Tier 4 Fund Management Discussion

dysconnect · October 24, 2015, 6:56pm

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:

The covariance between non-NuBot NBT price, NuBot NBT price and BTC price.
The covariance between NBT walls and BTC price
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 · October 25, 2015, 3:22am

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

JordanLee · October 25, 2015, 7:57pm

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 · October 25, 2015, 9:40pm

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 · October 25, 2015, 10:30pm

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.

JordanLee · October 25, 2015, 11:03pm

I’m not sure what you mean by “hard rate limits”. Are you talking about the 25% and 40% thresholds for taking action?

By velocity I believe you mean the speed at which the liquidity walls are brought toward being balanced. I think we should leave that up to FLOT, although in the case of tier 4 funds being used they will likely choose to bring the wall back to the 40% threshold in a single operation. Tier 6 buy side is much more complicated and the proposed motion asks FLOT to use their best judgement based on the details of the situation because things like NSR liquidity and the degree to which the walls are unbalanced will have a pronounced impact on what the optimal action is. Whether park rates are being used will also be a big variable.

There has been discussion about how to keep funds decentralised (which means on multisig addresses) during fund use and a number of other regulatory details. I didn’t address those suggestions because I think we need to keep things simple and give FLOT discretion to react to a situation we can’t anticipate today. The team’s procedures will quickly evolve as well. For example, in regard to keeping funds in multisig addresses, the nature of this will change completely with B&C Exchange. In the meantime, two approaches are possible: 1) keep use of funds off exchange and have the other party transfer first when making an exchange or 2) send funds to an exchange account owned by a single signer and complete the trade on the exchange. The first approach may take too much time and may not be liquid enough. The second approach requires trust of a single signer. I’m happy to let FLOT figure out those details, at least at first. If shareholders see behavior they don’t like, that would be the time for additional regulations in my opinion.

Let’s keep it simple so we can get this functioning, then make adjustments as experience shows us how we can improve.

mhps · October 26, 2015, 1:03am

No. In the last few days it was realized hard limits is not the full story. How fast liquidities descreases should also be considered. For example if the buy wall dips below 25% very slowly, it might be time to burn NBT in the sell wall, because the trading volume is too low compared with the sizes of the walls, instead of increasing the buy side.

I think the simplistic rules set in the draft need more discussion. The fact that only a few of the potential signers are actively participating in discussion shows that the condition is not matural.

If having the multisig group to offload Jordan’s duty quickly is important, how about forming a provisionary group to take over the fund (and follow shareholder’s further instruction) first, keeping discussing to reach consensus, and forming a formal T4 group by the end of the year?

Nagalim · October 26, 2015, 3:02am

We want the process to ultimately be simple enough that signers just pass around a tx when it’s time and they all sign it because the rules are clear. We don’t want signers fighting to come to consensus while the peg languishes, let’s not rush this process.

I’m with @mhps that we should do a halfway step. I’d be comfortable with a simple statement at first that the multisig groups should only buy nbt for <$0.9 and sell nbt for >$1.1. Beyond that we can start to make more complicated rulesets.

JordanLee · October 26, 2015, 10:05pm

It isn’t clear to me what you are proposing, because I’m not sure what is meant by “provisionary group”. It seems to imply that the signers will change, but I don’t see an advantage to that. We need to get enough of the right kind of signers right from the start to protect the large amount of shareholder value they will control. If we get the right signers from the start, then there is no need to make changes later.

Some want more complex rules governing the use of funds. I have no doubt that the rules articulated in my draft motion can be improved upon, and will be in time. However, the project to get a group of signers managing tier 4 and some tier 6 funds is not showing decisive progress and is overdue at this point. It is irresponsible of shareholders to not have any provisions in place for short term (rapid) use of tier 6 liquidity. What is needed is a short and simple iteration to bring progress. Then further refinements can be made. The simple rules I proposed are quite comparable to what is already occurring with tier 4 liquidity. It is status quo. The only thing that is really new is using multisig addresses to hold funds, and everyone can agree that is an important improvement. So let’s get that important improvement implemented and then discuss additional improvements individually.

Are there any specific suggestions for changing the actual text of the draft motion? I want to hash it soon.

Nagalim · October 26, 2015, 10:35pm

shudder

Happy with this.

“If the total liquidity in tiers 1, 2 and 3 across all currencies is greater than 100,000 NBT with less than 35% on the buy side, NSR will be sold. If the total liquidity is less than 100,000 NBT, a threshold of 25% will be used. The speed at which shares are brought to market is up to the discretion of signers and future shareholder motions.”

There’s a very deep occurance here, wherein you are allowing someone to buy as much NBT as they want and sticking all the funds in T4. Interestingly enough, it is in a signer’s personal interest to increase T4, but that’s not the biggest concern to me. The 100,000 NBT limit becomes very critical, as these rules could stimulate signers to bring all NBT to market, potentially selling to a single entity, and ending up with BTC. They can then sell right back to us after BTC crashes and we lose. Are we really willing to just straight up placing 100,000 NBT bets on the price of BTC?

The solution that @JordanLee has set in place is to use the share buyback motion to perform NSR buybacks when T4 goes over $80,000. That’s a good solution, honestly. One of my concerns is with the $80,000 number in light of the 100,000 NBT number. The $80,000 in my mind can be treated as a sort of collateral for the sellside NBT in the event that both funds are drained entirely via vast manipulation or oscillating market pressures. I would like to have a 100% collateral instead of an 80% one and would argue for a FLOT nbt cap that coincides with the T4 cap (which is of course 80,000 at the moment).

The other concern I have is with the 40% number. I’d like this to be 30%. As I’ve shown, market oscillations can hurt if they happen faster than we can perform buybacks. We should keep a large virtual spread.

JordanLee · October 26, 2015, 11:06pm

It is just a suggestion and signers advancing a motion to get themselves elected to FLOT can include whatever content they want, so long as it specifies that they are to be a member of FLOT. They can ask for whatever compensation they need as well, although at least a couple people have already indicated they won’t charge to be a signer.

This is a good opportunity to point out that perhaps the best way to position yourself to be a paid B&C Exchange signer is to first become a FLOT signer. With the 4.0 B&C release nearly ready, the time to begin selecting B&C signers is coming soon.

Nagalim has suggested the threshold for using tier 4 funds to balance be 30% instead of 40% and that the threshold for using tier 6 funds be 35% instead of 25%. What does everyone else think about these two specific suggestions? I’m mainly concerned that a mere 5% difference in the threshold for tier 4 and tier 6 means we will be likely to engage balancing efforts using tier 4 and 6 simultaneously. I would rather see us use just tier 4 first, then tier 5 (parking) to top tier 4 up if needed, and then tier 6 only if the previous actions aren’t producing the results we would like. We can utilise tier 4, 5 and 6 all simultaneously if needed, but I think we should be escalating from tier 4 to 4 and 5 to 4, 5 and 6 as needed. Most interventions will only require tier 4. A minority will require tier 5 in addition to tier 4. A minority of tier 5 use cases will escalate to include use of tier 6 in addition to 4 and 5. I’m concerned @Nagalim’s proposal will unnecessarily increase the use of tier 6 liquidity.

tomjoad · October 27, 2015, 1:09am

I’m in favor of any structure that leads to clearer delineations between tiers. Complexity will lead to redundant efforts between groups at times, and more frustration for the multisig groups that are required to act. So, I prefer a greater difference between T4 and T6 thresholds. 40% (T4) and 25% (T6) feel about right to me in the absence of empirical data. Once B&C Exchange is operational it is unlikely we would ever experience a >25% drop in buy-side liquidity over a 24 hour period if the majority of our liquidity contracts are of set length and irrevocable during times of panic.

mhps · October 27, 2015, 1:15am

Mr. and Ms. Right Signers don’t just appear out of the blue. A coherent architecture of tiered liquidity need to be constrcted and understood before potential signers realize they can be up to the task and be willing to become a signer. Changes WILL happen. With multiple signers changes of signers can be accomodated.

Democracy takes time to find concensus.

If changes of rules such as the hard rate limits and way the limits are used are envisioned, it would be close enough to how the provisionary group I proposed work.
But what can you do if a signer wants to quit before the one year term specified in the draft ends?

I agree. But I don’t have strong opinions on the numbers 25%, 30% 40% … they are all made up from thinking rather than measuring.

Things will get sorted out as long as a group is commited and properly authorised but monitored. So I would like to see a clause in the motion that the group can excercise discretion, and decision making of the group is visible to the shareholders all the time.

Nagalim · October 27, 2015, 1:49am

Currently, we have over 100,000 NBT (~200,000 currently), so it would still be 25%. My adjustments are:

Reduce T4 to 30% instead of 40%. This is because 40% does not give enough spread and we will get gamed (in my opinion, @mhps is right that this is conjecture).
Reduce T4 sell side to 80,000 NBT to coincide with the $80,000 buy side in T4. I think this is an important point for an internal consistency of having 100% reserve within T4.
Increase T6 to 35% when total liquidity drops below 100,000 NBT (otherwise leave it at the 25% @JordanLee originally proposed) . I am willing to concede this point, but I think it stands as a good marketing scheme to state that if our T1-3 liquidity drops we will be willing to dilute NSR more easily (gives more confidence in the peg).

I think the difference between 30% and 25% is vaster than you think. I also like the idea of T6 stepping in front of T4 when T1-3 liquidity totals drop below 100,000 NBT. I’d possibly be willing to compromise somewhere around 35% for T4 support. 40% is just begging to get gamed.

Another, more vague point I am trying to make is about how T6 is sent to market. It is not going to be like buying NBT with BTC, it will be vastly more important what the price for the NSR is because that’s the illiquid market. It is not a bad thing to get a head start on it and do it slowly over larger time periods. Ideally contribute to the liquidity of the NSR market like this:

JordanLee · October 27, 2015, 2:28am

Can you say more about how this makes us vulnerable to gaming please?

JordanLee · October 27, 2015, 2:39am

I added the following text to the draft of the motion:

Nagalim · October 27, 2015, 2:43am

There are 2 reserves. Let’s assume an attacker chooses to evaporate both reserves into each other, what would that look like? If you give me point 2) and we have a 100% reserve, it would look like this:

Attacker buys 10% of NBT liquidity (20,000 NBT) breaking the 40% threshold. This causes signers to start dumping NBT. Attacker buys all of it (total: 100,000 NBT). He does this when BTC is high, because he has the opportunity to time it while Nu does not (signers are obligated to push back).
T4 now has 160,000 and begins to buyback NSR. This is good, but isn’t super fast. The statement here is that turning NBT into BTC is fast while turning NSR into BTC is slow. This causes a buildup of BTC in tier 4 (which is actually a liability).
Attacker sells NBT fast again, tripping signers and selling T4 back down below $80,000.

In that circumstance, the attacker was able to win a gamble with us of a large amount of money. Our saving grace was the use of funds to buyback NSR and the possible repurcussions that could have had. Increasing the spread to 30% dampens the impact of fluctuations. We will always be vulnerable to this kind of attack as long as we peg BTC, but we can raise the liquidity bar required to interact with our signers directly.

JordanLee · October 27, 2015, 3:08am

I just added this content to the draft motion:

JordanLee · October 27, 2015, 5:53pm

The attack scenario articulated by Nagalim has a premise that the BTC price can be predicted, which I don’t accept.

He makes some valid points about asymmetries in liquidity between tier 4 sell side and tier 6 (buy side), but I believe that asymmetry is of minimal importance when selecting the threshold at which to intervene in the currency market.

Nagalim · October 27, 2015, 7:16pm

Let’s pretend we move the % up to 49%. Now, the signers are basically constantly selling and buying, much like T1-3. Except now the volatility risk is not decentralized, it is essentially taken directly out of Nu’s marketcap. The % gap (‘virtual spread’ as I call it) allows us to dampen the effects of volatility using park rates and decentralized liquidity. A wider spread allows us to sustain a wider volume of volatility before we engage multisig funds directly.

If I want to sell a lot of nbt it would be better for me to put it up as sell side, kick the percentage over the 40% barrier, and force signers to buy from me at the spread premium (or just under so I step in front of the other custodians). The threshold determines how much liquidity I need to activate the signers, in all scenarios.

Put up 100,000 buy side. Force signers to sell at $0.99.
Take down buys and put up 100,000 sell side. Force signers to buy at $1.01.
Profit at Nu’s expense.

If we go from 40% to 30% we make it so the threshold for that kind of manipulation is $40k instead of $20k (Assuming 200k total liquidity). If we factor in T5 and things like fixed cost and ‘shift’ in additional to normal supply and demand rules, doubling the threshold can give us a good bit more of a comfort zone than even that $20k. With a 30% threshold the amount of liquidity required to attack the network in such a way more than doubles over a 40% threshold.