What Happens When the NuShares Price is Too Low to Be Used to Decrease the NuBits Supply?

Sentinelrv · July 19, 2015, 8:18pm

Here is a response to one of MasterOfDisaster’s posts…

So what would we do in the event that we cannot rely on printing and selling NuShares to burn NuBits and decrease the supply, for example because the NuShares price is too low? Is the only recourse to increase interest rates or jack up transaction fees? Is there anything else we can implement to help in a situation like this? Wouldn’t implementing credit introduce counterparty risk into the system?

Here is another quote by the same person…

[quote]"Well at least the persistent hyperinflation risk is gone, but there’s still balance sheet risk, and a new harmful dynamic has been introduced.

Central banks, before they lost their collective minds with QE, used to hold almost 50% of their assets in short term credit in case they needed to fight inflation. The rest they’d hold in longer maturities for income.

Now NBT’s fundamental problem is that its assets are more or less invested in the shares, and equity is the least stable of all, so if demand declines for both, price stability can no longer be maintained. There is also a conflict of interest problem that will pit shareholders against currencyholders when this situation arises. Finance is black swan, law of small numbers turned big. Bet on it.

If you’re going to continue on this general track which is ridiculous since we as cryptocurrency producers have the benefit of not having to use the bank model to issue our banknote/bank reserve equivalents then you need to be more aggressive at building a financial structure. As Keynes said, if you’re going to commit suicide, might as well have a doctor present.

If you’re going to implement the bank model then do it all the way. Not everything in cryptoland needs to be rebuilt in Frankenstein’s image. The reason why the financial structure is so large and integral to daily life is because it works. Officially become a bank in a bank haven, swap the shares into the currency, use the credit union model, and begin making responsible loans denominated in the currency mostly in the short term and somewhat longer term. Banks are always starved of short term funding, so their willingness to supply commercial paper would be high if NBT was price stable."[/quote]

Nagalim · July 19, 2015, 8:27pm

I mean, if we write checks we can’t cash, then yes we’re in trouble. This is so far from the case currently, it’s almost staggering.

The complete answer is that we would be forced to reduce the peg from $1 to something like $0.5.

masterOfDisaster · July 19, 2015, 8:45pm

How lucky Nu is that B&C Exchange will be created. I can imagine having funds at multisignature addresses
This will lead to a controversial discussion, because of the nature of that idea.
But to put all money that Nu receives for selling NBT in NSR buyback might not be the best idea in Nu’s early days (which will go on for some time).

For example BTC might be volatile as well (as NSR are), but the BTC market is much more liquid than the NSR market (until Nu has gotten some traction) and buys or sell in the height of several hundred thousand USD doesn’t move the market very much.
The BTC volatility might be the lesser (financial) risk compared to a huge NBT buyback by issued NSR.
Funds at multisignature addresses might - especially when Nu starts to get traction - be important.
The volume of NBT that need to be sold might rise faster than market liquidity of NSR rises.
Trying to incorporate the funds into Nu by buying NSR and burning them would lead to a dramatical rising of exchange rates. In case Nu needs to buy NBT back by issuing and selling NSR the exchange rate plummets.
Nu might lose a lot of money - the difference between the price that was paid when buying NSR and when selling them again.
Effectively the loss can be way bigger than the loss by BTC volatility.
Until NSR markets reach high liquidity I’d prefer keeping a (big) share of the earnings from NBT sells in BTC or something else (at B&C Exchange!) with continuous high liquidity and some “stability”.
Once the NSR market volume rises and stays at a sufficiently high level, the BTC can still be traded for NSR to burn them incorporating the value of the sold NBT into Nu, albeit delayed and freed from some risks.
Because, frankly said, if issued NSR can’t buy Nu enough BTC or whatever to buy NBT back in times of drastically decreased demand, Nu is about to fail.
I don’t see that coming, but nevertheless Nu should be prepared as good as possible!

Nagalim · July 19, 2015, 8:51pm

Your arguments here are based off liquidity on open markets. Instead, consider a concept like my seeded auctions. If we seed pseudo continuously, there is no discontinuous sell or buy event with a big spread. Instead, an illiquid buy side would result in a low price and vice versa. Liquidity is no longer a concept, price says it all.

masterOfDisaster · July 19, 2015, 8:59pm

Your seeded auctions would indeed be great.
But I can’t imagine them to be successful (in both directions) as long as the NSR market is as illiquid as it is now.
Don’t you think that is a reason that keeps people averted from participating in an auction?
At the moment a seeded auction would be great for people to buy large amounts of NSR which they can’t at the market without affecting the price big time.
But maybe I still lack understanding of the seeded auctions.
Feel free to educate me - and others! I see much potential in these auctions!
But even with seeded auctions having some funds at a BCE multisig address might be convenient as buffer, don’t you think?

Nagalim · July 19, 2015, 9:08pm

Illiquid markets really have nothing to do with auction participation. People don’t participate because they don:'t understand/trust them. They are not made for big volumes and you could not use the auction to trade large amounts without affecting the price; just the opposite, submitting funds to the auction affects the price directly. It is my opinion that Nu should be using the price of my auctions (in NSR/NBT) as the official price of Nushares (in NSR/USD).

Locking funds is a form of reserve, and comes with it counterparty risk. You’re totally right that that function can and should be used as a ‘buffer’, but only alongside other concepts, not as a 100% reserve.

Edit: I reacted too strongly to this and am finding myself backpedaling. We should discuss it more.

masterOfDisaster · July 19, 2015, 9:18pm

I never meant 100% reserve at BCE as the concept.
Too risky
I don’t know how, but BCE could fail, the commodity which is kept could fail, etc.
Too much counterparty risk.
But as long as we don’t have something better (and I consider the seeded auctions as much better!), I’m willing to choose a bad solution over a worse solution.
At the moment (in terms of market liquidity) it would be horrible for Nu to incorporate large amounts of money from NBT sells via NSR buys and burns.
Long-term I only see a small fraction of money kept at BCE. Just enough to postpone (or prevent!) parking rate interest to some degree.
As parking interest costs Nu money, taking a little counterparty risk might be worth it.

masterOfDisaster · July 19, 2015, 9:39pm

I think I hold off until I heard the opinions of others.
This could become one of the rather important discussions

Nagalim · July 19, 2015, 10:32pm

So if b&c fails these timelock funds are lost right? So why not lock them as BKC? That way, no volatility if B&C doesn’t fail, and if it does the funds are lost either way.

And this way, Nu would be a big bkc holder and BKS holders will once again see the value of the partnership with Nu

JordanLee · July 20, 2015, 3:45am

NuShares can be created and sold for NuBits so long as the price of NuShares is not zero. So, under what circumstances could we expect the NuShare price to become zero? There would have to be complete consensus that there would never again be demand for additional currency and NuShares would never receive a dividend in a new system such as B&C Exchange again. Over the last year, despite only very modest adoption of NuBits, the annualized dividend yield of NuShares has been a stunning 29.04%. Between BlockShare and Peercoin dividends, $409,811 has been issued as dividends over the 10 month life of NuShares. With the current NSR market cap of $1,695,396, that is 24.2% dividend, and an annual dividend yield of 29.04%. This is almost unheard of.

Let’s consider the factors that can effect the total liabilities of our network in the form of NuBits and other currency in our network:

change in the value or purchasing power of NuBits (such as due to US dollar inflation)
change in the total money stock of all currencies (principally outside our network)
NuBits burned as transaction fees
NuBits whose private key is lost
changes in the proportion of demand for currency in our network versus demand for all currency globally

The importance of factor 5 is well understood and factor 3 is reasonably well understood. Factors 1, 2 and 4 appear to be generally overlooked.

Let’s examine these factors in greater detail. Factor 3 is dependent on how shareholders set the soon to be variable transaction fee and the velocity of currency in the network. I suspect the transaction fee will be raised from its current hard coded value of 0.01. Let us suppose it averages 0.04 in the future. Currently, there are an average of 47 NuBit transactions per day with around 330,000 NuBits in circulation. 47 * 0.04 *365 = 686.2 NuBits per year. With this scenario 0.207% of NuBits are burned each year in transaction fees. Then there are NuBits whose private key has been lost. One estimate suggests up to 35% of Bitcoins have been lost in this way (http://www.coinbuzz.com/2015/03/31/23-bitcoins-mined-13-may-lost/). While that estimate is likely too high, and the actual quantity of lost Bitcoins or NuBits will never be known, it is quite clear lost NuBits will apply substantial downward pressure on the quantity of NuBits in circulation. Let’s conservatively assume 1% of NuBits are lost each year.

Now consider that the total stock of money is increasing over time well beyond the rate of inflation. While annual US dollar inflation has averaged 1.75% over the last five years (http://www.bls.gov/data/inflation_calculator.htm), the US dollar M2 money stock has increased an average of 5.8% per year (https://research.stlouisfed.org/fred2/series/M2). This means that when inflation is substracted, the monetary stock has risen an average of 4.05% per year. As productivity increases, people simply have more wealth and demand more money.

So, let us suppose the proportion of all currency in the world held as NuBits remains constant. Let us assume 1.75% inflation, a 4.05% increase in M2 money stock, 0.2% NuBits burned as transaction fees and 1% of all NuBit private keys lost each year. Under this scenario, new demand for NuBits will rise 7% per year while the proportion of all currency in the world held as NuBits remains constant. Said another way, given the assumptions and extension of historical trends just described, the proportion of all currency in the world held as NuBits could drop 7% per year without requiring any burning of NuBits via NuShare sale.

Now let’s consider operating expenses such as liquidity provision and development. In the coming months, we expect to spend around $10,000 per month on development and $10,000 per month on liquidity. That is 14% per year given a market cap of 1.7 million. If Nu is even modestly successful, I expect the percent spent on development to decline and the percent spent on liquidity to dramatically decline. If these combined expenses dropped below 7% annually, Nu would be sustainable without ever increasing the share of global currency held in our network, given the modest economic assumptions detailed above.

In summary, in order for NuShares to drop to zero, all market participants would need to conclude the proportion of global currency held within our network is in permanent decline and no more dividends of new equity such as BlockShares would ever be issued. Is this possible? Of course. It is even likely over the very long term. But it seems unlikely such a scenario will emerge in a short period of time. The longer we keep the NuBits peg and the longer network use expands, it becomes less and less likely that this will occur in a short period of time. Currently, with transaction volumes rising many hundreds of percents per year as detailed here (NuBit transaction volume up 249% in six months) and an annualized dividend yield of 29%, there is little danger of NuShares dropping to zero. And if NuShares don’t drop to zero, we have a mechanism that can maintain the NuBit peg. Conversely, if the value of NuShares do drop to zero (exempting a temporary flash crash), then the peg will certainly be lost.

Nagalim · July 20, 2015, 4:11am

Excellent analysis, lots of factors there I hadn’t considered. Also, we are not really spending $10,000/month on liquidity; in the last 30 days we created 3,795 NBT, 5,361 NBT in the 30 days before that, 10,762 NBT before that, 2,671 NBT before that. And what’s more, even if NSR somehow miraculously went to real zero, BKS holders could still conceivably bail us out using funds external to Nu. We’re absolutely golden in the short term, despite the waning NSR price.

tomjoad · July 20, 2015, 5:18am

That was a key point of Jordan’s message. In 2014, IBM had a 2.62% dividend yield, Coca-Cola had a 3.21% dividend yield, and General Electric had a 3.34% dividend yield. Nu is on pace for an almost 30% annualized dividend yield in a year that we spent months cleaning up from major exchange hackings. There are still at least a few of us quietly acquiring NSR as long as we can while the market doesn’t realize how Nu has performed.

This project has a market cap almost exactly twice that of NSR to put into perspective how divorced from reality crypto valuations can be.

Chronos · July 20, 2015, 5:35am

I respectfully disagree with this statement. Instead of complete consensus, this could happen even with a core group of investors that fully believe in the share value, but do not have the resources and/or risk appetite to buy up all new share issuance to preserve the peg.

For example, there could be 50 investors who believe in the future share potential, each with the ability to put forward $2000 USD each without endangering their financial wellbeing. This brings a total “bailout resource” of $100000, which may not be enough to save the peg (which, by the way, is interestingly different than saving the NuShare price from $0) in the case of a severe shock to the system.

Of course, this is a simplistic view, because if prices approach zero, funny things start happening. For example, a new share buyer could suddenly own more than half the network, solely via new issuance.

Anyway, I just thought I’d point this out. Carry on.

Nagalim · July 20, 2015, 5:51am

This is a super important point. The weight of ownership over new NBT distribution alone should cause repulsion from 0. In fact, this resource is what we are selling when we bailout NBT. If we continuously bailout NBT via burn gateways, we should see a continual reinvestment of alternative investors (those 50 investors may not be the core group) and the votes will change. In some way this can be seen as evolution, though if our particular ‘genetic’ branch fails to remain decentralized we die as a project. Conversely, as share buybacks eat their way through sellers, the chaff will fall from the wheat and only the holders that are beneficial for Nu should survive.

As new investors jump on the sinking ship, we will find a vote for decreasing the peg arises and is voted in. Now, our $100,000 buys us 200,000 NBT. With even $1 of bailout, a theoretical complete buyback of NBT at a value of $0 can occur. This would be a hard reset to the system, and anyone holding NSR after the dark ages can vote to reestablish the peg and begin again. As long as a diversity of minters are always found, security of the system should never be lost and the blockchain will remain intact.

Chronos · July 20, 2015, 2:35pm

Good point. If stakeholders are open to this kind of “bail-in” then the system can always be re-stabilized around a lower peg.

Raythma · July 20, 2015, 2:58pm

If Somehow Nu has provided a steady and sustainable Revenue for Nushares holders, we Wouldn’t have to worry about this NSR price, So we Can say that NuBits supply is tied to how much Profitable is NSR holding?!

In the contrary i am afraid that NSR Can’t both Sustain the Peg And Remain Decentralized for along time without Some business plan, Even a tiny steady Revenue Could Sustain the system for years, but we will always be at the Risk of Centralization And or Peg failure without any sort of profitability realtive to the Market capitalization Rather than the initial NSR initial price at sept 2014!

Nagalim · July 20, 2015, 3:22pm

NBT demand is profitability. All we need is use cases, we don’t need external revenue. Tx fees are permanent revenue and putting NBT into circulation allows us to generate profit. Liquidity provision and development are currently our only costs (aside from parking which is really really trivial right now). I just don’t think these costs will sink us, as they are both services that help us attain a higher amount of both circulation and Tx fees (by providing peg and tech support for use cases).

We are not floating on our initial NSR price. With a 30% dividend, we should be at $0.0014 or so if this were the case.

cryptog · July 20, 2015, 10:11pm

How do you compute that?

Nagalim · July 20, 2015, 10:11pm

$0.002 * (100%-30%)

crypto_coiner · July 21, 2015, 11:47am

i) what does it mean for NuShares to receive a dividend in a new system such as B&C Exchange?
Do you insinuate that Nu cannot/will not generate dividends by itself, in a self contained manner?

ii) BlockShare generation from NuShares cannot be considered a dividend from the classical and standard accounting practices since dividend means a “cut” of the profits generated from the business activity.