[Withdrawn] Motion to create a new Tier 6 (Restricted Network Access) of liquidity

[tomjoad]

If we stuff BTC proceeds fom NBT sale into NSR buybacks, if the T4 reserves are above a threshold, the rational choice is to sell NSR for removing NBT from market, it the T4 are below a certain threshold.The proposed 9% leave a buffer to the 15%, which allows an early and efficient NSR sale.

The demand collapses I’ve mentioned are far in excess of a gradual drop from 10% buy-liquidity to 9%. It could take the network from 50% to 0% in a matter of days. RNA is another protective tool for our network.

Don’t make Nu just another central bank that puts more risk on the customer’s shoulders than on the own shoulders…that even risks total failure to avoid (temporary) cutbacks of NSR value and scarcity.

NuBits customers have zero risk right now. NuShareholders have indicated through motion that they will sell new NSR until equilibrium is reached, even if NSR are diluted 10,000% in the process. This is almost certainly hurting our NSR adoption, because there is no perceived long-term scarcity. One government announcement could destroy all NSR value. I have slowed my purchases of NSR on the open market since NSR sales were enabled, and I think other shareholders have too.

The hybrid model I proposed to Cybnate and Cryptog above is a responsible shared approach to risk. RNA is inconvenient for NuBits users but ultimately takes zero value from them if they wait until the crisis passes. NSR sales in limited amounts are inconvenient for NuShareholders but necessary. That is the responsible model we should pursue in my opinion.

For those interested in the economic theory, I am advocating a macroprudential view to our network’s health as opposed to a microprudential. .

The term macroprudential regulation characterizes the approach to financial regulation aimed to mitigate the risk of the financial system as a whole (or “systemic risk”). In the aftermath of the late-2000s financial crisis, there is a growing consensus among policymakers and economic researchers about the need to re-orient the regulatory framework towards a macroprudential perspective.

[tomjoad]

I’d like to really drive my point home with more economics. Back in November 2014 we had @Benjamin educate us on the “Impossible Trinity”.

Intro to Economics Behind Nubits System

The impossible trinity says the following. You can only ever achieve 2 out of the following three goals:

1. maintain a peg
2. maintain some control over the interest rate
3. maintain free markets
   If you promise to do all three, then you will inevitably have to break your promise. It’s the economics equivalent of selling a perpetual motion machine.

From the Wikipedia article on the Impossible Trinity:

All three of the policy objectives mentioned above cannot be pursued simultaneously. A central bank has to forgo one of the three objectives. Therefore, a central bank has three policy combination options:

Option (a): A stable exchange rate and free capital flows (but not an independent monetary policy because setting a domestic interest rate that is different from the world interest rate would undermine a stable exchange rate due to appreciation or depreciation pressure on the domestic currency).
Option (b): An independent monetary policy and free capital flows (but not a stable exchange rate).
Option ©: A stable exchange rate and independent monetary policy (but no free capital flows, which would require the use of capital controls).

Currently, Eurozone members have chosen the first option (a) while most other countries have opted for the second one (b). By contrast, Harvard economist Dani Rodrik advocates the use of the third option © in his book The Globalization Paradox, emphasising that world GDP grew fastest during the Bretton Woods era when capital controls were accepted in mainstream economics. Rodrik also argues that the expansion of financial globalization and the free movement of capital flows are the reason why economic crises have become more frequent in both developing and advanced economies alike.

Right now we’re trying to do all three as a network which is impossible in the long-run to sustain. My approach is very similar to Option ©, which is advocated by the Harvard economist.

[woodstockmerkle]

Though off-topic from the motion at hand, I’d like to re-kindle the idea of a protocol level method to buy NBT for time-locked NSR.

TL;DR: we offer to sell NSR that are discounted to the open market (say, 10%), but time-lock those just-sold NSR using a method similar to the NBT interest rate model.

With this mechanism, if the investment proposition is good, investors would be motivated to buy NBT in the open market and “bring them home” to the network. The Nu Shareholders would have full control of the exchange since this happens in the blockchain. i.e.: this would eliminate the need for Tier-N pools, custodians, exchange defaults, etc.

Since this is a “buying” action and not a “selling” action, this may help retain liquidity in off-blockchain NSR exchange pairs, instead of inducing (more) panic selling because giant NSR sell walls popped up or a custodian had to sell in to the bids (like a hot knife thru butter).

This could also be virtuous in adding buy-side NBT liquidity and be a force to drive the peg up.

This moves the illiquidness (and risk) to NSR and to investors, as is the intent with the coupled NBT (stable) / NSR (risk) model.

And yes the locked-up NSR come to market (eventually). Nothing different than an IPO with locked-up investors.

All of this works if the network imbalance (call it “debt”) is temporary (a liquidity issue). If the network goes insolvent, there is no hope. But, presumably the network has a revenue stream and there would be a way to “pay off the debt” and eventually buy back those shares by way of the revenue stream the network receives.

[cryptog]

how would you feel about an updated motion text that specifies simultaneous activation of the two tiers? So 25,000,000 NSR (or whatever amount FLOT has at the time of the emergency) is immediately put up for sale, while RNA is activated alongside it. Then, further NSR sales can take place to minimize the time RNA is activated

I think simultaneous activation should be seriously considered.

NuShareholders have indicated through motion that they will sell new NSR until equilibrium is reached, even if NSR are diluted 10,000% in the process.

Which motion exactly?[quote=“tomjoad, post:62, topic:3160”]
This is almost certainly hurting our NSR adoption, because there is no perceived long-term scarcity
[/quote]
I think there is a problem of perceived value of NSR right now because it has not increased significantly since inception. Infinite possible dilution is certainly one reason for that.

[mhps]

emphasising that world GDP grew fastest during the Bretton Woods era when capital controls were accepted in mainstream economics

Capital control means to control capital flow into or out of an economy. RNA proposes to hinder the entire economy including the internal one. It’s like when saving a bleeding car accident victim, in order to stop bleeding of an open wound, the rescuer tries to stop the victim’s heart from pumping blood.

Even with RNA the on-exchange nubits and nushares are traded with no control. Nu can do nothing on the price.

RNA is inconvenient for NuBits users but ultimately takes zero value from them if they wait until the crisis passes.

If Bob has to pay bill due today with nubits and there is a 30% fee, either he pays 30% more or defauts.

if NSR are diluted 10,000% in the process

It’s something we are not capable to deal with now but I am sure we will know when it shows evidents. And the fear of 10,000% dilution will keep us honest and vigilant.

[tomjoad]

This motion has been withdrawn.

[jooize]

This motion has been withdrawn.

Why? Do you intend to post a modified version?

[tomjoad]

Why? Do you intend to post a modified version?

This motion has received under 10% of the vote in the previous 100 blocks. Without data feed provider support from @Cybnate or @cryptog, this has no chance of passing.

I need to give it some thought on how to re-frame this problem. I’ve clearly explained - using proven economic theory, and not ideological stances - why this sort of mechanism is needed for our network if we want to ensure long-term sustainability. However, it seems there isn’t an appetite for discussion of this idea at this time. Shareholder responses have mainly focused on issues I’ve already explained in the OP, outright dismissals of the idea on ideological grounds, or confusion on how this specific macroeconomic policy tool is any different from what we already use.

I fear shareholders are confusing proven economic theory (for example, capital controls as a solution to the Impossible Trinity problem, or as part of the IMF toolkit) with distrust of governments who have used those economic theories to protect themselves after their corruption and over-spending.

I suspect shareholder attention is on other issues right now, so I will hold off on an immediate re-posting of an updated motion. My last remarks are important though for future debates; they are problems our network has not solved, no matter how much we want to pretend ignoring them will help.

NuBits customers have zero risk right now. NuShareholders have indicated through motion that they will sell new NSR until equilibrium is reached, even if NSR are diluted 10,000% in the process. This is almost certainly hurting our NSR adoption, because there is no perceived long-term scarcity. One government announcement could destroy all NSR value. I have slowed my purchases of NSR on the open market since NSR sales were enabled, and I think other shareholders have too.

The hybrid model I proposed to Cybnate and Cryptog above is a responsible shared approach to risk. RNA is inconvenient for NuBits users but ultimately takes zero value from them if they wait until the crisis passes. NSR sales in limited amounts are inconvenient for NuShareholders but necessary. That is the responsible model we should pursue in my opinion.

[masterOfDisaster]

This is just my perception, but I think RNA would find more support, if NSR sale to support the buy side would be an instrument that doesn’t only start to be used if things are already going pear-shaped, but way before that.
I doubt that people completely refuse the RNA concept. It might be more a matter of how and when it’s available.
I guess the RNA approach will have an easier time once we agreed on starting to sell NSR as soon as the T4 reserves drop below, say 10% of NBT in circulation.
Just my 0.02 NBT…

[Sentinelrv]

Capital control means to control capital flow into or out of an economy. RNA proposes to hinder the entire economy including the internal one. It’s like when saving a bleeding car accident victim, in order to stop bleeding of an open wound, the rescuer tries to stop the victim’s heart from pumping blood.

@tomjoad, what do you think of what @mhps said here about the difference between real world capital controls (in and out of an economy) and what you’re suggesting here (halting the entire economy for a period of time)? Are you taking into consideration this difference and does it change anything in your opinion? The proven economic theory you’re talking about is a little different from what we’re talking about here isn’t it?

Even with RNA the on-exchange nubits and nushares are traded with no control. Nu can do nothing on the price.

This is true, but I think it at least prevents even more NuBits from being sent to exchanges, so it’s achieves partial control of the selling, rather than complete control.

[Cybnate]

This is just my perception, but I think RNA would find more support, if NSR sale to support the buy side would be an instrument that doesn’t only start to be used if things are already going pear-shaped, but way before that.I doubt that people completely refuse the RNA concept. It might be more a matter of how and when it’s available.

This ^

RNA should basically be the last resort. It is the panic button. Similar but slightly different is the example with BTER. There are now charging 1% exit fee without notice to their users. It is interesting to see how many customers they would keep and what is the next step. 2% fee? If anyone had shares in BTER they would now plunge as customers walk away to a competitive exchange.

[Sentinelrv]

I would support RNA as well, but I agree with MoD and Cybnate. Don’t think the low voting percentage is because people reject RNA itself. I don’t think that’s true at all.

[tomjoad]

@tomjoad, what do you think of what @mhps said here about the difference between real world capital controls (in and out of an economy) and what you’re suggesting here (halting the entire economy for a period of time)?

Nowhere have I said that this motion is about halting the economy at a full stop. It is absolutely about exactly what mhps said, which is reducing the USD capital flows out of the Nu economy. We want to prioritize servicing those users who are willing to reduce our circulating supply of NBT when needed, through very high transaction fees. You’ll recall:

Variable transaction fees – and especially volume-dependent transaction fees - provide shareholders with one final course of action through Tier 6 (Restricted Network Access). After the major world government declared US-NBT illegal, shareholders realize that an extreme crisis is taking place. They immediately begin to vote for an emergency transaction fee proportionality constant that will significantly raise transaction fees at all volume levels. Within perhaps 1000 blocks, the transaction fee for a 1500 NBT transaction has increased from the standard 0.25% to a staggering 50%. Transferring 1500 NBT through the network will now cost (and destroy) 750 NBT. Over the following weeks, as NBT are destroyed by those users who value access to the network most, shareholders gradually reduce the proportionality constant until transaction fees are back to historical network norms.

And:

This example demonstrates just how powerful volume-dependent transaction fees could be in maintaining NBT asset pegs. During times of emergency, the network can differentiate among its users to prioritize those who are willing to pay the most to reduce the supply of NBT for us. Over time, shareholders would slowly vote the proportionality constant back to normal rates as the circulating supply of NBT reduces to match the decreased US-NBT demand. This is similar to parametric order books, a mechanism that penalizes users who quickly sell large amounts of NBT.

In theory, this new Tier 6 (Restricted Network Access) mechanism will allow US-NBT to remain $1.00 US forever in the very long-term. However, during an extreme crisis only those users who are willing to pay a significant transaction fee to move their $1.00 US-NBT through the network will be using Nu’s fast and efficient blockchain. Nu can guarantee US-NBT users that a US-NBT will be worth $1.00 US forever, but with the caveat a user may have to wait an uncertain length of time to access its full value if a serious emergency is occurring.

When Tier 6 (Restricted Network Access) is in effect, Tier 7 (NSR sales) can be coordinated. As funds are raised, the transaction fees can be gradually lowered.

You should think of the Nu network as having USD in our system as internal capital. As long as US-NBT demand matches US-NBT supply, we’re all happy, and the peg is maintained at $1.00. The danger of our system is if USD begins leaving the system through users selling their US-NBT for USD. If we only have 500,000 USD worth of demand, but 1,000,000 NBT in circulation, we have a big problem on our hands.

This is exactly what capital controls are intended to do; to slow the loss of capital from a monetary system. If we forecast that a negative event will decrease demand from 1,000,000 USD to 500,000 USD, we can place controls at the onset of an event that restrict the flight of USD capital from the system. US-NBT users will know that they may have to wait a few days or weeks while transaction fees reduce from 50% to 40% to 30%, etc, but that eventually equilibrium will be regained.

@mhps raised a good example here:

If Bob has to pay bill due today with nubits and there is a 30% fee, either he pays 30% more or defauts.

This is no different than if Bob made a deal with a loan collector to pay back 5000 Euros worth of cash, and then discovered that he was restricted to 60 Euros in withdrawals per day in Greece during the 2015 capital controls. Bob is in trouble, which should be expected in a financial crisis. However, in Greece the capital controls were slowly lifted, and the same would be expected in Nu as the crisis passes.

I realize thinking about unpleasant events is not fun. I fully support a dual RNA-NSR sale activation and will work on new wording for a motion that reflects this.

This is just my perception, but I think RNA would find more support, if NSR sale to support the buy side would be an instrument that doesn’t only start to be used if things are already going pear-shaped, but way before that.

Tier 6 is the last line of defense in our liquidity operations model; it is not there to be put into motion well in advance of an emergency. Your line of thinking is correct I think, but it is an issue of Tier 4 percentage reserves, not Tier 6. If we’re worried about the protection, let’s increase our USD reserves in Tier 4 from 15% to 50%. It is far more effective than selling NSR when it is anywhere near being devalued.

[Sentinelrv]

If we’re worried about the protection, let’s increase our USD reserves in Tier 4 from 15% to 50%. It is far more effective than selling NSR when it is anywhere near being devalued.

That, and I think if tier 4 reserves go lower still, the next step would be to raise tier 5 parking rates before we resort to printing and selling NuShares. Parking rates may only need to be raised until tier 4 reserves return to normal levels, which means we would have never had to sell a single NuShare. If however parking rates are sustained for a period of time, then it may be time to look into tier 6 and 7.

I honestly think we need to determine a lower tier 4 reserve threshold where shareholders should activate tier 5 parking rates.

[Cybnate]

If we’re worried about the protection, let’s increase our USD reserves in Tier 4 from 15% to 50%.

Holding USD reserves, that is potentially expensive due to the risk of confiscation, I suppose you refer to the equivalent in USD in crypto-currencies.

Maybe we need to define better what NSR is at risk. To me that are the NSR FLOT is holding (25m) as a reserve. As others have mentioned you can argue whether this is tier 4 or tier 6. Suggest to make it all tier 4 in your proposal.

Next thing is that we are looking for a trigger to activate tier 6. With selling all NSR we are already having parking rates for more than 30 days. What timeframe and under what rules do we consider the NSR selling as complete? When they have all been sold to any price? In a day, a week? Does it matter? A better indicator is probably whether the buy side is still under a % threshold.

A scenario
Given we have already high parking rates for 30 days and have sold all the T4 reserves, the current 15% and the 25m NSR (current T6) are on the exchange for sale decreasing say daily in value with 10% to meet the market. When we can’t keep up meeting the sell demand of the NBT and say the buy side is still sustained under a certain threshold (say 20%), then we would activate RNA.

In this scenario the NSR are still for sale while the RNA gears up with ever higher transactions costs. This would suit your perspective, wouldn’t it?

Other issues
Thinking of these scenarios the following occurred to me:
I think it is clear that in the above scenario the peg is already lost when T4 is being sold on many exchanges to some extent. The selling of the NBT on exchanges are not subject to transaction costs and speculators would jump in to determine a marketprice based on partly potential Nu reserves left to buyback the coins and emotional senses (not likely to be rational) for the NBT still floating around on these exchanges.

To reduce the risk of this situation from occurring in the first place it would make sense to increase the T4 reserves from 15% to say 50%. I would support that as the above scenario is not attractive as a Shareholder. I also know this comes at a cost as always when you are trying to cover risks. It is a difficult balancing act for Shareholders between costs and risk taken.

Also just like to say that the measures to prevent a risk from occurring are different than the measures when a risk is eventuating and actions are urgently needed to protect the peg and NBT holders. They should be clearly separated out and weighed against each other in future proposals.

[mhps]

I agree control capital into and out of the system is a useful tool.

NuBot actually already does it by increasing spread when volatility is high, to discourage hedging which is at the expense of Nu. How about we go a step further in this direction, and drastically increase spread or even pull liquidity out of peg when sutained extreme selling side pressure happens (BTC price collapsed) or buying side pressure happens (BTC price exploded) ? Nu could do this as long as the pressure doesn’t let up, and resume after chaos is over.

This taxes those who sell/buy (traders), instead of those who pay/receive (end users and merchants).

[Cybnate]

This taxes those who sell/buy (traders)

A kind of RNA but mainly for traders, I like this even better as this is a far more likely scenario than end users and merchants suddenly returning their NBT. The professional traders would be first selling (or buying) anyway.

[masterOfDisaster]

Tier 6 is the last line of defense in our liquidity operations model; it is not there to be put into motion well in advance of an emergency.

As you are aware I’m not shying away from questioning the current schemes if I think there’s room for improvement.
Using NSR sale to support the buy side is such a thing.

The FLOT is in possession of 25 million NSR. If there’s need to support the buy side by selling NSR you can be sure that I’m going to try to convince FLOT members to do exactly that.
The FLOT is much more agile than an NSR grant, which can be passed by NSR holders. But refilling the FLOT T4 NSR funds would be the next task I’d start once the FLOT would agree to sell NSR way before the situation gets so dire that the value of NSR would likely be much lower and even more NSR need to be sold.

It’s one thing to claim, that NBT are ultimately backed by NSR and wait until the last possible point of time to do exactly that.
Maybe we should adjust our thinking from "NBT are ultimately backed by NSR to “NBT are backed by NSR”.
With NSR being used to support the peg way before the T4 reserves have run dry, a measure like RNA looks much less bad and desperate.

I agree that RNA can be useful. But we need to make sure to do all in our power to prevent it from being used.
I consider selling NSR rather early than too late a prerequisite for RNA.
Increasing the ratio of T4 reserves is in my view another prerequisite, although I’d like to postpone that until tools like NuSafe are available and could be tested. The volatility risk is a serious issue, which is the main reason why we just don’t keep more BTC.
The diversification (beyond including by NuSafe) of T4 reserves is another helpful step.

RNA is great. It’s just not the right time for it.
I’ve experienced what can happen, if there’s a tool for emergencies - it seduces people to be slow in the creation of tools that prevent emergencies.
Just look at the NuBot gateways and what happened to them (and me)…

I’m totally for RNA - later…

[Nagalim]

With bitcoin having the governance problems it’s having i would be against raising the btc reserve threshold. Money is safer in nsr or an alt, or NuSafe.

[Nagalim]

Lack of commitment to liquidity is our biggest threat now

It is unnecessary to raise fees to support the peg, and planning to do so will certainly have a negative impact on NuBit adoption. It is exactly the sort of thing that I would characterize as a suicidal tendency.

The International Monetary Fund (IMF) has published an extensive series of articles and papers on capital inflows and outflows. In the case of Nu, our largest risk comes from capital outflows (ie. NBT being sold for fiat). One excellent IMF paper that is relevant to our network is here: http://www.imf.org/external/np/pp/eng/2012/111412.pdf beginning on page 25. In particular, points 42, 45 and 51 are very relevant to our network. This paper shows there is empirical evidence that capital flow management measures such as Tier 6 (Restricted Network Access) are perfectly acceptable as part of a toolkit for managing a currency, as long as they adhere to certain criteria, such as being temporary in nature.

I’m hoping to get @JordanLee or anyone else to speak to the above quotes. I also am not a big fan of RNA, but for reasons I’ve spelled out in this thread. Namely, that I don’t think it works without volume-dependence, I worry about the security risks it poses, and I question the application without a fundamental use like governmental taxation.

However, I am not against RNA as a concept. RNA is for sure a real thing that works for governments, there’s really no question about that. The question is about the analogy to Nu txn fees.