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Author Topic: NuBits are operating as a fractional reserve.  (Read 6449 times)
Shuai
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January 16, 2015, 03:00:26 PM
 #1

During the great crash, the "trusted" nubot custodians had millions worth of BTC dumped on them. They did not hedge these BTC as evidenced here: https://discuss.nubits.com/t/possible-solution-to-custodian-loss-of-value-due-to-btc-exposure/1099

Bottomline: The nubots are insolvent and nubits are operating as a fractional reserve.

In a desperate attempt to make back the huge amounts of money lost due to BTC exposure, the "trusted" custodians have now resorted to widening their nubot spread to 5%, hoping they can make the lost funds back before there is a run on the bank. This is akin to mark karpeles continuing to run Mtgox after it became insolvent due to theft or seizure, hoping to make back the lost funds on the trading fees.

To explain why NuBits aren't safe, but other pegged assets such as BitUSD can be, check this out: http://bitsharesblocks.com/assets/market Notice the data on collateral, the single most important thing when you want to guarantee a peg. BTS took a beating in the crash too, but notice that BitUSD, BitCNY, BitGOLD is still collateralized with more than 200% of their market value. This is the primary market for their collateral: http://www.btc38.com/trade.html?btc38_trade_coin_name=bts Notice the huge orders of non-bot, non-fake buy and sell walls.

NuBits had noble intentions when they started their coin. The idea of a stable, pegged cryptocurrency is the holy grail to enable wider crypto adoption. They never meant to run the system as a fractional reserve ponzi, but that is unfortunately what has happened as they apparently hadn't prepared for a crash in BTC value. It doesn't matter how you try to rationalize it, the following statement cannot be refuted with anything less than a cryptographic proof of solvency:

NuBits = Fractional reserve

Edit:

To understand why NuBits deserves FUD thrown at them, watch this video at the 2:20 mark: https://www.youtube.com/watch?v=D_imtRPCKCg "One nubit will always be worth one US dollar". That right there is a promise. At no point does the video even attempt to explain that there could possibly be risk involved. Given that the trusted custodians can't and won't repay each outstanding NuBit with 1 USD worth of BTC, their team are at best guilty of absolute incompetence, and at worst criminal fraud.

Also Jordan Lee, the "revered creator of NuBits" responded to this thread, but apparently my post "contains too many errors to bother refuting". How convenient, eh? Also check out their hilarious logic of "tiers" of liquidity, to which the best response I can think of is: http://xkcd.com/670/
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nomoreheroes7
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January 16, 2015, 03:06:24 PM
 #2

Wow. This is some serious shit.
liondani
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January 16, 2015, 03:12:29 PM
 #3

The collapse will come sooner as expected!

NuShares down 35%! already! http://coinmarketcap.com/assets/nushares/#charts
The smart ones are selling right now! Guess who is selling ?  Maybe the anonymous Custodians that have inside information?
Maybe they are one entity (the most)(?), is it not obvious which one controls them?

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FandangledGizmo
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January 16, 2015, 03:24:34 PM
 #4

Clearly a plug for BitUSD  Smiley

Everything is true though, NuBits are operating on fractional reserve due to the downturn in BTC.
I would never have bought any anyway but they're looking very risky now.
Shuai
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January 16, 2015, 03:28:47 PM
 #5

Clearly a plug for BitUSD  Smiley

Everything is true though, NuBits are operating on fractional reserve due to the downturn in BTC.
I would never have bought any anyway but they're looking very risky now.

http://bytemaster.bitshares.org/article/2015/01/14/A-New-Perspective-on-NuBits/


Yes and no. I like BitUSD but my primary motive is that PEOPLE GET THEIR BITCOIN OUT OF NUBITS WHILE THEY CAN. Do not let another fractional reserve mtgox-system continue on for years again until it finally collapses and brings down the entire crypto ecosystem.
mrz123
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January 16, 2015, 04:21:34 PM
 #6

Is this real news?
Btw i think its not. Because if they had millions of usd worth of btc dumped on them, then that means people bought nubits. which is good.
i think you are making FUD.
Omnivion
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January 16, 2015, 04:28:57 PM
 #7

I'd sort of like to see the nushares and nubits markets start to crash just to see how a currency centered around the idea of stability fares when it comes to real volatility.  It would be interesting to see if it holds up or if it ends up being destroyed - if the price of Nubits starts to fall the whole system comes crumbling with it.  (Of course, I have no money at stake, so it's easier to be simply curious.)

Theoretically, a fractional reserve could continue to function as long as there is no "bank run" or continued fractionalizing of the system, but certainly not an ideal situation (even a gradual, long-term decline could eventually deplete the funds).
Shuai
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January 16, 2015, 04:34:28 PM
 #8

Is this real news?
Btw i think its not. Because if they had millions of usd worth of btc dumped on them, then that means people bought nubits. which is good.
i think you are making FUD.

Yep, they had millions worth of BTC dumped on them. That means that when BTC went from 300 to 200, they held BTC and lost hundreds of thousands of dollars in value.

If people try to get out of NuBits now, then they will suddenly find that there is not enough BTC to cover the bought NuBits at this lower price. Suddenly the buy wall will disappear and your NuBits will be worthless. The only way you can have a safe peg is if the collateral is locked on the blockchain where you can see it and evaluate the risk!

I'm absolutely making FUD, yes. But until there is cryptographic proof that NuBits' "trusted" custodians are solvent, then my FUD is true. NuBits is operating as a fractional reserve.
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January 16, 2015, 06:16:30 PM
 #9

Shareholders of a dual currency with reserve have no incentive to actually use the reserve for its purpose. Since there is also no law that forces them to do it anyway, the reserve model is not applicable as long as the shareholders act as rational agents.

The backing has to be done within the system, and right now I don't see any project (neither NuBits nor BitUSD) which does this in a completely convincing manner. Although at least at NuBits those things are heavily discussed.

In total I agree with Omnivion, that it will be extremely interesting to see how these things turn out. However, I personally would like to see a dual currency succeeding, because they in fact fulfill a need.
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January 16, 2015, 06:23:50 PM
 #10

Shareholders of a dual currency with reserve have no incentive to actually use the reserve for its purpose. Since there is also no law that forces them to do it anyway, the reserve model is not applicable as long as the shareholders act as rational agents.

The backing has to be done within the system, and right now I don't see any project (neither NuBits nor BitUSD) which does this in a completely convincing manner. Although at least at NuBits those things are heavily discussed.

In total I agree with Omnivion, that it will be extremely interesting to see how these things turn out. However, I personally would like to see a dual currency succeeding, because they in fact fulfill a need.

BitUSD is fully backed within the system, you can see the status of the on-blockchain locked collateral here:

http://bitsharesblocks.com/assets/market

You can see the orderbook for the collateral here:

http://www.btc38.com/trade.html?btc38_trade_coin_name=bts

You can read how market pegged assets function here:

http://whatisbitusd.com/whitepaper/

Also 24H BTC/BitUSD volume on bter is now 80 bitcoin with a nice order book: https://bter.com/trade/btc_bitusd
noerc
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January 16, 2015, 06:55:56 PM
 #11

Please correct me if I am wrong, but as far as I read into both whitepapers it seems to me that both NuBits and BitUSD won't be able to keep up the pegging if and only if NuShares or BitShares respectively crash to zero value. I don't see how the BTS market rules are able to counteract this effect.
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January 16, 2015, 07:22:03 PM
 #12

This is exaggerated FUD that contains misinformation. Why on earth would the reserves to guarantee 1 USD peg to be held in bitcoin? That's just stupid. These reserves are mainly in USD and only a small amount is available in BTC.

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January 16, 2015, 07:23:18 PM
 #13

Please correct me if I am wrong, but as far as I read into both whitepapers it seems to me that both NuBits and BitUSD won't be able to keep up the pegging if and only if NuShares or BitShares respectively crash to zero value. I don't see how the BTS market rules are able to counteract this effect.

The idea is that by the time it gets to 0, all outstanding bitassets should have already been bought back and covered - you can't have the rug pulled out from under you except for truly catastrophic collapse where traders literally cannot react in time. With NSR you can have insolvency creep up on you without anyone noticing

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toast
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January 16, 2015, 07:23:54 PM
 #14

This is exaggerated FUD that contains misinformation. Why on earth would the reserves to guarantee 1 USD peg to be held in bitcoin? That's just stupid. These reserves are mainly in USD and only a small amount is available in BTC.

Jordan specifically said their *goal* is 0% reserves, which means they are really backing it with NSR's ability to inflate to buy back NBT

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Hyena
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January 16, 2015, 07:31:57 PM
 #15

This is exaggerated FUD that contains misinformation. Why on earth would the reserves to guarantee 1 USD peg to be held in bitcoin? That's just stupid. These reserves are mainly in USD and only a small amount is available in BTC.

Jordan specifically said their *goal* is 0% reserves, which means they are really backing it with NSR's ability to inflate to buy back NBT

The main trading pair is NBT/USD. They hold USD to maintain the peg. Bitcoin can go to zero, it doesn't change the amount of dollars available for maintaining the peg of 1 NBT per 1 USD.

Shuai
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January 16, 2015, 07:35:29 PM
 #16

This is exaggerated FUD that contains misinformation. Why on earth would the reserves to guarantee 1 USD peg to be held in bitcoin? That's just stupid. These reserves are mainly in USD and only a small amount is available in BTC.

Any proof of this? From the internal discussion it's pretty clear that "trusted" nubot custodians are NOT hedging the BTC they got dumped on them.
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January 16, 2015, 07:41:05 PM
 #17

This is exaggerated FUD that contains misinformation. Why on earth would the reserves to guarantee 1 USD peg to be held in bitcoin? That's just stupid. These reserves are mainly in USD and only a small amount is available in BTC.

Any proof of this? From the internal discussion it's pretty clear that "trusted" nubot custodians are NOT hedging the BTC they got dumped on them.

Any proof of the opposite?

toast
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January 16, 2015, 07:43:30 PM
 #18

This is exaggerated FUD that contains misinformation. Why on earth would the reserves to guarantee 1 USD peg to be held in bitcoin? That's just stupid. These reserves are mainly in USD and only a small amount is available in BTC.

Jordan specifically said their *goal* is 0% reserves, which means they are really backing it with NSR's ability to inflate to buy back NBT

The main trading pair is NBT/USD. They hold USD to maintain the peg. Bitcoin can go to zero, it doesn't change the amount of dollars available for maintaining the peg of 1 NBT per 1 USD.

Right now they do, but again Jordan said their plan is to have NO reserves at all.

Quote
There are some reserves right now. My point is that because reserves equate to counterparty risk and are not necessarily useful in backing NuBits, we are aiming for 0% reserves,  not 100%.

So the only mechanism there to support nubit price if it starts falling is to NBT to NSR burn (equivalent to inflating NSR to buy back NBT), which is in the process of being implemented.

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January 16, 2015, 07:50:18 PM
 #19

This is exaggerated FUD that contains misinformation. Why on earth would the reserves to guarantee 1 USD peg to be held in bitcoin? That's just stupid. These reserves are mainly in USD and only a small amount is available in BTC.

Jordan specifically said their *goal* is 0% reserves, which means they are really backing it with NSR's ability to inflate to buy back NBT

The main trading pair is NBT/USD. They hold USD to maintain the peg. Bitcoin can go to zero, it doesn't change the amount of dollars available for maintaining the peg of 1 NBT per 1 USD.

Right now they do, but again Jordan said their plan is to have NO reserves at all.

Quote
There are some reserves right now. My point is that because reserves equate to counterparty risk and are not necessarily useful in backing NuBits, we are aiming for 0% reserves,  not 100%.

So the only mechanism there to support nubit price if it starts falling is to NBT to NSR burn (equivalent to inflating NSR to buy back NBT), which is in the process of being implemented.

I think you misunderstood what Jordan might have meant by having no reserves. It means that the "reserves" are actually in use by the custodians to maintain the peg. There are no reserves just sitting somewhere in a vault waiting for a bad day. The latter would be just stupid. Instead, this money is constantly being used to maintain the buy side walls. I think you should clarify for yourself what exactly is meant by reserves. If you find that out, enlighten me too, please.

Shuai
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January 16, 2015, 08:18:52 PM
 #20

This is exaggerated FUD that contains misinformation. Why on earth would the reserves to guarantee 1 USD peg to be held in bitcoin? That's just stupid. These reserves are mainly in USD and only a small amount is available in BTC.

Jordan specifically said their *goal* is 0% reserves, which means they are really backing it with NSR's ability to inflate to buy back NBT

The main trading pair is NBT/USD. They hold USD to maintain the peg. Bitcoin can go to zero, it doesn't change the amount of dollars available for maintaining the peg of 1 NBT per 1 USD.

Right now they do, but again Jordan said their plan is to have NO reserves at all.

Quote
There are some reserves right now. My point is that because reserves equate to counterparty risk and are not necessarily useful in backing NuBits, we are aiming for 0% reserves,  not 100%.

So the only mechanism there to support nubit price if it starts falling is to NBT to NSR burn (equivalent to inflating NSR to buy back NBT), which is in the process of being implemented.

I think you misunderstood what Jordan might have meant by having no reserves. It means that the "reserves" are actually in use by the custodians to maintain the peg. There are no reserves just sitting somewhere in a vault waiting for a bad day. The latter would be just stupid. Instead, this money is constantly being used to maintain the buy side walls. I think you should clarify for yourself what exactly is meant by reserves. If you find that out, enlighten me too, please.

This is further proof that the collateral backing nubits has been sitting as bitcoin, and has thus been severely hit by the 33% fall where thousands of bitcoin was dumped on the "trusted" custodians.

NuBits = Fractional reserve
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