Where Do Dividends & Network Revenue Come From?

[Sentinelrv]

The dividend system is a big part of NuBits, but there doesn’t seem to be too much information in the whitepaper about how it works and what its purpose is. I read in there that custodians will sell their NuBits for Peercoins and then distribute them to NuShareholders. I don’t completely understand this.

It says that the network will produce revenue and that shareholders will receive this revenue in the form of Peercoin dividends. How exactly is this system producing revenue? Where does the revenue come from and why is it going to shareholders? Also, is it going to all shareholders or only those who are minting?

Answering these questions will hopefully allow me to understand how big of a role Peercoin will play in NuBits.

[Chronos]

I read that custodians will sell their NuBits for Peercoins and then distribute them to NuShareholders.

Correct.

How exactly is this system producing revenue?

Shareholders elect dividend custodians and create new NBT for them, which are created by the network after a vote. The custodians sell the NBT on the open market. With the proceeds, they distribute dividends to shareholders. If demand for NBT rises, this can create a lot of dividends. If demand falls, custodians may end up selling the NBT very slowly, or not at all, in order to help maintain the peg.

Why is it going to shareholders?

Shareholders receive dividends as a reward for buying NuShares. Think of it like buying stock in a company that pays dividends.

Also, is it going to all shareholders or only those who are minting?

It goes to all shareholders, equally distributed. Shares that have not yet been sold from the premine will also receive dividends, and Jordan has pledged that those proceeds will be used to fund core development.

Answering these questions will hopefully allow me to understand how big of a role Peercoin will play in NuBits.

NuBits will create a demand for peercoins, in order to pay dividends. If all shareholders immediately sell the peercoins they receive, the net effect will be zero. However, if shareholders keep some dividends, the extra demand could increase the price of peercoins.

I hope this helps!

[Yurizhai]

Chronos beat me to it, but let me give you an example as someone who is also new to the system.

The shareholders elect a custodian and create 100,000 NBT for them ( in what is called an ‘expansion block’).
Demand is healthy and the custodian is able to sell them to people who want to use NBT. The custodian turns around and uses the profits to buy Peercoins, then pays them out to the shareholders. As the whitepaper mentions, a custodian is likely to be a shareholder himself, so his intentions align with the other shareholders. The revenue goes to the shareholders as that’s kind of the point of the system. There is revenue to be made in the network, and you are buying shares in that potential revenue.

[Ben]

@Sentinelrv - the best way to show you how it works is to direct you to an actual custodial grant proposal. @KTm introduced this a bit over a week ago, and the network has been voting on it.

Proposal to Operate a NuBits Grant to Provide Early Stage Dual-Side Liquidity and Shareholder Dividends

Currently it has reached consensus amongst voting shareholders (5044 / 10,000 blocks) and nearly has reached the share days destroyed required (49.439% vs. 50.001% required).

[Sentinelrv]

[quote=“Yurizhai, post:3, topic:182, full:true”]
The custodian turns around and uses the profits to buy Peercoins, then pays them out to the shareholders. As the whitepaper mentions, a custodian is likely to be a shareholder himself, so his intentions align with the other shareholders.[/quote]

Ok, this all makes sense. Let me ask this question though. What stops a custodian from just keeping the profits for himself? Is there some mechanism to prevent this or is there an incentive for the custodian to distribute the dividends as promised?

[Yurizhai]

Custodians will hopefully be shareholders themselves. Even then, it’s really going to be up to the shareholders to pick custodians carefully. The custodian could always sell the NBT, sell their shares, then run off with the profit.

[mhps]

The custodians sell the NBT on the open market. With the proceeds, they distribute dividends to shareholders.

I think the proceeds obtained from selling the NBT is not profit, but liablities. NBT are IOUs given to the buyer, promising that “I will pay back $1 to whoever has 1 of this notes called NBT.” If the proceeds is spent (paying for development or to the investors), it is removed from the system. Then there are less USDs in the system than NBTs in the world, The system will be running on fractional reserve. What do I think wrong?

[Ben]

The system will be running on fractional reserve.

I wouldn’t use that terminology, but I think your point still stands. Nu isn’t a bank, and it’s doubtful that any currency (other than one that is 1:1 supported) could survive a true “run on the bank”.

If everyone tried to call in their markers at one time, there would be problems.

[Sentinelrv]

I’m thinking about what would make somebody want to take on the responsibility of being a custodian in the first place. If they sell the NuBits on the market and send the proceeds back to shareholders, they’d be making the same amount in dividends as everyone else. Where is the incentive to take on this position?

I’m thinking rather than steal the proceeds and run, it would be more profitable to win the shareholder’s trust and get voted in as a custodian, build a good reputation and then start charging a reasonable fee to continue their service to the network. The shareholders would pay the fee because this person providing the service can be trusted to carry out their responsibility. They could build a business around it and provide live auditing so shareholders can see if they’re doing anything funny with the money behind the scenes.

Would something like this make sense in this system?

[Ben]

It absolutely does, and is already in something that the ground work is being laid out for.

[mhps]

I wouldn’t use that terminology

Sorry if that term didn’t reflect the full scope of Nu. I was thinking Nu as the Federal Reserve of the nubits economy.

Let’s take a look at the countries that peg their currencies to the USD. If you want to spend your USD in these countries, you have to get the local currency from the local government (or its agency banks ) and hand the USD to the government. The government will take the USD and keep it out of the local economy, usually by buying US T bond, bulding up the countriy’s forex reserve. However the country could also use the USD to invest out side the country. The local government (or its agency) then equivalently prints more local currency to give to you for your USD. When you leave the country you can exchange your unspent local currency to USD. Then the government equivalently takes some USD from its forex reserve to give to you, and taking your local currency out of the local economy. NBT is like one of the pegged currency, except it is not locally confined – it lives on the Internet yet you have full control of your money; it’s a revolution. The proceeds from sellling NBT is part of a “forex reserve” and “sovereign fund”.

Since nubits is such a great thing people would want to use, could the profit come from a fee charged against exchanging NBT/USD from the Nu “Fed”? Could the NBT blockchain transaction fee be used for it?

Edit to add:

it’s doubtful that any currency (other than one that is 1:1 supported) could survive a true “run on the bank”

It could if the currency issuer makes sure that every $1 worth unit going out to circulation has $1 coming into the reserve. Is that what you meant by “1:1 supported”? Anyway to achieve that, dividends and parking interest paid out have to be paid exclusively by revenue generated from somewhere. Practically, I think Nu’s best way forward is to be a limited liability entity, and decidedly accept and mange the risk.

[towel]

I think the proceeds obtained from selling the NBT is not profit, but liablities. NBT are IOUs given to the buyer, promising that “I will pay back $1 to whoever has 1 of this notes called NBT.” If the proceeds is spent (paying for development or to the investors), it is removed from the system. Then there are less USDs in the system than NBTs in the world, The system will be running on fractional reserve. What do I think wrong?

I came to the same conclusion and wrote about it here: Question about selling pressure aka the buy wall I suggested a Proof-of-Collateral, thinking at if there was just enough collateral to make the system solvent and protect against whipsaws, then people would feel more confident and hence not put the system under stress because of fear of the system not being solvent. Chronos comment on this, was that it’s not a long term solution. Jordans comment on the whole thing, is that something doesn’t have to work perfectly for ever, to be useful and add value to an economy for a great while. I agree with both of them.

I suggest that when the cracks starts to appear, a first sign will be super high volume of NBT being traded and sharderholder market price plummeting. Those left holding the shareholder bag, will have to decide if they think it’s worth bailing out the system by injecting new capital. They could very well think that, it could be worth it and then they would buy up floating NBT’s and burn them or park them for ever. If the profit they made earlier is big enough to support this action, they could do it. If the cost outweighs the profit, they might not I think.

If shares are being traded on open exchanges, these profits that could be used as collateral may very well have been squandered by previous shareholders. New shareholders would be holding the bag and when price goes to zero of NBT, they along with current NBT holders will be paying the price for the peg not holding.

I would very much like to be proven wrong on this.

EDIT: I also think that it could be very profitable to be a shareholder during the expansionary phase. Since the price will be super stable and since its decentralized, I very much expect to see many exchanges adopting NBT. I also think NBT could be the backbone currency of decentralized exchanges, which would now offer basically a USD derivative as stable as USD. I believe arbitrage bots will ensure that 1 NBT will be worth 1 USD across the exchange network. During the phase lot and lots of NBTs will be created and create a stream of peercoins into the pockets of shareholders.

[Sentinelrv]

Ok, I have one more question relating to this. I want to know if there are other ways shareholders can make dividends besides just having a custodian sell NuBits.

Let’s use Peerchemist and his Peerbox project as an example. Peerchemist decides he wants to make an extension to his project, which he’ll call NuBox. Peerchemist needs funding though to help speed things up. He submits a proposal to the community that lays out his plans, developing his OS for Nu, having a website made, having a sleek outer casing designed for NuBox, manufacturing a whole bunch and then selling them to people. His proposal lays out how many NuBits he’ll need to carry out this project to completion. He also agrees that if his product produces a profit, that a percentage of the money from the sales will go back to the shareholders which made the project funding possible in the first place. So shareholders could distribute NuBits to projects that will help the entire ecosystem These projects may also bring shareholders a return in the form of Peercoin dividends, a result of the success of these projects.

Are scenarios like above possible as well?

[towel]

Are scenarios like above possible as well?

I’m not the right person to answer, but I’ll say “yes” anyway.

[mhps]

I came to the same conclusion and wrote about it here: Question about selling pressure aka the buy wall I suggested a Proof-of-Collateral

I am very surprised that I missed all but the first two posts of the thread. Thank you towel. We are on the save wavelength. About collateral, I think to backup NBTUSD it has to be USD denominated.

[mhps]

Are scenarios like above possible as well?

I think so. Once nubits works there will be many real-world investment opportunities accesible to the shareholders who basically have limited ability to print or loan USD. However I hope the founding shareholders could first elect to use the investment profit to prop up the reserve and totally remove the risk of bank run.

[towel]

About collateral, I think to backup NBTUSD it has to be USD denominated.

I agree totally. The major reason I guess a USD collateral thing would have to be in treasuries (to keep up with inflation), probably in a laddered portfolio so that to diversify risk through out the yield curve. I guess that’s kind of make the backing a centralized operation which doesn’t really play well with the rest of the system I guess. I suggested peercoins instead because it’s already in the design and the PPCUSD could be propped up by the steady stream of peercoins. Definitely a lot of downside risk and right now a bad backing with the current down trend in PPCUSD.

[lovely89]

Not sure if I missed it but I understand that a large part of economics is psychological. Because of this, if people think nubits is insolvent due to lack of collateral, there will most definitely be a bank run.

My question is, will there be collateral and will there be a transparent auditing of it? Also, like the federal reserve, if that collateral loses value, how will this affect the demand of nubits (I believe the federal reserve is encountering this issue but has not addressed provided a satisfying solution)?

If there is a bank run or lack of demand, will interest rates be enough incentive for demand to pick up? What if it doesn’t and more and more nubits are injected into the economy (through interest) creating more inflation and decreasing demand further. I think the system needs to be able to buy back the coins in low demand.

Another issue is the custodians. I would be much more comfortable if these were decentralised autonomous entities that require 0 trust. Could this happen?

I also have an issue with distributing the dividends. If lets say 10 people own all of the nushares and they buy 100 peercoin worth of nubits each, will the dividends paid then be 1000 peercoin? If so, they will receive 100 back each! I don’t need to comment on why this is bad but i believe this is also the cause of my previous concerns.

Sorry if this has been answered. I’m really excited about nubits and will love to be able to answer these questions.

[mhps]

Another issue is the custodians. I would be much more comfortable if these were decentralised autonomous entities that require 0 trust. Could this happen?

Custodians are people. What you want is a custodian getting a proposal approved to make decentralised autonomous entities that require 0 trust happen.

About dividends distribution, it might be helpful is you read Jordan’s post on undistributed NuShares in this forum board.

[irritant]

also have a question about Dividends, not where they come from, but where do they go to? How can I transfer my dividend PPC (only see option for sending NBT or NSR, sorry if this is a stupid question)?