INTRODUCTION
SURF profitability and attractiveness comes from a revaluation over WAVES, that is, BR grows faster than waves price. Otherwise, it is better to conserve WAVES instead of swaping WAVES->SURF, or buy WAVES instead of swaping (or buying) USDN->SURF.
There are some two mechanisms which makes BR grow faster than WAVES:
- transaction fees from neutrino nodes
- issuing of SURF itself
SURF was introduced because the first mechanism is not enough to help in BR recovering, as it acts very slowly. The problem is that, there is a mechanism that reduces BR, and so SURF profit performance, disabling the capacity of SURF to help when is most needed. This factor is the classical neutrino burning of USDN->WAVES.
THE PROBLEM
In order to understand the performance of SURF, the sole index to monitor is the smart contract WAVES/SURF ratio. If this ratio grows, then SURF is doing its work. If not, then it isn’t. When SURF was introduced on August 8, this ratio was 0.0275. After three days, it is 0.0259. So, that means that USDN->WAVES burning is the dominating force, and SURF not only is not doing its work, but also is not attractive at all in order to do it.
At the end of this post, I include the demonstration that, in order BR to increase, or not to decrease, for each USDN burned by USDN->WAVES mechanism, (1-BR)/BR USDN or more must be burned via USDN->SURF mechanism. Under the current BR, 0.16, more than 5 USDN has to be burned via USDN->SURF mechanism, for each USDN burned via USDN->WAVES one. And this is not happening.
So, the proposal is to disable or limit USDN->WAVES burning when BR < 1.
However, as someone pointed out in the room, disabling USDN->WAVES burning will remove the arbitraging mechanism that helps to conserve the USDN peg. So question arise here: how do we conserve a peg mechanism under the effects of this proposal, when USDN market price is below 1.0?
Alternative 1
May be we can think in an hybrid mechanism: to add the requirement, in case BR < 1, to burn part of the USDN by SURF, in order to allow to burn USDN by WAVES.
For example (exact numbers can vary, I just want to illustrate the concept) I want to burn 1,000,000 USDN. At BR=0.16 as now, 16% of the USDN will be burned against WAVES. The remaining (84%) will be burned against SURF. In order to compensate the partial loose of arbing profit, burn fees can be removed. Notice that by ensuring this proportion of USDN->SURF burning over USDN->WAVES burning, we ensure that BR don’t decrease. A variation can be to increase this ratio in order to make the burning to result in an increase of BR. So the person doing the burn is ensuring that the SURF he receives don’t devaluate or even increase value. Thus avoiding to make the operation undesirable.
The effect for the investor is that, the instant arb profit will be reduced significantly, and the remaining of the profit will be posponed via the SURF mechanism. With BR=0.16, the burning result in 16% of arb profit and 84% of delayed SURF profit.
We must also consider that the sole burning of USDN, despite not having direct impact over peg, helps to reduce depeg pressure as USDN supply decreases. Even if this proposal may reduce repeg effectiveness, it is preferable to have some depeg than run out of collateral quickly, which will cause anyway a bigger depeg later.
Alternative 2
Ensure another external mechanism that burns USDN->SURF, after certain accumulation of USDN->WAVES burn operation has been performed, in a way to fulfill or surpass the minimal ratio between the two mechanisms. This requires the availability of a big USDN pool to burn via SURF. And that pool is on vires, which is where all this problem started. So, a possibility is to burn part of USDNs locked in vires, via SURF. There are hundreds of millions of USDN locked there, either by locked supplies or in reserve for the 1 year vesting reconversion program.
This alternative presents some risks, and may be they are less risky at higher BRs, in order to get faster the return. But it is a matter of doing computations and check how much can increase BR. If it is able to raise BR over 1.0 (there are hundreds of millions USDN there), the yield of staked SURF from this action will allow the slow payment from USDN deposits and vesting reserve. Also, even by increasing BR significantly without reaching 1.0, it can greatly increase the attractiveness of SURF, making more people to invest on it and relieving vires investment additionally.
And after all, the problem with BR right now is the excess of USDN issued some months ago, and all that excess is stored in vires.
Alternative 3
This one could be considered a more acceptable variant of the alternative 1: swap power need to be restablished via appropiate rate of USDN->SURF burning when BR < 1. That is, when BR < 1, each gNSBT can be used only once. And daily restablishment is disabled. This can increase a lot the demand for SURF under depeg situations.
The requirement of ensuring (1-BR)/BR USDN->SURF burn for each USDN->WAVES burn, implies, in addition, to adjust the swap capacity of gNSBT by a factor equal to current BR.
Some conclusions
Alternatives 1 and 3 implies a limited arbitrage capacity, and so depeg can grow bigger before people start to arb, but in the long term it will avoid BR run out.
On the other hand, a simultaneous application of alternative 2 can be used to reduce this problem. For example, the (1-BR)/BR requirement of alternative 1 and 3 can be moderated, that is, allow some amount of BR reduction. And use alternative 2 to complete (and improve) the required ratio of burns.
APPENDIX: DEMONSTRATION
**
In order BR to increase, or not to decrease, for each USDN burned by USDN->WAVES mechanism, (1-BR)/BR USDN or more must be burned via USDN->SURF mechanism.
**
Lets call X the fraction of USDN that has to be burned by WAVES. So the portion that will be burned by SURF will be (1-X). Lets compute the X that ensures that, after the burn operation, BR does not decrease.
We know that:
amount of waves collateral = total issued USDN * BR / waves price on SC
so
BR = waves collateral * waves price on SC / total issued USDN
Under the constraint BR before = BR after
we have:
WAVES collateral before * waves price on SC / total USDN before = WAVES collateral after * waves price on SC / total USDN after
As waves price on SC don’t change because of burning, it can also be considered a constant during the burning (despite in the process may have a variation due to market changes, but they are not relevant for our purposes). So lets cancel the waves price on SC in both sides and we get:
WAVES collateral before / total USDN before = WAVES collateral after / total USDN after
or more formally, in order to conserve BR:
initial WAVES collateral / initial total USDN = final WAVES collateral / final total USDN
Let be UB the total burned USDN. So:
WAVES collateral extracted = UB * X / waves price on SC
Combining last two equations:
initial WAVES collateral / initial total USDN = (initial WAVES collateral - WAVES collateral extracted) / (initial total USDN - UB)
or:
initial WAVES collateral / initial total USDN = (initial WAVES collateral - UB * X / waves price on SC) / (initial total USDN - UB)
After some movements, we get:
X = initial WAVES collateral * waves price on SC / initial total USDN
That is, X is exactly equal the BR. So, in conclusion, if we want to burn USDN for arbing, without affecting the BR, then the fraction that has to be burned against WAVES is BR. The remaining fraction, 1 - BR, must be burned against SURF.
Or, put in a different way, for each BR USDN burned with WAVES, (1-BR) USDN must be burned with SURF. Or:
for each USDN burned with waves, (1-BR)/BR USDN must be burned with SURF.