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.