there are 100 nbt in existence, 80 of which are in the hands of trusted people (not including Lucy)
F) There is 0 market demand for nbt.

Every day, people will submit to the auction with a 10:1 ratio of NSR:NBT. This is because market demand is exactly $0.1 and nbt is pegged to $1, so if the auction price deviates from $0.1 at all and you submitted 10:1, then you win.

People sell some NBT to lucy for her NSR, but they sell it onto her wall, so she gets the NBT cheap from her spread. So let’s say she lost 10 of her 100 NSR and gets 1.01 NBT in return. She now puts that 1.01 NBT up to auction.

So now the auction, feeling the low NBT demand, seeds 10 NSR. People submit let’s say 30 NSR and 3 NBT. Lucy submits 1.01 NBT. The auction closing price is: 4.01/40 = $0.10025. Lucy receives 9.97 NSR which she puts back up on the buy wall. As long as this only happens every 3 days, she makes money off this process via the custodial grant.

The result of this is that Nu gets to sell its NSR directly to Lucy for relevant prices without having to trust Lucy at all. This is exactly the intent of our current weekly auctions. Here it works beautifully and uses the tllp incentive as a direct financial consequence of not using the auction to balance the peg.

[Benjamin]

There are barely any NSR markets with real liquidity

Didn’t realize things were this bad and now I think I see your point. That greatly strengthens the case for this proposal. Liquid NSR markets are necessary for any form of NSR burning to work well.

The proposal would create a liquid NSR market.

[mhps]

@Nagalim
There are barely any NSR markets with real liquidity

Didn’t realize things were this bad

It’s a side effect of voting-by-minting, dividends, and perceived appreciation potential.

[Sentinelrv]

Didn’t realize things were this bad and now I think I see your point. That greatly strengthens the case for this proposal. Liquid NSR markets are necessary for any form of NSR burning to work well.

The proposal would create a liquid NSR market.

I read a recent quote by @JordanLee that the parametric order book update in NuBot will help increase liquidity for NuShares.

Edit: Here is the quote from bitcointalk on May 13th…

Parametric order books are being implemented in NuBot right now, and when it is released I expect we will bring liquidity to NSR/NBT pairs. It won’t be deep liquidity at first, but it will be an improvement.

[Nagalim]

Parametric order book is a long way off. A week ago we needed NSR sales, today we need NSR buys. NSR price is still tanking. The park rates cannot maintain a consistent picture of the health of Nu with this kind of buy and sell side variation. Does everyone now understand the need for such a daily auction that can result in either NSR buybacks or NSR sales?

If y’all are such fans of centralization when it comes to burning, we could even have @JordanLee pick someone to run the auction like NuLagoon is run, where all you have to do is send NBT or NSR to an address to participate. Then, each day, they could trade out of their reserves which currency was ‘burnt’ or ‘created’. Jordan could also pick whether the vote results in 0 or 1. I mean, I’d much rather an approach that is consistent with our morals and ethics as an organization, but if y’all need it to be proven in a centralized fashion before you’re willing to consider a decentralized one, we can do it this way.

This type of auction is far superior to the auctioning off of a fixed amount of NSR to the highest bidder.

[mhps]

Can you formulate a plan to execute daily burn/creation manually?

[Nagalim]

Someone decides NSR or NBT dilution at distribution time. Funds are produced from reserve equivalent to 1% of the total number of NBT on the blockchain (6,000 NBT). The first day the price is set at some practical value, future auctions have seeds corresponding to the previous day’s closing price. NSR is then also produced at the proper amount also from reserve (~3 million NSR). Any funds sent to the correct NSR or NBT address is credited (just like with NuLagoon). ‘Burns’ are sent back to reserve. Then, it’s just a matter of marketing.

[Ben]

I like the direction that this concept is moving in. I’m not that well versed in the underlying economics to be able to give it a 100% approval, but I’ll keep following along with this discussion and support the community with my votes if it is summarized in a motion that details the action steps required to make this a reality.

Thank you, @Benjamin, for introducing it and to the rest of the community for the enlightening discussion that has followed.

[masterOfDisaster]

This is in fact a cross post, but the important part of it is related exactly to this discussion regarding new concepts (on protocol!) for peg maintenance.
I beg your forgiveness for cross posting.
I hope the post supports the discussion though.

Park Rate Voting

This is why Nu needs a feedback loop on protocol level and not only parking interest and motions based on what NSR holders think might be appropriate. At the moment there's no immediate and ongoing feedback between decisions (vote for 0% park rate; vote for x NSR to be sold to buy NBT and burn them). An effect is that Nu faces parking rates that are higher than necessary and NSR sales that with bigger amounts than necessary to stabilize the peg. Once the B&C Exchange funding is through Nu …

[Nagalim]

Why don’t we seed both sides every day? It doesn’t give the same kind of manual leverage over the peg, but it does allow easy flow between nbt and nsr. We could have 2 bits in the blockchain instead of 1: both seeds are on by default and a 50% or greater vote can turn off either seed or both.

[mhps]

Any funds sent to the correct NSR or NBT address is credited (just like with NuLagoon). ‘Burns’ are sent back to reserve.

Such resereve-based centralized operations essentially is just a shareholder funded LPC on the NBT/NSR pair, if the reserve fund is printed. Such operations had all sorted of problems and was closed off.

If the reserve is produced by pooling members’ funds together, then isn’t it just a NuLagoon on NBT/NSR with 6,000 NBT on the sell side and ~3 million NSR on the buy side? It is unlikely to make much difference than current peg operations (30k - 40k NBT on each side).

Open ended burning is what is needed.

[Benjamin]

Why don’t we seed both sides every day? It doesn’t give the same kind of manual leverage over the peg, but it does allow easy flow between nbt and nsr. We could have 2 bits in the blockchain instead of 1: both seeds are on by default and a 50% or greater vote can turn off either seed or both.

I strongly prefer seeding only one asset type for the following reasons:

1. You are adding an additional alternative. Asking people to vote over three alternatives may result in the group selecting an undersirable outcome. [http://en.wikipedia.org/wiki/Arrow’s_impossibility_theorem][1]
   [1]: http://arrow%20impossibility%20theorem%20wikipedia

Specifically, even if every single voter agrees that outcome A is better than outcome B, the group can still end up voting for B.

2. Seeding a single currency is effectively creating a subsidy for private liquidity providers to enter the market. If you seed both currencies, then there is no longer any incentive for private participation. This would hinder the development of a liquid NSR market.

[Benjamin]

Such resereve-based centralized operations essentially is just a shareholder funded LPC on the NBT/NSR pair. Such operations had all sorted of problems and was closed off.

This in incorrect. The LPC system directly controls the market price of the NBT/NSR pair. In the auction system, supply is controlled and the price is determined by market equilibrium. The auction system incentivizes private market making activity, i.e. profits from arbitrage go to currency speculators. The LPC system controls market making activity directly, profits from arbitrage are ruled out by price controls.

[mhps]

The auction system incentivizes private market making activity, i.e. profits from arbitrage go to currency speculators. The LPC system controls market making activity directly, profits from arbitrage are ruled out by price controls.

Thanks for pointing it out. I like the direction of the proposal made in the OP but altering the protocol is risky and no small task so it would be best if we could bootstrap the process by demonstrating.

[Nagalim]

The biggest differences sending to reserve rather than burning has are:
A) centralization
B) one person picks nsr or nbt rather than the blockchain
C) a grant will be needed when reserves on one side run low
D) auction volume will not have a feedback loop (this is somewhat trivial in my opinion)
E) we are actually already prepared to implement it if we use a reserve, we don’t even have to wait for nsr grants.

We could implement this thing tomorrow without too much difficulty, honestly.

[Nagalim]

Could we institute this with a small seed and slowly ramp up? Like start with 50NBT/25000NSR and increase by 50NBT per day until 1% (5 months). This would allow a price to be built over a little time and get word out. If the Auctioneer announces the seed 4 hours before auction result, it will be a good test and hopefully get people used to it (or there could be a continual announcement that cannot be flipped within 4 hours of the auction closing). Again, bidding for the auction is as simple as sending funds to NSR and NBT addresses. If you send a proportional amount of NSR and NBT to equal your ideal price, you will always win from your own perspective.

By the way, my above example was totally wrong. If Lucy is the only one participating in the auction she wins all 10 NSR just by bidding .01 NBT.

Anyway, I just really want to see this be a motion. The technical challenges of being an auctioneer are just having NBT and NSR addresses, having access to the reserves, and doing a manysend that is proportional to the recieved outputs for the day.

[Nagalim]

Is this alright? If not, please let me know, I’d be happy to step down for someone else to hash and word the motion. I’m just really scared that we’re going to continue with the mandatory NSR selloff.

[Draft] Seeded Auctions

Custodial hash RIPEMD160 hash: tbd =##=##=##=##=##=## Motion hash starts with this line ##=##=##=##=##=##= 1350 nbt @Nagalim will continue running automated auctions every 5000 blocks and will seed the auctions with 200 nbt per auction for 25000 blocks. Received nsr will be burnt. @Nagalim will be rewarded 200 nbt for open sourcing the software, 100 nbt for acting as auctioneer, and 50 nbt for acting as reserve. =##=##=##=##=##=## Motion hash ends with this line ##=##=##=##=##=##= Tria…

[mhps]

By the way, my above example was totally wrong. If Lucy is the only one participating in the auction she wins all 10 NSR just by bidding .01 NBT.

Would you mind modifying that post to show a corrected and easy to understand version of how it works? I think i understand what you meant to do but I am not sure as I have a hard time parsing something like

But this will only keep her neutral with the nbt demurrage, so she goes a tiny bit more to even the peg gradually over time.

[Nagalim]

I edited that post.

“The result of this is that Nu gets to sell its NSR directly to Lucy for relevant prices without having to trust Lucy at all.”

If we go further and take Lucy out of the picture, we will wind up with @Benjamin’s concept, that NBT will deviate from $1 and that deviation will use the auction as a lever to right the peg. One of the key points I’m trying to make is that we don’t need the deviation from $1 if we have liquidity targets with compensation because deviation from a balanced peg acts as a virtual deviation from $1 financially.

[mhps]

I edited that post.

Thanks. The post is much easier to understand now.