What should to be done with revenue except for paying dividends?

NuShares Dividends
#1

Continuing the discussion from [Passed] Proposal to create a strategic reserve of NuBits:

Introduction##

This brings focus on another topic NSR holders need to discuss: what to do with the proceeds of sold NBT?

Paying operational costs as well as development comes into mind. I want to focus on something different, on distributing the net revenue, because operational costs and development are not strictly tied to selling NBT. Both should be ongoing processes, independent from recently sold NBT.
Here I want to focus on distributing and investing the proceeds.

I can imagine 3 ways in which the proceeds could be used for:

  • dividend distribution
  • filling/increasing tier 4 buy side
  • NSR buybacks

TL;DR##

Not only the interaction between the tiers needs to be defined - feedback loops between the tiers need to be created as well.
To put it simple:
if more NBT are in tier 1-3 (“in the wild”), more value needs to be in tier 4 and 6 as well. Tier 5 has been left out, because this is a tier which would not be used in times NBT are being distributed; NSR holders wouldn’t increase parking rate interest the same time loads of NBT get sold, right?

Reasoning

I’m aware that the white paper deals with dividend distribution (https://nubits.com/about/white-paper#overview):

Neither does the whitepaper say that network revenues must be distributed as dividends (not even if you subtract the operating expenses before), nor would it be wise to do that.

I’d argue that in case new NBT enter the market, the tier 4 buy side should to increased (feedback from increased tier 1-3).
Further I’d argue that a part of the net revenue (operating expenses already subtracted) should be used for NSR buybacks (feedback from increased tier 1-3).

The reasoning is simple:
if all revenue would be distributed as dividends it could lead to a situation in which the rational choice for NSR holders would be to leave the boat, let the peg fail and Nu perish instead of defending it.

Scenario
the world gets crazy for NBT, the FSRT sells 4,000,000 NBT for BTC and distributes the value as PPC dividends. NSR holders are happy. One week later the world is annoyed by NBT (for whatever reason) and wants to sell a big part of the 4,000,000 NBT back to Nu.
Tier 4 buy side gets depleted, tier 6 reserve of NSR as well, NSR holders don’t care for defending the peg, because they have received dividends double the value of their NSR. And even if they care and let NSR grants pass, they have to create insane amounts of NSR and sell them. The NSR price will drop the more they (try to) sell. One reason is because of the immense sell pressure, another reason is the perception of Nu’s situation - who would buy NSR in such a situation?
It could be very well possible that (former) NSR holders dump their NSR and leave.

Admittedly this is an extreme scenario.
But it’s useful to see the benefit of considering an adjustment of tier 4 buy side and NSR buybacks.

I perceive Nu as being in the long run a stable crypto currency.
What can be done to improve Nu’s situation, to provide NSR holders with incentives to stay with Nu, defend the peg?

Regarding Tier 4
Tier 4 buy side carries a volatility as well as a default risk, because it holds BTC. Still the tier 4 buy side is what buffers falling demand for NBT in the first line.
The more NBT that are out, the bigger tier 4 buy side should be. A formula needs to be developed.

Regarding Tier 6
Using revenue to create NSR buybacks has an effect on the NSR price and hence on the value of Nu that should always be (far) above the value of the NBT that are in the wild.
Nu can hope for the NSR price to rise in case a lot of NBT get sold. This will happen, if people are aware that (at least a part of the) revenue will be used for dividend distribution.
One question will be important for that effect: what’s the point of time NSR need to be owned in order to get a dividend?
If the point of time (block height) is far enough in the future, people might want to buy NSR to get a dividend. This should make NSR very attractive.
The inherent risk is that this attractiveness has only a limited lifetime and they sell NSR right after they received the dividend.
But maybe they get interested in NSR and realize the future potential. The more NSR owners the better the distribution. I’d seriously consider that for the timing of the dividend distribution.

If Nu doesn’t want to rely on that mechanism, it can create NSR buy pressure by performing NSR buybacks. The buybacks increase the net value of Nu. This could be another mechanism to draw people’s attention to Nu.

Ideally Nu would try to buy back NSR before a dividend distribution gets announced - which would be great for marketing, but should increase the price.
With NSR buybacks being performed first the increased value of NSR should draw attention to Nu which possibly makes people aware of the dividend distribution - even better marketing than advertising dividend distribution!

Conclusion
I wrote this lengthy post, because it’s not only related to the FSRT, it’s important for the operation of Nu in general.
For example it’s important when Nu introduces new products and sells CH-NBT or EU-NBT.

The decision about what to do with proceeds from selling products is in the hands of NSR holders.
Depending on the outcome of that decision it will become clear, whether NSR holders want to be in the long run NSR holders or try to make advantage of a hit and run scenario.

2 Likes
#2

excellent analysis!
question: the age of NSR (how “old” they are in wallet) can play a role in distributing dividents?
then “hit and run” is out of the question, i guess :wink:

#3

instead of staying on the boat and possiblly receiving more dvidends? the reason isn’t that simple.

#4

Distribute dividends every month, 0.1% of the marketcap. This would be $24k of PPC/year at our 2mil marketcap. Get the money from creating NBT and keep the peg by creating NSR. This reasoning is cyclical, but it allows for both decentralization and shareholder input at each step, allowing for real shareholder feedback. Tier 5 is a cyclical loop unto itself, complete with feedback mechanisms.

Ignore all effects that timing will have. If we perform things regularly according to contract the market will adjust for us.

#5

The age plays a role.
Just as recently seen with the BKS distribution PPC distribution happens at a certain point of time. NSR holders need to own NSR at that point of time to receive dividends.
So the NSR don’t have to be in the wallet for some time to be eligible for dividends. It’s just that at the moment of dividend distribution it counts who owns the NSR, in whose wallet is the dividend related UTXO.

nud help distribute
distribute <cutoff timestamp> <amount> [<proceed>]
cutoff is date and time at which the share balances should be considered. Format is unix time.
amount is the the number of peercoins to distribute, in double-precision floating point number.
If proceed is not true the peercoins are not sent and the details of the distribution are returned.

Not the type of hit and run I was trying to outline:
Hold NSR -> receive a vast amount of PPC -> dump NSR

This requires the prospect of receiving additional dividends.
The scenario was dealing with trouble for Nu (after a lot more products were sold) and why NSR holders wouldn’t need to care as much as they’d care, if a part of the proceeds from selling products were used for NSR buybacks.
With NSR buybacks a significant part of NSR holders’ wealth is not in the received dividends, but in the Nu market cap - a reason to keep the market cap of Nu high.

#6

I think a continuous dividend distribution of e.g. 0.1% monthly is something the market and NSR holders would appreciate (assuming that it wouldn’t reduce the market cap of Nu by more than 1.2% per year).
But that doesn’t solve the problem receiving large amounts of money for selling NBT creates.

How does that relate to handling large proceeds from selling tens of thousands of NBT (or in some months or quarters maybe CH-NBT and EU-NBT)?

If you intend to distribute those proceeds in 0.1% (of market Nu cap) chunks it might take some time.
The only tier to keep the proceeds from selling products in control of Nu is tier 4. It would mean that BTC need to be kept on tier 4 buy side until they are distributed - posing both a default risk (in case Bitcoin fails) and a volatility risk.
I don’t feel comfortable with storing all proceeds from sold products in tier 4 buy side. A part of it should go there. I don’t know how big that part should be, but not 100%.
A part of the BTC could be exchanged to PPC over time as sooner or later PPC would be needed to be distributed.
But imagine $240,000 value were received as BTC from selling new products.
Even if that would double Nu’s market cap (because the market would go crazy for Nu), it did take 5 years to distribute the value as dividends.

I feel the question is not yet answered:
What should to be done with revenue except for paying dividends?

What about filling or increasing tier 4 buy side and if, to what level?
What about NSR buybacks?

#7

NSR buybacks is where we should distribute NBT primarily. We could easily be doing 2.5kNBT/auction with auctions every 5000 blocks ($262,800/year if we never have to do a share buyback ever). The seeded auction mechanism naturally controls the rate of NBT marketcap growth during the fastest periods of growth with direct shareholder feedback.

1 Like
#8

That means instead of selling NBT for BTC, they’d be sold for NSR and the received NSR would be burned.

Effectively that would mean:

  • dividend distribution: 0%
  • filling/increasing tier 4 buy side: 0%
  • NSR buybacks: 100%

As much as I’d like to see seeded auctions playing an important role, I think at least increasing tier 4 buy side should seriously be considered if big proceeds from selling products happen.
Paying dividends is not important to defend the peg; a sufficiently filled tier 4 buy side is!

Regarding increasing tier 4:
if all NBT were brought to market with NSR buybacks (e.g. via seeded auctions), it would mean that a part of the NSR would be exchanged to BTC to increase tier 4 buy side with them.
Not bad.

But how much of the proceeds to be put on tier 4 buy side?
Try to even out BTC volatility and adjust the buy side to a desired rate (related to the NBT that are in the wild)?
Use a percentage of the proceeds and put it on tier 4?
Raise it in steps - for each sold 16,000 NBT (I’m ignoring future products here) put $2,000 of value on tier 4?
Why 1/8: at the moment there are 625465 NBT out and a tier 4 size of $80,000 is assume to be sufficient.

#9

you do 1% dividend, tier 4 does smart stuff to keep from draining the cold storage and the shareholders make a motion to deal with refilling it. NSR buybacks are just the fastest way of doing it.
If we assume that the peg has broken upwards and we have 0 sellside tier 1,2,3 and we’ve burned all tier 4 sellside and the buyside is overflowing and tier 5 is at 0% with nothing parked, the rate of NBT creation would look like this:

  • dividend distribution: 0.1% of marketcap
  • Filling tier 4 buy side: 0 because we don’t need it
  • NSR buybacks: whatever we are confident the auctions can handle

This would boil down in my theoretical number set as:

  • dividend distribution: 10%
  • leaving tier 4 alone: 0%
  • NSR buybacks: 90%

Here’s the kicker: If we had set the park rate to be nonzero during more stressful times, we would never get to this situation because there would be more nbt on the market in the long term. Tier 5 is absolutely vital as a place to sink profits. Not to mention we’re paying for tier 1. My ideal:

  • dividend distribution: 10%
  • park rates: 5%
  • buybacks: 40%
  • tier 1: 45%

100% is the rate of marketcap increase, which I don’t think should be more than a few thousand a year at the current pace, even if the additional products take off.

#10

Sure, it would be good from a marketing perspective and therefore something to think about. However I don’t think it is good as a governance rule. Dividends should be closely related to the actual sales/profits -/- the costs (e.g. liquidity provisioning) and development of Nu client and other network supporting developments (e.g. NuDroid, NuBot, ALP, etc).

The best way to solve that are still NSR buybacks. Everything else has counterpart risk. The issue with the buyback might be that it will be expensive NSR will shoot up leaving less people to sell. This can only be solved by buying above marketprice. The issue with this is when NSR is sold, the marketcap will jump down and it will be another loss.

Distributing it as dividend will likely result in issues as the Shareholder already invested in e.g. that home improvement or new car and is not able to dish up the money when the network needs it. Timelocking funds in a basket of cryptocurrencies would probably be the only way to keep the cost low and the funds safe. B&C functionality might help out with that. Multi-sig is another similar more complex way to do this.

My conclusion is that neither dividends (1), buyback (2) or multi-sig/time locks are ideal by itself. It will require active fund management and smart selection of the 3 identified options available to the fund managers. Rules for this will be very complicated and different for a number of scenarios and I think can only be established based on experience by humans.

Nagalim has started with a relatively simple scenario. Each different starting point based on the values in each of the 6 tiers might require another mix of the 3 mentioned options. The only tool I know of how to sort that is some financial risk analyses like the Monte Carlo method. This requires decent computational resources and some clever application which takes all the variables (options, tier values, trends, charts etc.)

Another option is to have a strict rule set for each tier with defined interfaces which influences the behaviour of the other tiers in a kind off organic way. Maybe a bit of AI on top of it to create the necessary flexibility :wink:

…or trust a team of smart brains with a few basic rules as a starting point…

1 Like
#11

yes, we need an AI software ASAP :stuck_out_tongue:
but it is also a matter of trust anyway. why to trust AI over humans and vice versa?

#12

An AI won’t have a political agenda, emotional responses and other undesirable behaviour for this purpose unless you program them in. You would trust an AI only when you know the underlying code. Not that different from applications.

1 Like
#13

It depends. If dividends are not distributed directly after sales occurred, but are temporarily buffered in tier 4 buy side (which needs to exist and we don’t know how big it needs to be) dividends can be paid for a longer time frame. BTC can be converted to PPC over time reducing the effect on the PPC price. I’m not saying this makes things less complicated, but it can turn out to provide NSR holders with more PPC plus it creates an additional buffer in tier 4 close to the sales (in case NBT need to be bought back with tier 4 funds).

I’ve come to a similar conclusion :wink:
Wow, that Monte Carlo method is complex!

I’d like to add the benefits and drawbacks for Nu and the NSR holders of the three different methods to distribute revenue. Imagine the drawbacks and benefits being listed for each scheme being the only scheme to deal with revenue - I hope this makes clear why a clever combination might be the best way.
The benefits and drawbacks are subject to interpretation and I don’t think they are complete.
For a start:

dividend distribution

  • benefit for Nu: relatively easy and simple way
  • drawback for Nu: funds are external and out of control; can’t be used to keep the peg
  • benefit for NSR holders: receive PPC which can be sold without effect on NSR price
  • drawback for NSR holders: need to purchase NSR on the market if they want to invest dividends in Nu

filling/increasing tier 4 buy side

  • benefit for Nu: funds stay Nu internal; can be used for NBT buybacks; more funds available to buffer (temporary) decline of NBT demand
  • drawback for Nu: collateral with volatility and default risk
  • benefit for NSR holders: no direct one, but tier 6 (NSR grants) will be required later to deal with declining NBT demand
  • drawback for NSR holders: no money for them, although the company made revenue

NSR buybacks

  • benefit for Nu: funds stay Nu internal; can be used for NBT buybacks; will likely be burned and created on demand: no management for funds required
  • drawback for Nu: investing all revenue in NSR buybacks pumps NSR price (especially as long as the market depth is low); in case NSR need to be sold close to the buyback, there’s a big loss of value
  • benefit for NSR holders: price of NSR rises
  • drawback for NSR holders: need to sell NSR to capitalize the increased NSR value

First it needs to be defined/calculated how much of the revenue to put where. I think a combination of all three schemes is superior to using only one of them. Some drawbacks of one scheme get eliminated or reduced by the benefits of another one.

Increasing tier 4 buy side to have a bigger buffer for declining NBT demand seems to be good.
This is only temporary; the increased tier 4 buy side sould over time be distributed as dividends or used for NSR buybacks to reduce tier 4 buy side over time (e.g. back to $80,000 value).

100% revenue enter tier 4 buy side. That’s where they end up anyway if NBT don’t get sold in seeded auctions.
They are buffered there and get consumed over time for x percent dividends and for 100-x percent NSR buybacks.
The collateral risk is increased for some time to reduce the impact of NSR buybacks on market price and to reduce the impact of PPC dividend distribution on market price.

I wouldn’t want to see Nu being faced with PPC pump&dump or NSR pump&dump accusations.
If dividends shall be paid and NSR buybacks shall happen, this will have an effect on the market price. Doing it over time reduces that effect and that’s all Nu can do.
Even seeded auctions can’t eliminate that effect.
Buying and selling NSR on the market is expected to happen around seeded auctions.

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