Lessons From the Fall of Nu - A New System

Here I have copied my suggestions that I have made in response to the failure of Nu. They may be relevant for the Augeas project. I made a few modifications as I saw fit and I added further details.

This proposal is subject to modification according to changing ideas.

TL:DR? Skip to the summary below for the overall points.

In recent times I think people have come to think of Nubits as being backed by NuShares, so Nushares acts as a Nubits reserve. In reality it ought to be the other way around. NuShares is backed by the profitability of NuBits. The price of NuBits may be moved upwards via NuShares sales and NuBits purchases, though ultimately NuShares has no value without profits. The entire system requires profits to survive. The neglect of profitability was the downfall of Nu which has become nothing more than a ponzi scheme.

Park rates have had no success. All they have done is provide a source of Nubits inflation that exacerbate problems further down the line. The interest paid to NuBits holders came as an expense to shareholders as the increased supply of NuBits could ultimately only be met by an artificial demand created through NuShares sales.

Not only that, but the liquidity operations were expensive by paying people to provide liquidity at the pegged price. This caused further loss. The amount of NuBits being burned by fees was too little, and attempts to increase the fees later on were too little too late.

A New System

For the purpose of the post I’ll give the name UltraShares (US) and UltraCoins (UC). However aspects of this hypothetical system could be incorporated into Augeas.

An exchange mechanism can be created between UC and US, so that UC is backed up by US through conversions. Shareholders would provide or delegate agents/oracles to provide the network with the current price of US. UC can be converted for US at the US price and vice versa. When UC are converted for US, the UC is destroyed and vice versa. This would ensure that 1 dollar worth (or whatever the currency prices are denominated in) of US can be converted with exactly 1 UC, less any fee, thus maintaining a peg. Multiple coins could be created denominated in different currencies. UC would first come into existence by converting US into UC.

When UC demand is high, it promotes US to be converted into new UC to provide liquidity on the exchange. This is because US can be converted to UC at the pegged price, so if demand is high, it provides opportunity to profit on the spread. Alternatively, people can obtain UC via first buying US and then converting it to UC.

If UC demand falls, then it provides an opportunity to buy up UC at the lower bid price and then convert them to US.


UC fees would go directly to a business account controlled by the shareholders. Alternative sources of revenue, such as fee-sharing with an exchange, can be provided to the DAC by sending the funds to the business account directly, which would likely be done via a special address. Shareholders will be able to see the revenues acquired into this account and be able to vote that some amount of these funds be 1. distributed amongst the shareholders as dividends or 2. sent to an address to pay for expenses (similar to custodian grant). The software can automatically generate a cash flow for this account. For total income external assets would have to be taken into consideration. Any debts would be taken out by custodians, though the liability would fall on them.

The overall fees should be as high as possible, but if the fees are too high then demand will fall, so they need to be carefully balanced. In any case it would likely be wise to implement proportional fees. A minimum fee could be calculated according to the size of transactions, but otherwise a percentage fee is applied. The expression could be:

fee = max(feePerKb * bytes / 1000, amount * proportionalFee)

Where amount could be calculated as:

amount = inputAmount - outputAmountSentToInputAddresses

So this way a sender can prove change by simply sending change back to an input address, and change can avoid being charged a fee. This is already established with avatar mode. Anyone that wants higher privacy by making it harder to determine change outputs would need to pay a higher fee.

A percentage fee would provide profits that are more proportional to transaction volumes. UC would need to be marketed as a tool of exchange and not as a store of value. Potentially UC that have not been spent after a certain period may incur a fee, to promote trade with them.

##Relationship between UltraCoin Demand and UltraShare Price

The higher the demand and velocity of UC, then the greater the profits through fees.

Increasing demand for UC would encourage US->UC conversions which would reduce the supply of US and increase the demand for US thus increasing the price of each share. Increased profits from fees would provide additional demand for US increasing its price and market cap despite a smaller supply.

Falling demand for UC would promote UC->US conversions which would reduce the supply of UC and increase the supply of US. As the US is then sold off, the price will fall. Reduced profits from fees would reduce the US demand and price further and the market cap should fall.

The UltraShare market will be driven by PE ratios, and the price of US should meet an equilibrium based upon current PE ratios and expected earnings. UltraShares would therefore have real value, based upon real profits, and not upon hopeful expectations of ever increasing future demand.

Since UC is not strictly backed by anything, its continued value depends on continued demand for its usefulness in exchange. It may appear a weakness that UC could be converted for US. Wouldn’t converting UC to US, dilute US?

If people want UC, they can only be created through US conversions which requires sufficient US to exist or be purchased. What really matters is the overall demand for UC. If the demand for UC remains the same, then reducing the supply of UC by converting it to US would create a sell-side shortage thus promoting US->UC conversions. Therefore the system balances itself according to actual demand. Only if profits were to fall would US ultimately fall in value because the value of US depends on the ability to generate profits. If demand and trade in UC remains strong, then US will also remain strong assuming costs remain under control.

##Manipulation Concerns

Market manipulators could manipulate the prices on external markets which are being used as a price source for the conversion ratio. For example someone could crash the UltraShares market so that they could buy US on the cheap with the conversion mechanism without moving the market up again.

To alleviate this issue, a large liquid market for US would be ideal, but beyond that, the way conversions are completed could make it much more difficult to pull off a successful manipulation. Firstly the conversion could be done in multiple chunks spread out over time. Secondly the conversion could be done at a random block within a period of blocks into the future. Future PoS-hashes (not the block hashes themselves as they can be manipulated) could be used as a source for this unpredictability. If the time at which the conversion is made is unpredictable, it’s not possible to know when price manipulation is required over the waiting period. However conversion times should be reasonably fast to allow quick liquidity provision when the buy and sell walls begin to unbalance, and to make conversion convenient.

In Summary - The Most Important Points

  • Remove park rates.
  • Provide a two-way conversion mechanism between shares and pegged coins.
  • Issue new coins by converting an equal value of shares.
  • Use delegated oracles to provide price feeds.
  • Randomise and/or split the settlement of conversions to avoid manipulations.
  • Focus on using fees for revenues.
  • Balance fees to ensure demand remains strong for the coins.
  • Promote trade in coins for maximum overall fees.
  • Discourage savings and storage of coins.
  • Focus on generating revenue and reducing expenses with a view on sustainable profitability.

Thoughts are welcome!


Upon further consideration I have determined that the US:UC market cap ratio will reach equilibrium according to the profit provided by the system. The higher demand for UC, then the greater the profits. Demand for UC would encourage US->UC conversions which would reduce the supply of US but increase the demand for US thus increasing the price of each share. But increased profits from fees would provide additional demand for US increasing its market cap.

If UC demand fell then it would promote UC->US conversions which would reduce the supply of UC and increase the supply of US, but the price of US would fall, and the price would fall additionally due to lower profits and the market cap will fall.

Therefore there is no need to regulate a US:UC market cap ratio as it would reach equilibrium according to the desired PE ratio (plus speculative future earnings) where earnings are dependant on UC demand.

Instead of burning fees to allow US->UC conversions to increase the share price and provide profits in a roundabout way, it would be much easier for shareholders to understand if all revenues were placed into a business account. From this account shareholders could 1. make payments to cover expenses and 2. distribute UC to themselves as dividends. It would be very easy to record revenues and expenses this way. Alternative revenue sources (such as exchange fee-sharing) could be provided by sending revenues to the account.

The more I think about it, the more I realise the system ought to self-regulate very nicely, making the entire focus for shareholders around reducing costs, and increasing revenues.

Edit: I’ve just changed the original post significantly upon further consideration of the economic model.

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