So the question is why should we pay you if all you do is keep money in a wallet? Only if we trust that you will bring your funds to market if we need them should we actually reward you for anything. So one way to do that is to create the concept of Fund-Days-Destroyed and stuff to make sure the custodian isn’t colluding, but that is difficult and complicated to get working. An MLP we can trust because we can use the third party of the exchange to verify that you have funds.
Let’s look at a peg break in the two situations:
a) T3 custodian destroys their Fund-Days to avoid providing liquidity, costing Nu nothing but disappearing right when we’re trying to rely on it. As long as we don’t count it as real liquidity, this is just fine.
b) MLP breaks contract to avoid having to rebalance the pool. This is why we want to make sure that the MLP has the same order of magnitude T1+2 funds as T3, otherwise the risk of several rebalances can outweigh the contract.
I’d love to implement a) as long as we’re careful not to depend on the liquidity it provides, I just thought that trusted custodianship was an easier place to start.
