History

The Peershares Template

On September 28th, 2013, Jordan Lee introduced his plan to develop Peershares, which was a template that could be used to build highly customized distributed autonomous organizations (DAOs) and corporations (DACs). In its most simple state, Peershares can be issued by businesses in order to raise funding and track share ownership in a decentralized way. Any profit made by the company can then be distributed back to shareholders in the form of any cryptocurrency. Each Peershares implementation would use its own independent blockchain secured cheaply and easily using Peercoin’s proof-of-stake and shares can be transferred and held just like any other cryptocurrency unit.

The World’s First Stable Digital Currency

On January 23rd, 2014 Jordan Lee announced that he had obtained around $500k funding from an investor and entrepreneur to develop a highly customized implementation of Peershares. Jordan hired several members of the Peercoin community and began work on this implementation immediately. The details of this major project remained unknown for eight months while Jordan and his team continued development. Finally on September 23rd, 2014 NuBits was unveiled as the world’s first price stable digital currency. As detailed in Jordan Lee’s whitepaper, the Nu Network is capable of issuing digital tokens that are pegged to real world currencies like the Dollar, Euro or Yuan. NuBits, the initial currency unit on the network is pegged to the Dollar.

Price volatility is one of the largest barriers to mainstream adoption of cryptocurrency and Nu solved this issue by separating the network into currency units and shares. Jordan believes that the critical flaw of both Bitcoin and Peercoin is that they use the same fungible unit for share and currency functions. In his view, shares must have the capacity to appreciate and reflect changes in the perceived value of the network while currency must remain stable regardless to be effective. It is impossible to accommodate these diverse pricing needs in a single unit.

While NuBits is the stable currency, NuShares represent ownership in the network and allow shareholders the ability to vote on decisions that will impact the future of the network. When Nu first launched, shareholders could vote on a variety of things. Consensus on major decisions was quickly reached by voting on motions. Shareholders had the responsibility of choosing trustworthy individuals to be custodians for the network. They did this by voting for a custodial address and a specific amount of NuBits to be granted to them. The custodian would then use a highly customized market maker bot called NuBot on exchanges to place large buy and sell walls above and below $1 in order to fix the price. If demand increased, new NuBits were granted to the custodian by shareholders to place sell walls and prevent the price from rising above $1. If demand decreased, shareholders would vote to set interest rates for parking. The parking mechanism synthetically increased demand by temporarily lowering the available supply of NuBits. When shareholders voted for higher interest rates, people would buy NuBits and withdraw them from exchanges to park for a certain length of time in order to collect the interest given as a reward. The parking interest ultimately had the effect of growing the money supply, but it was an effective tool at increasing demand when it was most needed to protect the peg.

First Liquidity Provider Custodians

On September 10th, 2014 before the public unveiling of Nu, Kiara Tamm (KTm) introduced her proposal to operate a NuBits grant and become a liquidity provider custodian (LPC). The proposal called for the creation of 1.8 million NuBits. The primary reason that this request included such a sizable amount of NuBits was because it was the seed amount intended to bootstrap the initial NuBits markets. The size of the grant would allow for deep liquidity, which would be put to use stabilizing the peg. The proposal was structured to continuously cycle liquidity from the sell side to the buy side and back again, and over time slowly removing portions of the grant to be converted to Peercoin and distributed to shareholders as revenue from the network. Through motion votes, dividends could also be redirected into other projects that needed funding. On September 26th, 2014 Jamie Miller (jmiller) submitted a similar proposal to become an additional LPC, requesting a grant amount of 200k NuBits. Both Kiara and Jamie were officially confirmed by shareholder vote and became Nu’s first liquidity provider custodians.

The Unsustainability of Parking

Shortly after Nu launched and the public had the time to read the whitepaper and come to an understanding about how the system worked, criticism was levied at the parking mechanism and a lot of discussions about it took place. [1, 2] The main criticism was that the parking mechanism would make the NuBits peg unsustainable in the long-term. With increasing demand, the simple solution was NuBits inflation to suppress the price. With decreasing demand however, critics pointed out that offering parking interest to temporarily take NuBits out of circulation had the same effect as adding more to the supply. So in both cases of increasing and decreasing demand, the solution was the same, to inflate the supply of NuBits. Critics pointed out that there was no mechanism for reducing the supply of NuBits in times of decreasing demand and that continually inflating the supply with parking interest would cause the peg to grow unsustainable and fail in the future. To these critics, it seemed as if NuBits was a product designed with an expiration date, a tool to be used now, but discarded once it started showing signs of weakness.

Possible Solutions to Reducing the Supply of NuBits

Recognizing this as a potential flaw in the design, NuShareholders began discussing different ways to solve the problem. The most popular solution involved introducing a mechanism to permanently reduce the supply of NuBits by burning them. [1, 2, 3] A motion was also passed to introduce variable transaction fees into the protocol. This would allow shareholders to set the transaction fee through voting. All transaction fees would be destroyed, helping to reduce the supply of NuBits. Jordan Lee finally introduced a draft motion to implement a burning mechanism for NuBits, but it was clear that the implementation still needed further work before it was ready, so it was delayed.

First Strategic Reserve Team

On October 10th, 2014 Jordan Lee introduced a motion to create a strategic reserve of 4 million NuBits. This reserve was created as a failsafe to the protect the peg in the event that demand suddenly and dramatically increased and shareholders were not able to act fast enough to increase sell side liquidity.

Price Stable Android Wallet

On October 11th, 2014 Cybnate posted her vision for NuNet, an Android wallet with ShapeShift functionality. Users that sent Bitcoin or Peercoin to this wallet would have their coins immediately converted to NuBits to protect their value against price volatility. When paying a merchant however, it would not be necessary for that merchant to accept NuBits. The Android wallet would immediately convert the NuBits in the wallet back into Bitcoin or Peercoin upon payment to the merchant. She had previously introduced a draft proposal to create a standard Android wallet for NuBits. [1, 2] The final proposal was passed by shareholders and v1.0 of the Android wallet was delivered on January 14th, 2015. After having successfully delivered the Android wallet, she proposed plans for v2.0 development, which included the ShapeShift functionality she envisioned in her original thread. This updated proposal was passed by shareholders on March 1st, 2015 and development of ShapeShift integration is currently ongoing.

Evolution of Liquidity Operations

On November 12th, 2014 Jordan Lee introduced a motion to guide the evolution and development of liquidity operations for Nu. The motion essentially reduces the risk of loss by splitting the liquidity provided into 6 different tiers. Tier 1 features a small amount of liquidity that is immediately available on the exchange order book. Tier 2 liquidity sits on exchanges, but is not placed on order books and can be promoted to the order book (tier 1) in seconds. Tier 3 liquidity sits off exchange and is held by liquidity providers in wallets not exposed to counterparty risk or the risk of NuBot malfunction. It can be promoted to tier 2 when needed in minutes. Tier 4 liquidity can be provided by custodians not dedicated to liquidity operations. An example might be funds set aside for operational and development expenses, but can be used to support the critical function of liquidity provision as needed. When these funds are used for liquidity, they are exchanged from one type of asset to another, but are still available for their original purpose, such as development. Tier 5 liquidity presents itself in the form of park rates to temporarily reduce supply and increase buy side demand. This liquidity is available in days and the cost takes the form of interest paid. Tier 6 liquidty takes the form of custodial grants for sell side (NuBits inflation) and currency burning for buy side. This liquidity takes a week or more to bring to market, but has zero maintenance costs.

The Intermediary Currency

In the same thread, Jordan laid out his vision on how we will bring about mainstream adoption of NuBits. [1, 2, 3, 4, 5, 6] Besides information about the 6 liquidity tiers, Jordan’s motion also called on NuBot developers to work toward integrating order book mirroring. He believes this will bring about significant advantages for Nubits. Here are several direct quotes from Jordan:

We can provide the best liquidity for every coin on every exchange. We can aggregate all the liquidity for any particular coin and offer it on multiple exchanges. In order to tap into this liquidity, people will need to buy NuBits. Providing liquidity has worked for us so far, but we can take it much further. Take Dogecoin for example, whose liquidity is fragmented between BTC38, Bter and Cryptsy among others. With the system I have outlined, a custodian with accounts at BTC38, Bter and Cryptsy can offer as much liquidity as all three exchanges combined, on any and every exchange they operate. This liquidity will be irresistable to traders. All they have to do to access it is buy NuBits. So they will. Talk of phasing this out in favor of our non-existent USD market is presumptive at best. Where is the demand for USD/NBT going to come from? No one is saying because no one knows. What we do know is the market has rewarded us for liquidity provision. Therefore, I argue for doing more of what has made us successful, not less.

Jordan went on to say that NuBits aren’t in a position to become the currency used by the average person at this time, rather we must gain that position for NuBits by first becoming the intermediary currency used in the cryptoasset trading market. Only by creating that role for NuBits will we have the liquidity, credibility and trust we need to drive mainstream acceptance. Here is another quote from Jordan clarifying this goal:

Let’s say I have some Dell stock and I want to exchange it for Google stock. There isn’t any liquidity in that pair, so I trade my Dell stock for a currency, such as US dollars, and then use the dollars to buy my Google stock. In the cryptocurrency world today, that intermediate currency is Bitcoin. If I want to exchange my Dogecoin for Litecoin, I first exchange to Bitcoin. With the plan I have outlined here, we can easily exceed the liquidity offered by Bitcoin for these scenarios. Better yet, our currency is stable, so someone wishing to trade Dogecoin for Litecoin doesn’t have to also expose themselves to Bitcoin if they use NuBits as the intermediary. Our goal should be to make NuBits play the same role in the crypto world that US dollars play in the US stock market.

NuBot developer Desrever has decided on a parametric model as an intermediate step to order book mirroring. He sees the road to this goal as iterative and explorative and the parametric model as a good starting point.

High Volumes, Open Sourcing & Dividends

On November 14th, 2014 NuBits daily trading volume eclipsed $1 million and was ranked in the top 3 along with Bitcoin and Litecoin. By this point, NuBits would frequently trade in the millions of dollars, even surpassing Litecoin at one point as second overall in worldwide trading volume. [1, 2, 3] Also on the 14th, Ben started a discussion to draft an open source license for Nu. [1, 2, 3] The open source motion eventually passed, but not until February 20th, 2015. On November 20th, 2014 Kiara distributed the Nu Network’s first Peercoin dividend. A total of 68,306 PPC were purchased and distributed to 481 unique addresses.

100% USD Reserves Offer Zero Benefit Toward Peg Stability

Around November and December 2014, shareholders started to ask questions about what type of reserve they should maintain for NuBits. [1, 2]. Since Kiara had already distributed a small portion of her 1.8 million NuBit custodial grant, plus the fact that some of the grant had been eroded away with the volatility of supporting crypto/NuBit pairs, many shareholders believed we were now operating under a fractional reserve system, meaning NuBits were now less than 100% backed by the primary reserve held by Kiara. This meant there were no longer enough funds held by custodians to purchase back all the NuBits in circulation. Questions and discussion about what our reserve should be went on for a couple months.

Finally, a member named Benjamin posted his economic analysis of the NuBits system and another paper explaining that a 100% USD reserve offered zero benefit for peg stability. His argument was that in normal circumstances, in the event of insolvency, bank shareholders are legally obligated to liquidate the bank’s tangible assets and use the revenue to repay depositors, however the same punishment cannot be enforced in a decentralized system. Since shareholders are not bound by law to repurchase NuBits, shareholders could allow the peg to break even if they have the financial capacity to support it. Here is a direct quote by Benjamin…

In my view, we should only expect NuBits repurchases to occur when repurchases align with shareholders’ economic interests. Rather than vote for repurchases, shareholders could just as easily vote to abandon a 100% reserve system and distribute reserve funds as shareholder dividends. If we allow shareholders to vote on the use of reserve funds and assume that they vote according to self interest, the argument that a 100% reserve offers support for the peg falls apart. If supporting the peg requires shareholders to deplete reserves, then rational shareholders will allow the peg to collapse. Conversely, if shareholders can support the peg without depleting reserves, then rational shareholders will choose to support the peg. The implication is that value held in reserves does not provide any support for the peg whatsoever.

He goes on to explain that maintaining a reserve is costly and that NuBits are backed by NuShares alone, regardless of reserve holdings.

Zero Reserve, Zero Counterparty Risk

It turned out that Jordan Lee agreed with this and much of his philosophy on Nu was already in alignment with Benjamin’s reasoning. On January 15th, 2015 Jordan posted the following explaining his view on a reserve and what backed NuBits:

Various members of our community and other communities have at times spoken about reserves and fractional reserve in relation to our network. Some seem to think that 100% reserves are desirable and equate to solvency, while others (including myself) wish to avoid the use of reserves altogether to avoid counterparty risk. Some view reserves as the backing for NuBits, while others see NuShares as the only possible backing for NuBits.

Benjamin contends that reserves cannot be reliably used to back NuBits. I agree. This view implies that solvency and fractional reserve cannot be assessed by the size of any reserve. If there is no reserve, the notion of “fractional reserve” doesn’t even make sense in the context of our network. However, a related concept is the ratio of assets to liabilities as Benjamin pointed out, where NuShares are network assets and currencies issued are liabilities. If the NuShare market cap is 8 million NBT and there are 1 million NBT in circulation, the asset to liability ratio is 8, not counting any reserves that exist. This is a highly solvent state that doesn’t resemble anything like fractional reserve.

It is clear the original design of Nu as articulated in my whitepaper is a network that avoids the use of reserves entirely to eliminate counterparty risk. When a LPC provides their own funding for liquidity operations, they are implementing this zero reserve model. Shortly before our September release it became clear that NuBot would need to support primarily NBT/crypto pairs instead of just NBT/USD. This was difficult to implement quickly, which means it had some bugs initially and this approach introduces some extra risks which were not well understood and could not be accurately measured at the time. As a result, KTm and Jamie began using shareholder funds to provide liquidity, which may be regarded as reserves in some contexts. It has been my intention all along that this would be a temporary situation as we would transition back to the original design of LPCs providing their own funds consistent with the zero reserve and zero counterparty risk model. Indeed all custodians besides Jamie and KTm are providing their funds and the transition is well underway.

NuShare Custodians & NuBits Burning

On January 10th, 2015 Sigmike (a core developer for NuBits and Peercoin) explained in a new thread that Jordan asked him to reintroduce the subject of currency burning and work on a supporting motion to be voted on. Many different ways of implementing a currency burning system were discussed. In the end though, shareholders opted for a simple solution and one that tied NuBits and NuShares even closer together. A motion was quickly passed that would alter the custodian system to permit NuShare custodians. In the event the supply of NuBits needed to be permanently reduced, shareholders would vote to grant a trusted custodian a specific amount of NuShares. These NuShares would then be sold and the proceeds would be used to purchase NuBits and burn them, effectively reducing the supply.

The Era of Data Feeds Has Begun

On January 18th, 2015 v0.5.3 of the Nu client was released. This release was important because it introduced data feeds. Just from the length of this history text alone, you can tell that being a NuShareholder is a big responsibility and that lots of time is needed in order to stay up to date on current events and motions that need to be voted on. This text pretty much only covers the major events in Nu’s history, so it’s hard to get an idea of the day to day responsibilities. For those shareholders who didn’t have enough time available to them to keep up on the news, this new feature allowed them to subscribe to a data feed that was hosted by another shareholder. Subscribing to a data feed would allow your Nu client to match the voting of the shareholder you were subscribing to. For example, if you were going away on vacation or just didn’t have enough time to follow along and there was another shareholder that you usually agreed with, you could just subscribe to that person’s feed and all your votes would be taken care of automatically, ensuring the network was getting the necessary amount of votes to pass important motions or grants. This is very important because if Nu has too many irresponsible shareholders who don’t place votes, it could paralyze the network. Data feeds help in preventing an event like this from happening.

Decentralized Liquidity Without Counterparty Risk Not Yet Implemented

On January 24th, 2015 Jordan Lee issued a stern warning to shareholders about their responsibility in working to decentralize liquidity operations and the consequences that would result if they didn’t. At this point in time, there were several LPCs besides jmiller and KTm who were providing their own liquidity funds for a fee paid by shareholders. The problem was that shareholders were being too picky in what they wanted to pay LPCs. Jordan saw this pickiness as dangerous to the health of network, especially when potential LPCs able to provide their own liquidity funds were in such limited supply. Jordan wanted to develop the LPC market, but shareholders often refused to approve LPCs because of the high fees they were asking for. Here is a quote from the original whitepaper:

First someone who wishes to fulfill this role must seek shareholder approval via the custodial grant mechanism. Say a particular liquidity provider or LP custodian has 10 million USD he wishes to use to provide NuBit liquidity. He would expect compensation for lost opportunity cost (he could otherwise invest those funds in rental property, stocks or bonds) and for the risk of loss via an exchange default, such as we have seen with Mt. Gox and others. While the market will continually reprice this, let’s say in our case the prospective LP custodian decides a 5% return every six months is fair compensation for lost opportunity cost and risk of exchange default. So, he promises shareholders to provide 10 million USD/NBT worth of liquidity for one year in exchange for 500,000 NBT. Shareholders approve this using the grant mechanism and he is granted 500,000 NBT. Now he must provide 10 million in liquidity constantly over the next year. Alternatively, once shareholders have sufficient credibility, LPCs may be compensated after providing liquidity services.

Now here is a direct quote of Jordan Lee’s warning to shareholders:

What Jamie Miller and Kiara Tamm are doing differs from what is described above in a number of important ways. Most importantly, they are not using their own funds, but shareholder funds. This simple fact introduces tremendous counterparty risk and is a source of centralization. It is a serious deviation from my design with potentially disastrous consequences. With data feeds now in beta, decentralized LPCs presenting zero counterparty risk remains the only major feature described in the whitepaper which has not been implemented. This feature is by no means of peripheral importance. In fact, I believe Nu will not succeed unless it is implemented. Time that we spend waiting to implement it is time that we put the network at considerable risk of failure, including catastrophic and total failure.

The software needed to implement this is already distributed. What is missing are LPCs presenting proposals and shareholders willing to approve their proposals. The situation is comparable to a healthy person who reasons they will not purchase medical insurance to save money (in our metaphorical scenario there is no government provided health care). After all, they have better things to spend their money on that improves their quality of life now. Being healthy, not having medical insurance is not a problem, until suddenly it is a very big problem because they develop cancer. Similarly, it is clear to me that shareholders are choosing an option that is cheaper in most circumstances, but is vastly more expensive in certain failure modes.

Consider what would happen if KTm lost control of the approximately one million NuBits in her possession and they were brought to the open market suddenly for sale. At a minimum, very high interests rates would need to be offered to stimulate enough demand for NuBits. At worst, the young system would be unable to stimulate sufficient demand in the wake of such a scandal. With a plummeting market cap, currency burning may not be effective enough and the peg may be permanently lost. However, the liquidity KTm provides is very cheap compared to the proper alternative.

Now consider what occurs if muchogusto or someone with a similar proposal providing liquidity lost control of the funds they were using. In order to have NuBits in the first place, muchogusto must buy them, so it would only represent the reversal of that initial purchase, not a brand new liability like with KTm. So even if those lost NuBits were immediately sold (and there would be much less incentive to so than with KTm), the sudden sale of 25,000 stolen NuBits carries no risk to the system. The loss is borne by muchogusto, not the network or shareholders.

The network had begun a transition to offering decentralized, counterparty risk free liquidity but in recent days it has become clear that the network is actually turning back toward increased reliance on KTm and Jamie. KTm and Jamie understand that their role is supposed to be transitional, and they are hesitating to expand their operations beyond Bter and CCEDK to provide shareholders incentive to do the right thing. So in fact what is occurring is that the network is failing to expand liquidity provision to newer exchanges while increasing reliance on centralized liquidity that brings risk of systemic failure. It is important this development not escape the attention of shareholders, because shareholders are certainly in a position to change the course of events.

So, as a shareholder, if you find yourself saying that a specific decentralized and counterparty risk free liquidity proposal such as the one proposed by muchogusto is too expensive, it certainly is more expensive than the liquidity being offered by KTm, just as not buying medical insurance is cheaper than buying it. My advice would be that if you think it is too expensive, present a competing proposal that is less expensive. If you are unable or unwilling to do so, you cannot demonstrate that it is too expensive.

It was my expectation that liquidity provision would be comparable in some ways to Bitcoin mining. It is a relatively simple way (all that you need to do is run some software and deposit some funds on an exchange) that people involved in the project can use modest skills to support the network while being rewarded financially for their contribution.

When Nu first began liquidity providers received no transaction fee discounts on exchanges. We felt lucky just to get support on exchanges at all. Now, the profitability of having NuBits on your exchange (with liquidity support) is undeniable, and we have begun to move toward zero transaction fees for liquidity providers. But when the market was immature, we had to pay a higher price for liquidity. Shareholders face a similar dynamic with decentralized counterparty risk free liquidity provision. That market is extremely immature, and the only path to lower prices is the creation of a market for those services. This market will provide innovation for hedging, ways to reduce exchange default risk, etc, but if there is no market then those innovations will not occur. Therefore, it is of paramount importance that shareholders pay whatever price is necessary to establish a market in decentralized liquidity provision. If they do so I’m certain innovation and competition will bring pricing down. If they don’t, the Nu network will continue to be exposed to centralization, counterparty risk and serious lack of scalability in its liquidity operations.

Exchange Hackings

Unfortunately, shareholders didn’t have much time to act on Jordan’s warning. In the month of February, his fears were realized as the Nu Network suffered from several back to back hackings of its most used exchanges. [1, 2, 3, 4] Together, these exchanges hosted 99% of open market NuBit trading. Liquidity was wiped out in a matter of weeks and it was discovered that a certain amount of shareholder funds had been stolen across all the exchanges. Thankfully, Jordan had the foresight to implement his 6 tiers of liquidity. This greatly limited the financial damage to Nu, since most liquidity was stored in external wallets in tier 3. Regardless, damage was done to Nu’s liquidity operation and it needed to be dealt with quickly.

NuShare Buybacks & Ending Centralized Liquidity Operations

In response to multiple exchange hackings, on February 14th, 2015 Jordan Lee proposed a motion to cease the centralized liquidity operations of KTm and jmiller and allow NuShare buybacks:

EDIT: I have been notified by Jordan that it is incorrect that this motion was in response to the hackings, because he told shareholders in this post before the hackings even took place that he was going to advance it. So he had already planned to introduce this motion regardless of the hackings that took place later. This is just a quick edit to point out my error. I’ll be revising this section soon.

When our network began, we had a way to increase the NuBit supply at the will of shareholders. We then decided to add a way to decrease the NuBit supply at the expense of increasing the NuShare supply (due in the 2.0 release). It should not be surprising then, that a mechanism for reducing the NuShare supply would also be introduced, to complete our flexible supply of both shares and currency.

Specifically, I am proposing that in most cases, instead of distributing dividends, proceeds from the sale of NuBits be used to purchase NuShares in the open market, which are then burned. This is commonly done with equities and is known as a share buyback. Due to low liquidity in the NuShare market, we can expect such activity will have a marked positive effect on the NuShare price. This high NuShare price will enhance our ability to sell NuShares later when we are in the opposite part of our economic cycle and need to support the NuBit price. Therefore, we will have two complimentary mechanisms which are the exact inverse of one another:

  1. When NuBit demand is low, NuShares will be created and sold while NuBits will be purchased with the proceeds and burned. NuShare supply increases as NuBit supply decreases. This depresses the NuShare price as it supports the NuBit price to the pegged level.
  2. When NuBit demand is high, NuBits will be created and sold while NuShares will be purchased with the proceeds and burned. NuBit supply increases as NuShare supply decreases. This inflates the NuShare price as it suppresses the NuBit price to the pegged level.

Fortunately, no protocol or even client changes are needed to do this beyond what is already approved by shareholders and scheduled for our 2.0 release. Whether dividends are distributed in addition to share buybacks being done will be up to shareholders to decide on an ongoing basis. Shareholders can also decide what proportion of NuBit sale proceeds go to dividends and what proportion go to share buyback by how they pass custodial grants.

In order to move to the model described above, which is decentralized and eliminates counterparty risk to NuShare and NuBit holders, the LPC operations of KTm and Jamie must be wound down. Their service was of great value at the launch of NuBits, but it is time for Nu to mature into the decentralized, counterparty risk free system it was originally envisioned as. Similarly, it is important that the undistributed NuShares I possess (currently nearly 300 million) either be distributed or burned. Once these actions are taken we can say that Nu is free of any single points of failure or catastrophe: decentralized, free of counterparty risk, robust and resilient.

Ending the LPC service of KTm and Jamie is also the key to unleashing share buybacks and dividends. Right now they are holding the proceeds of their NuBit sales as reserves. Transitioning to our zero reserve model is synonymous with ending the LPC operations of KTm and Jamie. When this transition is complete, proceeds of NuBit sales will not be held at all. Rather, NuShare holders will be immediately rewarded when those proceeds are used for NuShare buyback and burn or dividend distribution. In order to unlock the full benefits of share buyback and dividends, shareholders need to make a full commitment to paying a transparent and upfront cost for liquidity from LPCs providing their own funds. As I’ve said before, this feels kind of like paying health insurance premiums, but allows you to accurately predict the costs that will be incurred. While KTm and Jamie continue operations, we only know that our cost for their service will be between their modest 2% fee and 2 million NBT, if shareholders lost control of the funds somehow. Nu cannot afford a 2 million NBT cost at this point in its development. We can and ought to eliminate the possibility of this potential catastrophe quickly by purchasing insurance, so to speak.

The contents of Jordan’s motion which passed shortly after mandated that KTm and jmiller cease their liquidity operations within 90 days and burn all remaining NuBits in their possession. Within 60 days after the protocol is altered to permit custodial grants of NuShares, Jordan must burn all undistributed NuShares and within 30 days after the passage of this motion, Jordan must burn all his NuBits held on behalf of shareholders in excess of 250,000 NuBits. He continued:

Good preparations will need to be made to see the network in good health after this motion is fully executed. New LPCs will need to be funded and cultivated. The implementation of a liquidity pool is one particularly inclusive way to do this. Being an LPC requires ownership of significant liquid funds that can be put at high risk, it requires the skills and time to run NuBot, as well as a good understanding of trading and the nature of Nu liquidity operations. A liquidity pool would separate these requirements: A pool operator needs the skill and time to run NuBot and the understanding of liquidity operations, but they do not need to have any funds. Individual users of the pool only need a tiny sum of liquidity they can put at high risk, because users’ funds are pooled together to create a significant quantity in aggregate. Individual pool users don’t need any special knowledge and it won’t require any of their time on an ongoing basis. The potential profits for pool operators and individual pool users are huge at the present time. Based on recently passed LPC proposals, we can see that 10% return per month can be had. We shouldn’t wait for pools to emerge and fail to elect standard LPCs. As the Nu network matures, I expect we will see a mixture of LPC pools and LPCs providing their own funding. I would rather see the network supported by 100,000 NBT of liquidity by LPCs providing their own funds than 400,000 NBT of liquidity by LPCs using shareholder funds like KTm and Jamie.

Once the transition is complete, we will have two main types of LPCs, as mentioned in the whitepaper: single side (called sell side in the whitepaper, but this is being modified to include granted NSR that are used to apply buy side pressure on NuBits) and dual side LPCs. Single side LPCs come in two sub-types: (1) those that have been granted NuBits to apply sell side pressure and NSR buyback (and burn) or dividends, and (2) those that have been granted NuShares which they can sell to apply buy side pressure and NuBit burn. Dual side LPCs are the more common type that liquidity pools will be which provide both buy and sell side liquidity in order to create a buffer zone of liquidity for the peg. The purpose of single side LPCs, on the other hand, is to balance the buffer zone created by the dual side LPCs.

Proper preparations for the burning of undistributed NuShares will be the granting of a small percentage of outstanding NuShares (perhaps two or three percent) to a multisig NuShare address. This will allow the signers to agree to sell the NSR quickly to purchase NBT to support the peg when buy side liquidity is low. The idea is to have no more NSR than could be possibly needed for sale in a two week period. If additional NuShares are needed for sale beyond a two week period, they can be created in a new NSR custodial grant. Rather than creating a large fund for future development as originally planned, development will be funded with NuBits on an ongoing basis. If the emission of these NuBits creates too much selling pressure, the selling pressure will be counteracted by a NSR grant and a NBT burn. Our development savings are held in our market cap.

Interest rates may still be used as a peg support mechanism, however it is possible that NSR grants combined with NBT burning will become the more important mechanism.

If this plan is implemented NuShares will be even more volatile than they are now. It makes sense that they would be, because we are basically diverting the volatility the market naturally wants to impose on NuBits to NuShares. NuShares will be a speculator’s delight. They should never approach zero so long as the network purpose of a pegged currency that is used continues to be served.

NuShare Auction for Peg Support

On February 20th, 2015 Jordan Lee submitted a proposal to hold an auction for 100 million NuShares that remained undistributed and in his possession. The purpose of this was to use the proceeds of the auction to help support the peg, which had become strained after multiple exchange failures. Jordan explains below:

I designed Nu to maintain stable currency pricing as currency passed through cycles of increased and reduced demand. Cyclical changes in the level of demand are inevitable and the system can gracefully handle those changes while maintaining the peg. We can see that we are in the midst of a time of reduced demand as indicated by the recent decline in buy side liquidity. This means it is time to use interest rates as well as issuing new NSR where the proceeds will be used to buy NuBits or increase buy side liquidity. Shareholders won’t have the ability to create NSR by themselves using the protocol until the next protocol change is introduced. However, I have the ability to simulate this with the undistributed NSR I control.

It is true that much of the reason why this is needed is the losses that have occurred as a result of poor shareholder speculations. Shareholders have lost value in the BTC held by myself, KTm and Jamie. They have also taken large losses with the shareholder funds lost at BTER and Excoin. It only makes sense that shareholders would experience a dilution of their shares as we take steps to regain this lost value. Some people have the perspective that shareholders have been unlucky by having experienced these losses. While it is possible there is some validity to that perspective, it is not helpful. A much more helpful and empowering perspective is that shareholders made poor choices that increased risk far beyond what it needed to be. We are essentially a subset of Bitcoiners, who can be characterized as aggressive risk takers. So shareholders have taken risks on the value of BTC, on the reliability of exchanges and on the reliability of myself, KTm and Jamie. The risk taken on myself, KTm and Jamie have worked out so far. The speculation on BTC price and exchange default risk went quite badly, on the other hand. The notion of taking large unnecessary risks with network assets is very much at odds with trying to maintain a sure thing like a pegged currency. It won’t create trust in the stable value of NuBits. It is a serious mistake. It is contrary to the design I first revealed last April and have reiterated loudly ever since.

Here is a quote from my opening paragraph in Decentralized liquidity without counterparty risk not yet implemented, globally pinned for weeks, so that it has been the most prominent message on our forum. I believe it needs even more attention than it has received:

What Jamie Miller and Kiara Tamm are doing differs from what is described above in a number of important ways. Most importantly, they are not using their own funds, but shareholder funds. This simple fact introduces tremendous counterparty risk and is a source of centralization. It is a serious deviation from my design with potentially disastrous consequences. With data feeds now in beta, decentralized LPCs presenting zero counterparty risk remains the only major feature described in the whitepaper which has not been implemented. This feature is by no means of peripheral importance. In fact, I believe Nu will not succeed unless it is implemented. Time that we spend waiting to implement it is time that we put the network at considerable risk of failure, including catastrophic and total failure.

The urgency and prominence I assigned to this message has proved very appropriate. If we want the Nu network to succeed, we must send a strong signal that shareholders are committed to containing risk by implementing the design in full, and not a centralized, deformed variant laden with counterparty risk as shareholders have decided to do to date. I certainly wouldn’t bid on NuShares unless I saw shareholders make this commitment to quit their gambling ways. To demonstrate this commitment, shareholders need to pass this motion and they also need to quickly pass additional (existing) LPC proposals that provide liquidity with zero systemic risk by utilizing private funds. If this is done, our solution will have the credibility needed to have a successful NSR auction.

So, I’m proposing that we hold a blind auction for 100 million NSR in two weeks time. Bids would be accepted via Bitmessage or an email address dedicated to the purpose. Bids will only be accepted from business partners, which means you are or will be active in creating value for the network outside the scope of being a shareholder. The top price, lowest price and total funds raised will be revealed publicly at the conclusion of the auction. NBT, BTC or PPC will be accepted as payment, with a 2% surcharge added to bids when PPC or BTC is used. The exchange rate used for PPC and BTC will be the price at the time bids are due. Multiple bids from the same individual will not be accepted.

Jordan subsequently posted a draft of the auction rules. The draft also laid out the priorities for using the funds raised from the auction:

  1. The first priority for funds raised will be to ensure the buy side liquidity is equal to the sell side liquidity as displayed in the Nu client. PPC and BTC will be used to purchase NuBits to accomplish this if necessary.
  2. The second priority for funds raised will be to provide tier 4 liquidity. Suitable persons to hold these funds using multi sig addresses will be sought out. Hedging will not be employed due to counterparty risk. Tier 4 liquidity must be highly liquid, and BTC is the only instrument that meets this need at this time, although I hope that liquid NSR markets will permit NSR to be used as tier 4 liquidity eventually. The quantity of NSR for sale is as low as it is to limit the effect of BTC volatility.
  3. The third priority for funds raised will be the payment of contractors engaged in development. NuBits are generally used for this purpose, and in that case all that is needed is to ensure there is good buy side liquidity on the open market.

There apparently had been some controversy or confusion over why this auction was necessary and what the funds would be used for, so Jordan took the time to explain it in further detail and had shareholders pass a motion authorizing the auction.

There has been a modest amount of controversy regarding the planned auction. The passing of this motion will give it the legitimacy it needs and make clear that the majority of shareholders support the auction. I proceeded to announce the auction with the understanding that the time needed to have extensive community discussions and a full voting period was too great for our scenario. Still, there is no reason to not advance a motion such as this after the auction countdown is in motion. I expect it to pass and prevent a minority of shareholders from feeling that something unfair was done.

While the context that makes the auction a desirable course of action is clear to me, I may have made the mistake of not fully presenting that context in connection with my auction proposal. Here is that context:

The original plan was to distribute 1 billion NSR at ever increasing prices. At the time that commitment was made, Nu was designed as a network without systemic or counterparty risk (from the perspective of shareholders and NuBit holders) in its liquidity operations. The use of shareholder funds by LPCs like KTm and Jamie had not even been contemplated, so far as I am aware. The idea to do that first emerged in early September. Prior to that, it was anticipated that LPCs would only operate on NBT/USD pairs, and that is all NuBot was originally built to support. As our release date of September 23rd approached, there was no exchange supporting NBT/USD, but we did have NBT/BTC support worked out. So, we pivoted quickly to providing liquidity on BTC pairs as a matter of necessity. This meant NuBot was hastily modified to support that. Using a new piece of software with major last minute modifications that also exposed LPCs to complex scenarios regarding arbitrage and BTC volatility made the risks of operating NuBot very difficult to assess. So we turned to shareholder funded operations with the expectation that in a matter of weeks the level of risk would become known via the experience of KTm and we could switch entirely to self funded LPCs quickly. That did not occur for variety of reasons, chief among them being shareholder rejection of LPC proposals. I have consistently and earnestly pointed out the importance of self funding LPCs, beginning with the internal release of the whitepaper last April. Two days before release, I was focusing on recruiting self funded LPCs by offering bonuses to start the role. A month ago a summary of the risks became the only globally pinned topic on this forum, giving it the primary attention I understood it needed. Then came our wave of exchange defaults. This was combined with outstanding NuBits declining by about 60% over the last two months to create significant stress on the network. It is possible to overcome this by offering very high interest rates on NuBits. However, consistent with a shareholder motion to burn currency with the proceeds of NSR sold, shareholders have indicated they view the NSR market cap as a more credible way to ensure NBT value – one that demonstrates willingness to sacrifice NSR value to maintain NBT if necessary. It is a good signal to send to the market as well as a prudent way to manage the peg. That is what this auction does.

So to summarize, I said long ago that NSR would be sold for increasing prices over time and that liquidity would be provided without counterparty risk or systemic risk to holders of NuBits and NuShares. The latter has not yet occurred, against my own will and wishes. Current liquidity operations in the form chosen by shareholders have resulted in substantial defaults and systemic losses. This important change made by shareholders made it impractical to only sell NSR at increasing prices. Combined with shareholders’ decision to sell NSR on an as needed basis perpetually (not necessarily at ever increasing prices), this auction is a very reasonable action attuned to the evolving will of shareholders.

Finally, while what I have said may paint a picture of the network as strained, in recent days I have been elated about how recent stresses prove the resilience and robustness of the network. We had about 60% of all NuBits in circulation two months ago exit circulation and sustained exchange defaults that are likely to equal 30% to 50% of all NuBits outstanding at the peak of demand a couple months ago. This is the equivalent of having all NuBits sold back to LPCs and we kept the peg perfectly! It is clear we can repair our financial standing with additional NSR sales. If we also eliminate systemic risk in liquidity operations as shareholders are currently voting to do with 81% consensus (in the last 100 blocks), it becomes difficult to imagine what could break the peg in the future. Our design has been successfully stress tested to the extreme.

I should probably articulate what the alternatives to having this NSR auction are:

  1. Have a similar auction with somewhat different terms.
  2. Raise parking rates to double digits to stimulate purchase and parking of NuBits.
  3. Cut network expenses by terminating compensation agreements with most contractors building our network infrastructure. Currently, such network expenses are around 60,000 NBT per month.

Rise of the Liquidity Pools

As a result of the exchange hackings and Jordan’s guidance and encouragement, NuShareholders learned some hard, but important lessons based on their failures and started to become more responsible for the network and more engaged in finding solutions to decentralize liquidity operations before the custodian terms of jmiller and KTm expired. Up until this point, shareholders had voted on individuals to become LPCs. The idea of liquidity pools though seemed more compelling to many, as it would allow people to provide liquidity without the hassle of building up reputation first in order to get elected by shareholders. Pool operators would still need to go through this election process though. On February 27th, 2015 Henry introduced a proposal to create the first group liquidity pool called the Nu Lagoon. After passing, the Nu Lagoon went live on March 16th, 2015. This particular pool was centrally managed. NuShareholders would grant NuBits to Henry. Interested participants would then send their funds to the pool operator and he would use NuBot to place buy and sell walls. The users of the pool would then receive a 7.2% monthly return based on liquidity provided. The actual return could be less or more than expected because of the volatility of BTC’s price against USD and other factors. While this was a centrally managed pool by a trusted operator, it was much better since users of the pool provided their own funds, rather than relying on a reserve like LPCs initially did. Many pools could be modeled after the Nu Lagoon for different exchanges.

Trustless Liquidity Pool

What was an even more interesting project though was Creon’s trustless liquidity pool. As the name suggests, there is no trust involved with this liquidity pool. At no point are users required to hand off control of their funds to a trusted 3rd party. Users maintain full control of their funds through the whole process. Here is a short explanation on how it works. Many pool participants download a client. That client places buy and sell walls itself or uses NuBot to do it. The client then sends proof of these trades to a server, which verifies that they actually took place. Shareholders grant the server operator NuBits and when the server verifies the trades, interest payments are sent to the user based on how much liquidity they provided. However, operations have a target limit of liquidity attached to them and liquidity above the target will not get compensated. An auction system then jumps in, driving the interest payment down. So in the end you should provide a minimal interest rate you theoretically would be willing to get. This system ensures that custodians are paying the lowest possible fees and only for the liquidity that is actually being provided. The first operation using the trustless liquidity pool started at Bittrex on April 12th, 2015. This trustless model has the potential to be much more successful and plans are already being made to expand operations to other exchanges.

Blocks & Chains Decentralized Exchange

As a complete surprise to most shareholders, on April 21st, 2015 Jordan Lee introduced a proposal to fund the development of a decentralized exchanged called Blocks & Chains (B&C). The proposal called for the auction of another 100 million NuShares in order to raise $200k for development. A Bitcointalk thread accompanied it where technical questions were being asked about the design. The NuBits thread was mainly used to discuss the auction.

As most shareholders have likely noticed by now, centralized exchanges add considerable risk to trustless payment platforms. It is an especially limiting factor for projects like NuBits that have relied on centralized exchanges for providing liquidity. The Nu network saw 99% of its trading volume disappear within a couple weeks in February 2015 after several high-profile exchange defaults. While our 1.00 USD peg has performed admirably, our trading volume has not yet rebounded in the current bear market affecting all cryptocurrencies.

The arrival of a decentralized exchange has been eagerly anticipated within the cryptoasset community. In response to this unfulfilled market need, I am proposing that NuShareholders fund the development of a reputation-based decentralized exchange called Blocks & Chains Decentralized Exchange, or B&C Exchange for short. The protocol development that has occurred on NuBits and NuShares code can be extended in novel ways with B&C Exchange, giving us a considerable competitive advantage over outside projects that would attempt a similar design.

Full proposed design details for B&C Exchange are available in this bitcointalk thread, including a 20 page design document. This motion and surrounding discussion will focus on the implications of the proposed funding model as they relate to NuShareholder interests.

B&C Exchange will be a powerful tool for significantly lowering NuBit liquidity costs because the risk of exchange default and theft will be much lower than it is with centralized exchanges. For an exchange to be a success, it also needs liquidity. NuShare holders will have a powerful interest in providing a great deal of NuBit liquidity on B&C because of its low cost and the broad overlap in ownership between the two networks. There will be a powerful synergy between the Nu network and B&C Exchange, with Nu bringing liquidity to B&C and B&C lowering costs for Nu.

I am proposing that development of B&C Exchange be funded from the auction of 100,000,000 undistributed NuShares. In contrast to our recent auction to fund peg protection and Nu protocol development, stricter controls would be put in place for this auction, including a reserve price and minimum total amount of funding required for the auction to successfully conclude. I estimate the cost of development for B&C Exchange at 200,000 USD, which corresponds with the proposed 0.0020 USD reserve price for 100,000,000 NSR in the relevant bitcointalk thread.

Shareholders should observe that the bitcointalk pre-announcement thread is largely hypothetical at this point and is fully contingent on NuShareholders passing this motion. If the motion is not passed, other options to fund B&C Exchange that do not include NuShareholders will need to be explored.

It is very important to point out that my initial promise to shareholders was that no more than 1,000,000,000 NuShares would be sold from the initial undistributed NuShares. A subsequent motion passed by shareholders requires me to burn all remaining undistributed NuShares (of which there are currently approximately 187,000,000) within 60 days of the protocol allowing NSR custodial grants, a function which has not yet been implemented. So, this proposal to auction 100,000,000 of those 187,000,000 undistributed NuShares to fund development of B&C Exchange is still well within the authorization provided by shareholders.

I encourage every shareholder to read the B&C Exchange pre-announcement thread and design document to understand the profitability model of the design. B&C Exchange equity holders who own “BlockShares” will be eligible to receive Bitcoin dividends from profits realized during exchange operations. It is a much simpler design than Nu in regards to custodians and dividends because no liquidity support is required to maintain a certain asset price level. It is even simple enough that weekly dividends could very much be a possibility without requiring the complex accounting problems that KTm and jmiller have dealt with admirably. As well, liquidity for NBT/BTC trading pairs could be provided at much cheaper rates than currently offered on expensive centralized exchanges due to the potential reduction in trading fees paid; a potential direct benefit for all NuShareholders.

Auctioning the full 100,000,000 NSR would represent an equity dilution of 12.5% for current NuShareholders. This “funding round” approach to raising capital is common in entrepreneurial ventures in the private sector. While future performance is always uncertain and no promises can be made, my personal opinion is that it is quite possible that the future value of B&C Exchange operations - and by extension BlockShares - would exceed the $200,000 dilution required from NuShareholders to fund development. B&C Exchange directly solves a challenging problem faced by all cryptocurrency users, including the large Bitcoin community.

The motion passed shortly after being introduced and the auction is currently ongoing and the deadline for bids is scheduled for the end of May 12, 2015 UTC. No extensions will take place. Blockshares will be provided one for one based on how many NuShares you own. For example, if you own 5 million NuShares, then you’ll receive 5 million Blockshares when development is finished. It is recommended to purchase NuShares from the auction, because if the auction is not successful and $200k is not raised, the exchange will not be built. The reserve price is also under market price, so it’s possible to get cheaper NuShares than are offered on exchanges. In addition to questions being asked about the technical aspects of the exchange, profit projections were also discussed by some members in the Bitcointalk thread. While the projections may be off, it might be worth checking out to get an idea of what to expect if B&C is successful.