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Author Topic: NuBits are operating as a fractional reserve.  (Read 6737 times)
Hyena
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January 18, 2015, 08:07:08 AM
 #61

For example, if I want to be a custodian for Nu, I first must have my own personal capital (say 5000$). Now I promise to provide buy side liquidity for a month in return of 500 NBT. The nushareholders then vote and if I get elected I must use my own funds for a month to provide that liquidity. Instead of 5000$ I can use 10000$ or just 1000$. Either way I must prove to nushareholders that I filled my promise and this can be done. So if I cheat, for example, then I don't get elected next time (and perhaps I don't even get the 500 NBT?). So, now you ask NuBits custodians to publish proof of solvency? As a custodian in this hypothetical scenario, I personally don't care if some internet troll asks proof since I'm using my own capital to begin with. If the nushareholders doubt in my solvency then they simply won't elect me as a custodian.

This sounds very dangerous. Essentially we are being asked to trust you, which is opposite to the trustless movement Bitcoin started.

Who is we? The shareholders must trust the custodian. A regular nubits user must trust the shareholders to make the right decisions for the network. To have a cryptocurrency that is not volatile, a degree of human intervention is needed. There's simply no other way. The custodian is putting their PERSONAL capital at risk. If a single custodian defaults it's solely their problem and regular nubits users have nothing to worry about. There are many independent custodians operating concurrently on different exchanges which provides a perfect safety mechanism.

Quote from: robrigo
Say I get voted in using $5000 of my own capital. I use this capital to buy BTC to make a BTC/NBT market. Now BTC crashes by 30%. All of the sudden, everyone who bought NBT from me wants to get back into BTC for exposure because they think it will rise. But my initial capital is insufficient to pay them all back, because I took a loss of 30% from BTC exposure. Is some other custodian just supposed to eat that loss? Or maybe more NBT should be made out of thin air...

In the worst case scenario all operational custodians default at once. Although this is extremely unlikely, let's imagine what would happen. First, the peg is lost so the value of 1 NBT will be whatever the market decides. Then, demand arises to have new custodians providing buy side liquidity. These new custodians will replace the ones that defaulted. The peg will be restored. This works as long as there is supply of custodians.

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January 18, 2015, 11:46:31 AM
 #62

While I regret the tone of some of the Bitshares supporters in this thread, I fail to see any serious arguments from the Nubits crowd as to why their system is not a fractional reserve system. I see a lot of handwaiving from Hyena about how we should:

  • Trust the custodians because it's not in their interest to run away with our money
  • "The custodian is putting their PERSONAL capital at risk"
  • "To have a cryptocurrency that is not volatile, a degree of human intervention is needed. There's simply no other way"
  • there are exchanges that have NBT/USD trading pairs and that's where the peg is originally maintained. The NBT/BTC traiding pairs are just some random internet people doing arbitrage

The first one is such a poor argument I'm surprised you even dare use it. This has been proven wrong time and time again in the real world, Karpeles being a great example. Any time people have access to large amounts of money there is a risk of them running away with it, period.

Second argument: Unless I'm mistaken the user "Kiara Tamm" has access to at least 1.8 million NuBits. How much of her own money did she put up in order to do so? Zero as far as I can tell.. Why do you feel comfortable trusting her with that amount of money? From what I can tell looking through her posts she's already made huge losses on the price slide of PPC from 1.4$ do ~0.3$ today.

The third argument: that's a big statement that you cannot back up with anything. It might be, it might not be.. While Bitshares also has human intervention for now in the form price feeds, a major difference from NuBits is that no humans have the ability to run away with money as is the case for Nubits.

Fourth: Looking at CMC i see 0 volume for NBT/USD, the major volume is for NBT/BTC, meaning the custodians must have taken huge losses from the fall in BTC price.

Or from Jordan about how:

  • Fractional reserve doesn't apply because the system is designed to not hold reserves.
  • The system has several tiers of liquidity so there's nothing to worry about

At the end of the day what matters is: if there is a "run on the Nubits bank", can the custodians make everyone whole? It seems to me the system relies on a great deal of obfuscation to make this possible, through the "tiers of liquidity" and a general lack of transparency. At the current point in time it appears to me as if the first three tiers of liquidity would not be sufficient. If the fourth tier is activated, it would cause a big fall in the NuShares price so it is not at all clear it would be sufficient. Was the recent fall in NUShares price due to this tier getting activated for example?

That leaves the fifth tier, parking through interest rates. The efficiency of this tier is unknown and by the time it is needed the trust in the system might already be gone, at least if the process were known to the public.

Can the public know at any one point what tier of liquidity is being used? If not, the system may hold until someone figures out what's happening, at which point it will most likely collapse. It's similar to how exchange prices can hold up to a certain degree until the final proof that they've been hacked or "lost" all the deposits becomes available.
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January 18, 2015, 11:51:29 AM
 #63

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.

is there proof that they are insolvent tho?

Of course not. This person does not even understand what "true" means. It is also a huge turn off seeing all this FUD coming out of Bitshares. Some of their holders are acting like a second rate anoncoin, unprofessional, childish, and unappealing for serious investors.

so there's no proof.  delete this thread.

So when / where are NuBits custodians going to publish proof of solvency? The burden of proof is on them, considering they are the only ones with access to that information.

then i suggest opening a thread in the nubits forum and post it here at btt also. 

this thread is obviously a bitshares shill. 

R


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January 18, 2015, 12:32:34 PM
 #64

The first one is such a poor argument I'm surprised you even dare use it. This has been proven wrong time and time again in the real world, Karpeles being a great example. Any time people have access to large amounts of money there is a risk of them running away with it, period.

If that's so poor argument then why the whole world essentially relies on trust? Stop trying so hard to undermine what I have said because you're reducing the quality of your post and you are bloating the topic with crap. Karpeles didn't even have cryptographic shares for his company. The fact that you even dare to use mtgox as a comparison shows your low degree of willingness to be constructive in this discussion. Not cool, man, you're wasting my time. Bad karma.

...And yes, as with anything, there is risk (should really be obvious).

Second argument: Unless I'm mistaken the user "Kiara Tamm" has access to at least 1.8 million NuBits. How much of her own money did she put up in order to do so? Zero as far as I can tell.. Why do you feel comfortable trusting her with that amount of money? From what I can tell looking through her posts she's already made huge losses on the price slide of PPC from 1.4$ do ~0.3$ today.

I don't know about that. NuBits is just in the beginning phase and much of the power is currently distributed unevenly. I expect this to change as the network matures.

The third argument: that's a big statement that you cannot back up with anything. It might be, it might not be.. While Bitshares also has human intervention for now in the form price feeds, a major difference from NuBits is that no humans have the ability to run away with money as is the case for Nubits.

If you're background has anything to do with computer science then it should be fairly obvious to you that a mathematical protocol such as the block chain cannot stabilize the price on its own. For example, how should the computer know how much humans value gold at the current time? Unless we start building conscious computers, my original argument remains valid. Simple logic, but again I sense someone trying too hard to "win the debate".

Fourth: Looking at CMC i see 0 volume for NBT/USD, the major volume is for NBT/BTC, meaning the custodians must have taken huge losses from the fall in BTC price.

I don't care to verify that because it's obviously possible for a custodian to screw something up and take huge losses. So far NBT has never lost the peg. The fact that NuBits actually survived the drop of BTC even when some custodians took losses further proves the trustworthiness of NuNet.

At the end of the day what matters is: if there is a "run on the Nubits bank", can the custodians make everyone whole?

You can refer to the whitepaper to find an answer to that question. No one guarantees you that at any point of time you will get 1 USD for your 1 NBT. The mere essence of NuBits is to do its best to maintain the peg. If you don't trust it, don't use it. Same goes to dollars. I understand that right now there is much doubt in the air since Nu is just a couple of months old. When the time comes and NuBits has successfully maintained its peg for several years then all doubts should fade. Just let Nu prove itself and don't be hasty calling it a scam.

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January 18, 2015, 12:58:22 PM
 #65

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July 23, 2015, 10:53:48 AM
 #66

Old thread, i know...

Second argument: Unless I'm mistaken the user "Kiara Tamm" has access to at least 1.8 million NuBits. How much of her own money did she put up in order to do so? Zero as far as I can tell.. Why do you feel comfortable trusting her with that amount of money? From what I can tell looking through her posts she's already made huge losses on the price slide of PPC from 1.4$ do ~0.3$ today.

I think the custodians work on the spread in the orderbook. So even when they had to sell their nubits and got btc for it on the way the btc price went down, they will get btc for cheap when the price goes up again. Of course... its not an endless system, when the bitcoin price is crashing too hard then its a problem. So far the nubits have a stable price of $1 and each custodian providing liquidity to btc gets around 13% each month for his services. That should be the reward for providing liquidity. I think this reward backs the bitcoin price falling till now. So i think custodians did not really lose value at the end. Maybe in short timeframes when the bitcoin price crashed hard but not in bigger timeframes.

I think the point that there are enough custodians should show that it is rewarding for them. They wouldnt do it when they would check their wealth at the end of the month and they constantly would lose by providing liquidity.

I think the nubits price is not only established by the backing but by trust too. Seeing that bitcoins are completely a trust based currency, having nubits custodians and trusting its value, so no rush happens, is a good thing. Lost trust or hedging against bitcoins are the risks. But so far bitcoin price couldnt fall hard enough to make custodians lose their money. That the rewards paid to custodians is worth the same like all nbt is only trustbased, like its with all pos or pow coins. So the custodians earn more wealth over time.

Sounds like a not so bad system. For sure, its no fun knowing that you dont know how many custodians are there and how much btc back nbt at the moment. That would be interesting to know. At least they still live and it doesnt look like bitcoin price will fall anymore very much.

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