Tier 4 Fund Management Discussion

[dysconnect]

The catch is that parking itself isn’t a very good mechanism that connects its utility to the network and cost as pointed out by @Benjamin.

I have been vocally cautious with T1 liquidity and not a big fan of reliance on parking rates specifically for defending the peg. That said I don’t want to throw away T5 at the current state either, because it’s still cheaper than Tier 1, which has its own other problems.

While I talked about replacing the parking mechanism with deferred transactions I have been too busy for some time to write and think carefully about it…

[mhps]

The catch is that parking itself isn’t a very good mechanism that connects its utility to the network and cost as pointed out by @Benjamin.

His arguement was that parking in its current practise currently can cause an open end obligation to pay interest in the future. If it is only used for mid-short term (days to weeks) buy side support, for example by a motion to never pay interest for parking longer than a month, then the risk is gone and the benefit stays.

[Nagalim]

We set up a multisig NSR address (T6). This group is given 5% of the NSR supply (42mil NSR) with the instructions to sell a portion of them for NBT if buy side liquidity in T1-3 goes below $80k while sell side is above $100k (or if buy is <40% of total and total is <$100k)

What do people think about this? I think this would be a good first step.

Perhaps we should say that the group should use an increasing market velocity of $5/hour for every hour the above conditions are met. So that would mean that 10 hours of that condition will result in $225 of NSR going to market. 24 hours would result in $1,500.

[masterOfDisaster]

I don’t want to throw away T5 at the current state either, because it’s still cheaper than Tier 1

His arguement was that parking in its current practise currently can cause an open end obligation to pay interest in the future.

Paying for tier 1 liquidity is an open end obligation to pay as well. Liquidity needs to be paid for immediately, parking rates in the future.
Raising parking rates only in case of danger for the peg is less reliable than activity on tier 4 and tier 6.
Is parking rate really more expensive than paying for tier 1 (sell side) liquidity?

NSR holders can find out how many NBT get parked for x% per month and compare it with compensation for tier 1 liquidity.
If you pay 10% per month for $x (tier 1 sell side) liquidity, you have 1.1 times $x at the end of the month - the same is true for paying 10% interest for 1 month parking.

My gut feeling tells me that in the end “emergency short-term insanely spiked interest” is more expensive than offering decent interest continuously and not necessarily more expensive than compensation for tier 1 liquidity.

This is a rather extended side note, but I wanted to shed light on my perception of it.
My understanding is that

• parking rates (tier 5) should have a mid-term to long-term effect,
• NSR sales (tier 6) a short-term to mid-term effect and
• BTC sale (tier 4) an immediate effect on reducing the sell side.

If you remove NBT in excess from the market (paid for liquidity or interest) by exchanging them for NSR in a continuous process, you likely get more NBT for the NSR compared to selling NSR in a situation in which the peg is under pressure; which means it’s cheaper for Nu.
Selling NSR in case the peg is threatened is still possible.
Maybe my thinking is flawed, though.

We set up a multisig NSR address (T6). This group is given 5% of the NSR supply (42mil NSR) with the instructions to sell a portion of them for NBT if buy side liquidity in T1-3 goes below $80k while sell side is above $100k (or if buy is <40% of total and total is <$100k)

What do people think about this? I think this would be a good first step.

I agree.

Dealing with an hourly increasing market velocity might be the hardest part of that, because it would require frequent activity of the custodians. I doubt that is possible.

Or do you mean selling NSR once a day with the resulting $ of the formula $5/h? That should be possible, especially if different multi signature addresses are used. For managing only several hundred to a few thousand $ value 2-of-x or 3-of-x should be fine. The big amounts should require more custodians and a majority of total signers.

And once again I think how beautiful it would be to have seeded auctions for that, send NSR once a day to the auction, put a current status (=NSR market rate) and the remaining time of the auction on the auction website or on nubits.com and exchange NBT for NSR that way!

The ability to bring tier 6 funds to market needs to be delegated to custodians (the future tier 4 fund managers?). Shareholders can grant NBT or NSR, but the process to sell them is not ready yet.
This would be a start in the right direction.

@Nagalim’s proposal is simple and efficient.

What do the other potential tier 4 fund managers think of that?

[Nagalim]

Right, it wouldn’t require a sell every hour, just a nominal way to calculate how much to bring to market, whether that occurs once per day or whatever. The precise numbers can be fuzzy because the signers are human and can account to the best of their ability and a broken peg has no strict definition. There will need to be a strict protocol, of course, whereby funds are brought to market.

Seeded auctions will easily take advantage of these rules, we don’t need to worry about how that will fit in now.

[mhps]

Paying for tier 1 liquidity is an open end obligation to pay as well.

You get it wrong. If you set 1 year interest to 120% pa (10% per mo), the protocol will pay 10% per mo after 11 months to those who parked. Park rate can have 1 year 5 year 10 year terms… There is no way to stop paying interest to those who have parked short of a hardfork. That long term open end obligation was what @Benjamin was talking about. If you set liquidity interest to 10% per mo, you can stop it with a motion any time.

Is parking rate really more expensive than paying for tier 1 (sell side) liquidity?

No. Park interest is like 1/10 of T1 cost. See posts starting from this in “Park rates are our method for short term peg maintenance”.

parking rates (tier 5) should have a mid-term to long-term effect,

No park rate should be used only for mid and short term to avoid obligation in the future. Specifically rate longer than 1 month shouldn’t be offered.

NSR sales (tier 6) a short-term to mid-term effect and

Burnt NBT are by definition effective forever. Once its burnt it’s gone.

[masterOfDisaster]

If you set liquidity interest to 10% per mo, you can stop it with a motion any time.

I might have explained it badly. Exactly that was what I had in mind: parking interest for short periods of parking, but which are continuously offered.
Nu currently has per minute compensation for ALP and per month compensation for MLP.
Why not offer parking interest for one month parking period?

Specifically rate longer than 1 month shouldn’t be offered.

I agree that the parking period should be short and in case the incentive needs to be increased an increase of interest rate should be the means.

Burnt NBT are by definition effective forever. Once its burnt it’s gone.

And once again I might have chosen the wrong words. I’m aware of the lasting effect of burned NBT.
By categorizing

• parking rates (tier 5) as mid-term to long-term,
• NSR sales (tier 6) as short-term to mid-term effect and
• BTC sale (tier 4) as immediate

I didn’t mean how long the effect lasts, but instead the speed with that an action is effective on sell side reduction.

Raising parking interest takes some time to kick in.
But offering paring interest for one month parking and removing 10,000 NBT from sell side this way might be cheaper (per month) than paying compensation for reducing tier 1 sell side by 10,000 NBT or increasing buy side by 10,000 NBT value.

For the dilution of NSR (that might be necessary to remove NBT from the market) it plays no role whether the NBT entered the market for paying parking interest or tier 1 liquidity compensation.
I say Nu doesn’t know what’s cheaper at the moment and should try to find out.

Why not offering 5% monthly parking interest (with one month duration) if tier 1 liquidity compensation is double of that rate?

[Nagalim]

Pretty please can we stop talking about T5 here?

<80k buy and >100k sell activates T6, as does >60% sell when total liquidity is <100k, also if nbt is being sold for <$0.9. Acceleration is 5nbt/hr^2.

Are these parameters acceptable?

[mhps]

Pretty please can we stop talking about T5 here?

It’s just to understand the full picture or why are you talking about T6?

Are these parameters acceptable?

I think trading volume (how fast the wall is being eaten) should be considered.

[Nagalim]

T6 is multisig, T5 isn’t. I’d be happy to talk about T4 too, it will follow very similar rules.

The trading volume is the 5nbt/hr^2. Maybe we should do 2 nbt/hr^2? That would mean $600 in the first 24 hours and $1,752 in the second 24 hour period.

For T4, we can do:
<20k buy and >40k sell activates T4,
as does >75% sell when total liquidity is <50k,
also if nbt is being sold for <$0.9.
Acceleration is 5nbt/hr^2.

Maybe we should have a maximum velocity of $5,000/day or something. I’m also trying to think of a more smooth trigger, like:
<25% when total is <50k
<30% when total is <70k
<35% when total is <100k
<40% when total is <140k
<45% when total is <190k

I would have an absolute nerdgasm if we could use this equation:
Threshold = 50%tanh(x/150,000)
Where x is total network liquidity
And tanh is the hyperbolic tangent, a complex function used in relativity, among other things.
http://wolframalpha.com/input/?i=50tanh%28x%2F150%2C000%29&x=0&y=0

[Nagalim]

Threshold % = 40(1-20*arctan(x/20)/x) where x is the total liquidity in kNBT:

So the way it would work is that the signers would take note of when the threshold is passed and start counting in 2 nbt/hr^2. Once the signers are obligated to spend some unit of btc (5 btc?) a signer will make a tx and pass it around for everyone to sign.

[mhps]

That tan() looks too much like a hack.

How is this for a model, in layman understandable terms: if buy or side is going to reach 25% total liquidity in 24 hours, fire fighting mode is on.

To realize the above, I suggest that at any moment T0, use a 3rd order polynomial (a t³ + b t² + c t + d) to fit liquidity data in the last 48 hours, sampled in two hours interval so there are 24 data paires (liquidity, t), where t is time between sample time and T0, in hours.

The predicted liquidity in 24hrs is
a 24³ + b 24² + c 24 + d

The good things about the method is that

1. it takes 48 hours data so randome spikes will be mostly ignored;
2. it has up to the third order terms so it accounts for constant, speed, acceleration, and change rate of acceleration. No higher terms are used, to increase robustness of the fit;
3. It is updated at any time so the curve is adapting latest conditions

uncertain aspects:
3rd order polynmial may not act as fast. The exact form of the function can be improved.

To implement a script can be written to do the calculation based on liquidity data from a client by anyone. Nu website can have the data published in realtime.

[Nagalim]

So the issue with a hard rate (25%) is what happens if we have 500,000 nbt of liquidity? Then we get into the situation where we’re hundreds of kNBT in debt before we start putting out the fire. With more liquidity in the system, our threshold needs to be tighter.

Arctan is a sigmoid function. We can use other sigmoid functions that look prettier, but this one was my favorite.

I like the fitting, but in my mind the signers are basically just going to play things by ear anyway. But I’m not wholly against curve fitting, it could work if the sampling rate is reasonable. How do you feel about the 2 nbt/hr^2 acceleration? Does the curve fitting model use something else to determine the size of the Tx (in btc) to sign?

[mhps]

Curve fitting scales. I don’t know magic numbers such as 2 nbt/hr^2 are good, and if they are, they will still be good tomorrow.

I haven’t thought about tx to sign. Can be an amount enough to postpone hitting the 25% threshold for 48 hrs.

Combining the two paragraphs above, if we want to remove the 25% magic number, we can implement a “servo loop” that injects or removes fund according to a continuous feed back of liquidity status. The more off-balance the buy/sell sides are, the stronger fund injection/removal becomes to remove imblance. Just to achieve balance it can be quite insensitive to the form of the feed back function as long as the feedback is negative.

What you have proposed can be a step toward that directiion but it has many magic numbers. The curve fitting approach with a high thresold (e.g. 40%) plus continuous “postponing 48 hrs” (evaluated and applied if needed every day) is adaptive and conceptually easy to understand. (The 40% will be a soft parameter that is there to adjust gas/brake pedal dead gap.)

[Nagalim]

My approach uses that same 40% as one of its magic numbers. The other magic number I use is 20kNBT which is a scaling factor for the arctan. The final magic number (2nbt/hr^2) is totally up for debate for me. However, I really don’t understand how your method gets around the 2nbt/hr^2, which is a statement about market velocity and how much to bring to market how quickly.

So your fitting model is like this (tell me if I’m wrong):
We fit to find out if the trends are such that the threshold will be passed in the next 48 hours. If so, bring to market the amount required to make it so that the market will reach a balanced peg in 48 hours instead.

If there is a single big sell event, how would your method handle that? Wouldn’t it throw off the fitting so much that the numbers all go haywire and we bring way too much money to market?

[dysconnect]

Ultimately this is what we should aim for:

Based on a stochastic model, be able to calculate a confidence interval of NBT liquidity for the next 48 hours.

These are concrete measurements we should take:

1. The covariance between non-NuBot NBT price, NuBot NBT price and BTC price.
2. The covariance between NBT walls and BTC price
3. BTC volatility

For a start one should use a Gaussian distribution to model the ups and downs and do a simulation. Then perhaps we can consider fat-tail distributions for more robustness. Ultimately it boils down to the NBT flow in the system so things like constant parking rates or tiered transactions are quite important.

Rare events like “sudden sell-offs” are ultimately what we want to mitigate using tier 4 so they don’t really have to be modelled in the same way.

[cryptog]

Although i understand only a portion of it, it seems that Nagalim’s proposal is the most concise strategy so far.

[JordanLee]

I propose that 4 of 7 multisig addresses for NBT, NSR and BTC should be jointly managed by seven community members, known as the First Liquidity Operations Team, or FLOT.

Shareholders should elect individuals to FLOT via motion, with one motion for each signer. If 7 signers are not elected, then 4 of 6 or 3 of 5 multisig will be used. So, the first step will be to elect individual signers. Someone wishing to be a member of FLOT should advance a motion similar to this:

Begin motion
@satoshi shall be one of the members of the First Liquidity Operations Team. @satoshi can be reached via Bitmessage to coordinate signing at BM-2cTWuSKmRZ2gb91A4rbZz5LKEPJxoKVSWy. @satoshi promises to be a part of FLOT for at least one year and to abide by all shareholder motions governing the use of funds. @satoshi will be available for signing at least 5 days a week and 45 weeks a year. No monetary is compensation is required.
End motion

Willingness to continue being part of the team for an extended period is important, because if a single team member quits new multisig addresses will need to be formed.

While voting is progressing on motions that add specific members to the team, the terms of a motion governing how NSR, NBT and BTC will be used can be debated and voting on the motion governing how funds are used can proceed separately.

Here is the finalised and hashed version of the motion governing how funds should be used:

Motion RIPEMD160 hash: f99ddf406a32d39be7d614c13dc1ce63c96e4003

=##=##=##=##=##=## Motion hash starts with this line ##=##=##=##=##=##=

NSRA custodial grant of 25 million NSR should be requested using the FLOT multisig address.

Rules for use of NSR:

⦁ If less than 25% of all liquidity in tiers 1, 2 and 3 across all currencies is on the buy side, NSR should be sold with the goal of restoring buy side liquidity back to 25%. Sale proceeds should be converted to currency if necessary and burned, with the burn transaction IDs announced publicly. Additional details about how much to sell, how much at a time, etc should be determined by the signers in real time, because much more information will be available at that time than shareholders have now. We can be confident in any course of action agreed upon by 4 of the signers.⦁ The rules of NSR sales defined in this shareholder motion and other motions apply to these signers. Briefly, if park rates are offered for more than 30 days consecutively, NSR auctions and currency burns begin.

NBT

A grant of 150,000 NBT should be requested using A FLOT multisig address. The First Strategic Reserve Team (FSRT) will continue functioning as a backup to sell side pressure provided by this group. FSRT has a total of 4,040,000 currently in its possession. All but 151,500 of this should be burned within 14 days of when the NBT grant to FLOT is made. No commission or compensation will be paid for funds burned.

Rules for use of NBT and other Nu currency:

If sell side liquidity in tiers 1, 2 and 3 for a specific currency drop below 40% of total liquidity, signers shall sell currency in the open market until the sell side is restored to at least 40% of total liquidity. Proceeds of currency sale shall be added to tier 4 buy side funds, which may be used for share buybacks as specified by existing shareholder motion.

BTC

All tier 4 buy side funds (currently about 466 BTC) shall be transferred to a multisig address shared by this group.

Rules for use of BTC or other tier 4 buy side funds:

FLOT will be bound by the same rules established by shareholder motion to conduct share buybacks in cooperation with @NSRBuyback. BTC will be used to purchase currency when a specific currency’s buy side funds falls below 40% of total liquidity in tiers 1, 2 and 3 for that currency. The currency proceeds will be placed in the multisig currency address controlled by FLOT.

The preceding should be interpreted as guidelines, and FLOT may exercise discretion. Communications between FLOT members regarding decisions on how to use funds must be publicly visible.

In order to form FLOT, at least 3 signers must be selected by motion. Additional signers will be accepted for a period of 14 days after this motion is passed.

=##=##=##=##=##=## Motion hash ends with this line ##=##=##=##=##=##=

Verify. Use everything between and including the <motionhash></motionhash> tags.

Once the signers have been selected by motion and rules governing the use of funds have passed, signers will construct NSR, NBT and BTC multisig addresses together, which will become the target of NSR and NBT grants. BTC currently held as tier 4 buy side funds will be transferred to the FLOT BTC address.

Of course, I look forward to comments and suggestions about how this can be improved, as well as clarifying questions.

[Nagalim]

I support these, except the hard rate limits for reasons I’ve already spelled out. Also, these motions do not reference velocity. Basically, these motions are all fine and dandy but don’t address any of the concerns we’ve been talking about.

[tomjoad]

Basically, these motions are all fine and dandy but don’t address any of the concerns we’ve been talking about.

Could you propose replacement text for the motion? I think that approach usually allows shareholders to come to a consensus on motion text much quicker.