The Nu dividend system - and the BlockShares distribution


Today I learned how the Nu dividend distribution works. So we take some snapshot of the blockchain at a predefined timestamp and distribute dividends according to the balance distribution at this particular block. Likewise, the blockshares will potentially be distributed in a similar way, such that everyone in the second of the launch of the BKS blockchain will get one BKS for each NSR owned.

Now its not hard to imagine how a system like this affects a market with poor liquidity like NSR. It is to be expected (I would say its certain) that each of these snapshots will trigger a pump and dump because there is an opportunity to buy NSR, take the payout and sell all NSR afterwards. In other words the system increases the value of NSR dramatically for one single block and let’s the value drop back again one block later.

This is not good and instead to incentivize owning a particular number of NSR at a special point in time, I think we should incentivize holding NSR for the amount of time that is used to create the revenue by using shareholder funds as investment (like BKS). This means, we do not take a snapshot, but simply calculate the average balance over the time span of the operation.

Example: A sell side custodial grant passes to sell 1000 NBT within 30 days. Person A owns 50% of all NSR, person B owns 50% of all NSR and person C owns 0% of all NSR. After 15 days, C buys all NSR from A and B.
In the old system, C would either get 1000 NBT or 0 NBT, depending on where the snapshot is. In the proposed system, C will get 500 NBT, and A and B will get 250 NBT each.

I think it is obvious that it won’t make any sense to buy NSR shortly before the payout just to dump them. It also encourages holding your NSR although you know that the auction (or another investment decision) will make pressure on the current price.

Implementation: Not even worth making a pull request, its just this method here:

Analysis: Let’s consider the last dividend payout of 20,000 NBT by @KTm at 00:01 GMT on 20th of January. The following plots show how dividends would have been distributed when considering different snapshots. In all plots, the X axis is just some address and the Y axis corresponds to the percentage of the total dividends.
In the first plot we compare the dividend distribution if they were distributed one week before the announced date (upper plot) compared to the actual date (center plot). The bottom plot corresponds to the difference between the upper and the center plot.

This peak is an exchange address. It means that about 0.8% were in this address one week before the payout, and were not in this address anymore after the payout. At the same time we see several smaller spikes to the bottom which indicate addresses which got filled with NSR shortly before the payout. Now let’s see what happened to those NSR after the dividend payout by making the same comparison, but using the actual payout and a snapshot one week after the actual dividend:

Many coins were moved back to the peak address above, resulting in a large downwards peak here. Aside from that we clearly see a majority of positive deltas, which indicate that people removed NSR from these addresses.

With the averaged balance system the dividend payout is much less affected:

Comparing plot (2) and (3) reveals that the peak address receives only about 60% of the previous payout. The remaining 40% are distributed among the private keys of the previous owners. There is not much to gain from buying NSR one day before the payout, but a large incentive to hold them for the whole duration of the term.

So I am proposing two things:

  • Changing the dividend system to the average balance instead of a single snapshot (this will require a motion, right now I am just asking for feedback)
  • @JordanLee, please use this system to distribute BKS if your motion should pass and use the begin of the auction as start date and the launch of the BKS blockchain as end date. I am confident that this will also have a significant impact on the auction price and will reduce the sell pressure on NSR following after the auction.

My idea was to pick a random block between when the announcement is made and when the exchange is finished. Not as interesting as your analysis though :stuck_out_tongue:

As a current long-term shareholder, this is contrary to my interests (I’m playing devil’s advocate in this post, I always enjoy your technical analysis!)

Let’s pretend 1000 NBT are being given as dividends like in your example above where A and B receive 250 NBT each.

As a shareholder who is not selling his NuShares, I (let’s pretend I’m C) am in the business of maximizing my own return. Voting for a motion that rewards proportional ownership over the course of the month is (in my selfish shareholder eyes) nothing more than rewarding those individuals who have divested themselves from the Nu network. Many of those private keys will have dividends sent to them that will never be claimed, representing wasted value from the dividend. If A and B sold their NSR and then deleted their wallet, that’s 500 (250 + 250) NBT that could have gone to a shareholder like myself. The counterargument could be made that A and B would still monitor the network for dividends, but in my experience most users wouldn’t bother after deciding NuShare ownership isn’t for them.

That will make it tough to pass a motion. Current shareholders have zero incentive to reward those who no longer hold NuShares.

Could you explain this more? I’m not sure I understand (which might just be me being slow to pick up on the concept). As long as the asset (NSR) eventually splits into two separate assets (NSR and BKS), the appreciation in NSR to reflect the implicit market cap of BKS will occur regardless. In a proportional system (as opposed to a snapshot) the appreciation should just occur immediately, rather than at some point in time near the ex-dividend date. The primary difference is that in your example a negative utility is placed on shareholders (the requirement to hold shares for a certain length of time), which may actually depress the price of NuShares on the open market if they are seen as less convenient and more difficult to value than other cryptoassets.

That being said, I’m all for any ideas that can smooth the transition of splitting (ie. duplicating the blockchain) the assets. In my mind as long as a specific split time is mentioned traders will mostly be prepared. Would requesting that NSR trading be frozen for a few hours on our major exchanges work if accompanied by an announcement? That way the split could occur and traders would be properly notified that NSR buy/sell orders should be valued differently when trading resumes. Impractical if we were on 30 exchanges, but given that NSR volume is confined to 2-3 exchanges it could work. Just an idea.

Edit: Relevant article: . If I understand correctly, it works because most exchanges have set trading hours, which allows the market to adjust. We would just have to simulate a long-enough stoppage to allow the market to properly price each separate asset prior to trading again.

I don’t think there is a happy solution here unless we can figure out how to give a large enough incentive to hold NSR after the split. I feel like in the long term it is inconsequential if some investors dump as long as Nu and B&C continue to proves their ability to…

  1. Hold a stable peg
  2. Provide a safe place to trade
  3. Return a healthy profit to shareholders…
    … then we truly profit.

And the current system rewards those who just joined the Nu network (maybe one block before the snapshot) and who never participated in any Nu related decision. They are furthermore free to sell their NSR directly afterwards and get the full dividend.

It was A and B who let the sell side custodial grant pass in the first place. It was also A and B who perhaps endured earlier NSR price pressure in order to bring the network forwards, which now allows for this kind of revenue. C contributed nothing but buying NSR when it was lucrative.

You furthermore now consider an “all in” and “all out” scenario. Shareholders can have various reasons to liquidate parts of their shares which are totally unrelated to their support for Nu.

The instant 1:1 provision will have many severe effects in my opinion. You are basically subtracting the BKS market cap from the Nu market cap in a single second.

  • People who don’t care about BKS will immediately dump their newly owned BKS
  • People who just bought NSR for BKS will dump their NSR after getting the reward

We as a shareholder do this investment after the motion has passed. We will endure the auction, and hold our NSR although the price will probably go down through that. It is the shared capital of the shareholders holding NSR during the time of the investment which is at risk, and not the capital of the shareholders at the block of the BKS launch.

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This is entirely common in traditional stock valuations. From my link above:

Stock Price on the Day of Spinoff
On the day of the spinoff, the stock price of the parent company typically drops to reflect the fact that certain assets have been removed from its books and segregated into a new separate entity. Once a spinoff starts trading, the prices of the parent company’s and spinoff’s stocks should add up to the price of the old parent company stock prior to the spinoff, at least initially. Eventually the prices of the two new companies will be set by the market based on their individual values and prospects.

The issue isn’t the split, it’s that traders aren’t able to prepare for it adequately like they can on traditional centralized exchanges with set trading hours. My “exchange freeze” idea above simulates the real-world solution.

It really isn’t that simple though. By releasing B&C it increases the value of the Nu Network. My napkin math is very weak but in my mind:

New NSR Market Cap = (Old NSR Market Cap + B&C value added + new holding investors) - (B&C market cap + after split dumpers)

This is stock market, not a 10 BTC volume coin on Poloniex. Recently a single former community member reduced the NSR price by more than 20% over many days, because he decided to sell. As long as individuals are able to influence a market in such a way, I don’t see how to apply these concepts.

I also thought about that :wink: this all could be done, there is really no problem in achieving this. The BKS protocol would just need to grant only x% of your balance in each block until 100% is reached. Setting x to a small value will require you to hold NSR after the BKS launch.

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I see how that can keep people holding their BKS but not NSR. Unless you are talking about taking multiple snapshots over time? I don’t think I’m fully understanding your solution.

At the day of the BKS launch, you will get rewarded 0.0001 BKS for each NSR you own in each block for the next 10,000 blocks. So it encourages to hold NSR, not BKS. The incentive to keep your NSR linearly decreases over one week in this example.

I don’t know if that is feasible to do. My understanding of the process is, we take the nushares blockchain copy it, then drop it into the bks folder, and then say “pretend these nsr are bks”.

I think the inherent design of NU is to distribute divs via PPC, or not?

But you (as a long term holder, you’re a fourth party D) would not have gotten that 500 NBT, it would have gone to C, the new buyer, instead. As a long term holder, this concept shouldn’t affect you one way or the other, besides knowing that the market will be more stable for burn and auction mechanisms.

I’d like to make a somewhat orthoganol point about incentivicing holding NSR:
Increasing NSR minting rates is a more effective way to increase the value of a vote than share buybacks.

Is the current dividend distribution similar to the traditional stocks dividend distribution model?
It seems so according to: