Tier 4 Fund Management Discussion

[Cybnate]

[Cybnate]

We would like to divide the funds into two main segments:(a) a smaller part over which fund managers collectively have full authoritym in case of emergency; and(b) a larger part whose usage requires shareholder approval. Further subdivisions may be necessary, such as funds that are dedicated to specific projects supported by tier 4.

Agree, I think any emergency scenarios we can think of which require action within e.g. 1 week should be delegated to the trustees/custodians. The challenge is to come up with this set of rules which needs to be very clear and limited (rules and $). Everything else requires shareholder approval. We could possibly also think of a motion which endorses or challenges an emergency action of the trustees after the action took place. This can be useful when actions go against the will of the majority or have unexpected adverse effects not covered by the emergency rules. The action might be reversed or lead to a change of the rules the fund managers will need to comply to in the future.

For example, a custodian may delegated the task to submit funds to an exchange, use BTC to purchase NBT, and provide a proof of burn; this custodian may need to post a collateral to show he will not abscond with the funds.On the other hand, we may ask liquidity providers to burn NBT in exchange for an equivalent amount of BTC, where our bottleneck would be an escrow.In general, at some point, the funds will leave the multi-sig wallet and lose various forms of decentralized protection, and we need more input regarding which approaches are more acceptable.

Spreading the risk is usually the safest, but can be a bit dreadful. Ensuring every trustee has one or more exchange accounts they can use to fulfil their roles would be a good starting point. With that the trustees can vote amongst themselves which trustees would bring the funds to the exchange.

There could be one trustee randomly chosen when the value is relatively low or multiple ones. The random factor could partially mitigate ‘created’ emergency scenarios by a rogue trustee (remember power corrupts) in order to obtain funds and use them for other than intended purposes.

Full or partial collateral held by the Shareholders for each trustee would be ideal, but might be complex to manage. Escrow would be centralised. Decentralised tools to do this are not very straightforward for the average non-technical Shareholder.
No easy answer here. Maybe a smart contract on the Ethereum blockchain?

We need to establish a more detailed view of the roles of all tiers of liquidity, which amounts to a grand architecture of tiers 1-6, which provides a clear designation of responsibilities and a more precise definition of the interfaces among the tiers.

Fully agree, although the function of each tier has been described before, the interface and ‘rules’ when funds are transferred in tier 3-6 are not transparent at all. To see the attempts to have tier 4 transparent and decentralised is a big step forward and I like to thank the potential trustees for sharing their thoughts and efforts towards this. We might just need to take it step-by-step…

[mhps]

For example, a custodian may delegated the task to submit funds to an exchange, use BTC to purchase NBT, and provide a proof of burn; this custodian may need to post a collateral to show he will not abscond with the funds.

This is one of the places I don’t agree with. I think the job of Tier 4 managers is to provide fund to liquidity providers of Tier 3, 2, and 1 when their fund runs low. It is the Tier 3, 2, and 1 LPs’ job to deal with exchanges. The reason to design Tiered structure is so that managers of different Tiers have different response time, functions, risk, cost, and a limited set of things to worry about.

We need to establish a more detailed view of the roles of all tiers of liquidity, which amounts to a grand architecture of tiers 1-6, which provides a clear designation of responsibilities and a more precise definition of the interfaces among the tiers.

This foundation needs to be laid down before individual tiers can be coherently designed. @JordanLee’s input in vital here.

[cryptog]

In general, at some point, the funds will leave the multi-sig wallet and lose various forms of decentralized protection, and we need more input regarding which approaches are more acceptable.

Requesting a collateral held in multi-sig somewhere while at the same time minimizing the amount dealt with by the elected custodian who receives the actual fund seems to be the natural way to go.
Let us say that Nu needs to protect the peg with NBTs burning (BTCs are brought to markets and are used to buy back NBTs). The BTCs are unfrozen from Tier4 and sent to several addresses controlled single-handledly by each member of the multi-sig custodians group instead of one custodian.
That complicates the process but minimizes the loss risk.
At the same time, each custodian needs to show some form of collateral held in a multi-sig address controlled by the shareholders. B&C Exchange could be very useful here. An escrow mechanism coupled with a time lock function should be very relevant. If the elected custodian happens to steal the fund that Nu shareholders have entrusted him or her with, the collateral is confiscated; if there is no fraud, then the fund is not confiscated and released after the locking period is over.

By the way, note that in the past when for example @jmiller brought to markets NuBits with the goal to sell them for dividends creation, she was not asked to show proof of collateral, was she?
If she was not, then should we think about changing the policy and ask for a collateral requirement regarding NuBits sales, from now on?
I think we should for consistency’s sake.

[Nagalim]

I think the job of Tier 4 managers is to provide fund to liquidity providers of Tier 3, 2, and 1 when their fund runs low.

Ok, so I totally agree with this statement. Let’s talk about each tier:

1. Tier 1 is very decentralized at this point. The absolute best way to interact with a decentralized tier like this is to use an open market like an exchange. If we need to drop money into tier 1, we should do what others are talking about and give BTC to a contracted and trusted shareholder to sell on an open exchange.

2. Tier 2 funds are transient and constitute the trusted shareholder’s exchange account in the time before turning it into tier 1. Note that in tier 2, the trusted shareholder has the opportunity to time the market and get the best possible rate from the custodians on exchange.

3. Tier 3 only currently exists as NuLagoon. NuLagoon should be allowed to ask for a rebalance for Tier 3 from Tier 4 signers at a reasonable market rate. This would coincide nicely with the new rebalancing rules for NuLagoon. Somehow, the signers and NuLagoon would decide on a rate, then NuLagoon would burn the NBT and the signers would respond to publicly displayed proof of burn with a signature to send BTC to NuLagoon at the pre-approved price.

[tomjoad]

We would like to divide the funds into two main segments:(a) a smaller part over which fund managers collectively have full authoritym in case of emergency; and(b) a larger part whose usage requires shareholder approval. Further subdivisions may be necessary, such as funds that are dedicated to specific projects supported by tier 4.

What advantage is there to requiring shareholder approval for the larger amount? I think it should be assumed that shareholders will always immediately authorize all tier 4 funds to be used for maintaining the peg, as it’s our primary business goal. I can’t think of a scenario where shareholders would or should decline to use those funds for peg maintenance.

I would be in favor of granting full discretion to the Tier 4 fund group to use the entirety of the funds for peg maintenance when required, with the stipulation that shareholder approval is required for non-emergencies like conducting buybacks, funding development, etc.

does a term that allows quick decision making by “special motions” to release funds make sense? These “special motions” would pass with different limits (e.g. 201 of 400 blocks to name an extreme) and allow NSR holder to decide in case conditions arise which are not caught by the rules of fund management, but require quick action.

@Coingame and I discussed this here: [Withdrawn] Faster motions. While I still agree with the concept of different motion lengths that can be applied if they adhere to pre-set criteria, Coingame made an excellent point that shorter block windows naturally exclude more shareholders. I would prefer relying on the Tier 4 group’s discretion in using the funds for emergency peg maintenance rather than relying on a short motion that doesn’t include most shareholders.

This is one of the places I don’t agree with. I think the job of Tier 4 managers is to provide fund to liquidity providers of Tier 3, 2, and 1 when their fund runs low. It is the Tier 3, 2, and 1 LPs’ job to deal with exchanges. The reason to design Tiered structure is so that managers of different Tiers have different response time, functions, risk, cost, and a limited set of things to worry about.

I agree with @mhps here.

[Nagalim]

You make a good point. However, I would like to suggest that we could still have a hot and a cold wallet but do it with signer consensus. So something like 4/10 to access hot wallet and 7/10 to access cold wallet.

[dysconnect]

Just in case, I’ll add that the consensus requirement for using the cold wallet is a regulatory limitation rather than a technical one. The only thing stopping trustees using the whole lot is that at least a majority can be relied upon to uphold this rule, and the operating assumption “because they are shareholders…” can sometimes be rather willy-nilly.

Systematically it still costs less trust than what we have now (one JL to rule them all), but full decentralization won’t be possible until we complete the transition to zero-reserve. So this is a transient state and we should make better use of the flexibility.

Requiring shareholder voting even for the hot wallet is simply too much because there’s very little marginal gain compared its costs, that we need more eyes and time to react to urgency. If there’s anything that we should add to serve the consensus beyond the cold wallet, it would be check and balances, which may make use of collateral or specially designed compensation schemes.

[masterOfDisaster]

What advantage is there to requiring shareholder approval for the larger amount? I think it should be assumed that shareholders will always immediately authorize all tier 4 funds to be used for maintaining the peg, as it’s our primary business goal.

It’s the shareholders’ money. The tier 4 custodians only manage it. Hopefully the rule set, the guidelines how to use the money (may I call it fund charter?) are sufficient to create no conflict and leave no room for interpretation.
If there is such a conflict, shareholders need to decide.

While I still agree with the concept of different motion lengths that can be applied if they adhere to pre-set criteria, Coingame made an excellent point that shorter block windows naturally exclude more shareholders.

This is basically correct, but largely depends on the size of the rolling window. I’ve made some calculations in the same thread to show that: [Withdrawn] Faster motions

In the case of releasing tier 4 due to an exceptional - in terms of funds charter - emergency we should assume that a voting is a formality.
By exceptional I mean circumstances, for which are no rules the fund managers can follow; shareholders should decide in this case. This would need to be quicker than standard voting, though.
Most of those (possibly never to be made) decisions would be no-brainers (I hope).
But I wouldn’t feel comfortable if the fate of Nu were in my hand (assuming that I will be one of the fund managers).

We should keep it at the back of our mind that the normal activity of fund mangers would be “allowed” by the motion that defines the fund charter, that determines which actions need to be taken under which circumstances.

Urgent votes would only be necessary under rare occasions (if the charter is good, they are never needed).
The standard motion voting procedure with the standard passing limits would be used to adjust the fund charter.

[mhps]

Let’s talk about each tier:

1. Tier 1 is very decentralized at this point.

The problem with Tier 4’s dealing with Tier 1-3 is that T4 fund is from a sigle entity and T1-3 are managed by many LPs. How can T4 fund be injected to T1-3 in a timely and responsively, and to where it is needed? Will T4 managers have to be all-seeing-all-knowing to do a good job? That seems impossible?

The bottom of the problem is that current T4 liquidity is centralized. To solve the problem I have an idea of a different approach.

What about using T4 fund only as reward/interest that LPs get? T4 doesn’t provide liquidity fund per se, it provides incentive to make T1-3 materialize. For example T4 fund pays for every pool’s interest, every minute via a t4bot, according to global buy and sell side liquidity. T4 fund will deal with limited number of pools’ interest wallet, instead of a huge and unknown number of individual LPs’ liquidity accounts. To be safe, a t4bot only holds a week’s worth of interest. T4 managers will replenish t4bot’s wallet every week from the multisig address, and ask for fundings from shareholders for T4 operations per 3 months.

There are some technical improvements for example there can be several instances of t4bot controlled by different individuals for redundancy and decentralization.

[Nagalim]

I don’t see how asking tier4 to keep account of every LP is simpler than making deals to rebalance nulagoon (tier 3) and buying nbt on-exchange to burn (tier 2 and 3).

[mhps]

I don’t see how asking tier4 to keep account of every LP is simpler than making deals to rebalance nulagoon (tier 3) and buying nbt on-exchange to burn (tier 2 and 3).

Are addressing to my post? If yes I didn’t ask T4 to keep account of every LP (liquidity provider) but every pool (operator’s) interest wallet.

Nulagoon is just an example of every MLP. What about ALPs? My idea is dealing with every pool, uniformly and automatically.

Buying NBT to burn is the job of T6, no?

[Nagalim]

NuLagoon’s funds are separate from NuLagoon’s monthly cost to Nu. A rebalancing for NuLagoon has to do with their funds (buy vrs sell side), not their monthly cost. In your mechanisms, how would Tier 4 deal with a broken peg? Pay more to LPs to provide funds? That’s just the parking mechanism to an extreme.

T4 is originally designed as the developer fund, and it contains funds held in units of account external to the Nu system. It is a reserve and should be mobilized during periods of extreme network stress to buyback and burn NBT. T6 is indeed shouldered with the responsibility of burning NBT during periods of network stress, but cannot possibly be used in extreme cases without triggering a black swan event. That is why T4 should be mobilized to rebalance NuLagoon (T3) and buy back nbt from T1 custodians directly. In my opinion, the T3 rebalance should have higher priority than the direct NBT buyback, but the absolute fastest way of mobilizing funds in a peg brake is direct insertion into T1.

For example, someone slowly buys 150,000 NBT from the Nu network over the course of the year. Then, they put up every NBT they have as a sell wall all at once at $0.5 on NBT/BTC. Is Nu really going to sell $150,000 of NSR all at once, or are we instead just going to pump all developer funds at that wall? Note that if we decide to pump developer funds at that wall we could recover the peg near-instantly and still have money left over in T4.

[masterOfDisaster]

T4 is originally designed as the developer fund, and it contains funds held in units of account external to the Nu system.

No matter how tier 4 was designed - Nu needs a buffer to buy back NBT; tier 4 is in the ideal position for that.

In my opinion, the T3 rebalance should have higher priority than the direct NBT buyback

This is my opinion as well.
But in the end it doesn’t matter much, as the market can move funds between the tiers 1 to 3 quite fast.
The more urgent NBT need to be removed from the market, the lower tier to place the BTC can be chosen.

For example, someone slowly buys 150,000 NBT from the Nu network over the course of the year. Then, they put up every NBT they have as a sell wall all at once at $0.5 on NBT/BTC.

I’d be happy to buy as many NBT at $0.5 as I can afford as long as I can hope to sell them for $1 to Nu.
Nu could happily do the same.

Is Nu really going to sell $150,000 of NSR all at once, or are we instead just going to pump all developer funds at that wall?

At $0.5 only $75,000 in NSR would be required to buy the wall.
But I don’t think that the market depth of NSR is deep enough to dump $75,000 in NSR on the market without killing the NSR price.

In my opinion that’s exactly what tier 4 is for: buy NBT if the sell side is much bigger than the buy side.
Nu needs to define at which ratio action is expected from tier 4.

Tier 6 is what either

• refills tier 4 (NSR get sold for BTC, the received BTC fill tier 4 buy side) or
• interacts with lower tiers through seeded auctions (NSR get sold for NBT, NBT get burned)

at least in my opinion.

[Nagalim]

You’re right about it only being $75,000 NSR sold, but that’s still way more than we can efficiently do in a short term without black swanning.

what tier 4 is for: buy NBT if the sell side is much bigger than the buy side.

I disagree. Tier 4 is for developer funds. The only time Tier 4 should be used to support the peg is if there is actively a peg break scenario and Nu stands to lose its reputation. Tier 6 should be used to rebalance the global peg.

Refilling tier 4 should come from selling NBT in my opinion, not selling NSR. It should occur when Nu is expanding, either in the economic or the development sense. The genesis refill was of course the IPO, which we are performing buybacks with currently.

[masterOfDisaster]

Tier 4 is for developer funds.

Why should Nu keep developer funds in a volatile form?
I see demand for a tier 4 and a tier 4 sell side that interact with lower and higher tiers.

[Nagalim]

That’s tier 3 by definition though. Tier 4 is developer funds that also happen to be a reserve. It’s just that most developers in the crypto world prefer to be paid in BTC.

[masterOfDisaster]

Nu does not by definition hold tier 3 funds.
BTC could be exchanged close to payment with granted NSR.

edit: sorry for this extremely short reply. It was not meant unfriendly. I was typing on mobile phone. I think I’ll start a new thread that tries to supplement this discussion here by trying to draw a bigger picture in which the T4 fund management discussion hopefully fits.

[mhps]

In your mechanisms, how would Tier 4 deal with a broken peg? Pay more to LPs to provide funds? That’s just the parking mechanism to an extreme.

So? Does it not solve the problem?

@nagalim

For example, someone slowly buys 150,000 NBT from the Nu network over the course of the year. Then, they put up every NBT they have as a sell wall all at once at $0.5 on NBT/BTC.

I’d be happy to buy as many NBT at $0.5 as I can afford as long as I can hope to sell them for $1 to Nu.Nu could happily do the same.

Exactly. If the price is not going t bounce back to $1, I’d rather keep the developers paid than extending the peg for another few hours/days, because the developers are the source of hope.

We may first need to agree on this first: when is the T4 fund, which is mainly for paying developers, to be used as liquidity support fund? T4 managers need to clearly understand this to do their job.
To me these two things are an odd couple.

[masterOfDisaster]

Do we have a chance to speed the development of tier 4 fund management up?
I’m asking because of this:

[Passed] Motion to end LPC operations of KTm, Jamie and NSR sales of Jordan

This NSR burn is required by motion, but it's very bad timing. A pity that the community didn't put more efforts in forming a tier 4 (buy side) fund management - the NSR would be better there than burned only because of the time it takes to create them by grant. Keeping a part of tier 4 buy side funds in NSR instead of BTC seems wise in terms of BTC volatility and potential BTC default risk (which might be low, but not 0).