Nushares/Nubits is vulnerable to speculative attack.
Currently, there are about US$2 million worth of nushares outstanding and US$2 million of nubits outstanding. This is alarming.
To see why, suppose that I am a rich guy (or group of guys) with $4 million in BTC at my disposal.
I decide to make some bank by bankrupting the nubits system. Easy. Here’s how.
I put up a request to borrow up to 1 million nubits at a 50% annual interest rate. To back up my loan with collateral, I put up $2 in BTC at current prices for every $1 in nubits I borrow. If I don’t send $1.50 in nubits within the space of a year, my BTC collateral reverts to the creditor. Think of this as some type of smart contract enfoced through cross-chain trading.
Nubits holders takes me up on my offer en masse fulfilling my order for a loan of 1 million nubits. If I pay my debt back, then they convert 1 Nubit this year into 1.5 nubits next year. If I default, they convert 1 Nubit this year into $2 worth of BTC next year ($2 refers to the value of BTC at current prices). This is a win-win for an individual Nubits holder. Collectively, however, we will see that things turn out bad for nubits holders.
I sell the 1 million nubits I borrowed for USD. Dumping this many nubits on the market will break the peg, Is there a credible way for nushares holders to defend the peg?
The only ways of supporting the price of nubits are
a) beating my offer of 50% interest by offering more than 50% to people who park nubits.
This is not a credible long-run defense. If everyone expects the peg to hold after the interest rate increase, I could respond by simply parking my nubits and paying back my creditors at a profit. The nubits system, on the other hand, would get screwed. Next year we would have $3 million in nubits outstanding instead of $2 million. The system would be on even shakier ground than it is already. The next guy who attempted to bankrupt the nubits system would have an easier go of it. Hell, that would likely be me trying again next year. Eventually, I or someone else would succeed.
b) ‘burning nubits’ by allowing holders to convert them into nushares
This could be a credible defense, if the nubits central bank was run-well. But as things stand now, it is being run blindly. The ratio of value in nubits to value in nushares is much too high to be sustainable. Nushares holders would have to burn $1 million worth of nushares to offset all of the 1 million nubits I put up for sale. Selling this many nushares on the market at once would severely depress the price of nushares. There is no way one could obtain $1 million worth of revenue from burning nushares all at once.
Since both defenses are not credible, I will not be able to sell all of my 1 million nubits at a price of $1. Instead, the price of nubits will drop well below $1 due to the selling pressure I generate.
Once nubits have fallen off the peg for a sustained period, their price will go into a downward spiral. Since I began selling nubits at parity, the USD revenue I net from sales will greatly exceed the new market cap of nubits. I will use some of my USD revenue to buy up 1.5 million of the now nearly worthless nubits. I use these worthless nubits to repay my debts. The rest of my USD revenue I get to keep. They are my reward for breaking the nubits bank.
Solution: Target a long-run sustainable ratio of value held in nubits to value held in nushares. Something like 1 to 20, 1 to 10, or 1 to 5 seems appropriate to me. Maintain this ratio by issuing nubits when there is too little value in nubits and burning nubits when there is too much value in nubits. If the nubits price falls below parity or rises above parity at the target ratio, adjust the price by changing the interest rate on nubits. The necessary interest rate could potentially be negative in theory (but would likely always be positive in practice). Offer interest not just on parked nubits, but all nubits. Do away with this idea of parking nubits altogether (it creates debt overhang making the system unstable).
I have said my piece. I will only communicate further via private communication with the head developer Jordan Lee I believe. For personal reasons that I prefer to keep private, I cannot enter into any further public discussion about this. If the developers choose to sit on their hands on this, that is up to them.