Neutrino System Base Token (NSBT): new auction, utility & liquidation mechanics
A crucial new update is coming up to the Neutrino System Base Token (also known as NSBT, or simply base token), which is a utility token for the Neutrino system that is designed to ensure the stability of reserves on the Neutrino smart contract through the so-called mechanism of reserve recapitalization. After the update, NSBT will allow users to speculate on the so-called BR parameter, or Backing Ratio: the proportion of reserves in relation to the supply of Neutrino. As a result of successful speculation, traders will have a chance to generate profit in USDN.
In the future, in addition to being the driver of recapitalization, base tokens will be used as payment for protocol operations: creating a collateral position (generating USDN against WAVES) and paying fees to form “hedge funds” for generating new types of synthetic assets, such as GLDN (Gold Neutrino), EURN (Euro Neutrino) etc.
Backing Ratio (BR) and the factors that influence it
Simply put, Backing Ratio (BR) is the share of WAVES reserves in relation to the Neutrino supply. To calculate this crucial parameter, a trader should determine how much WAVES backs Neutrino on the main smart contract and convert it to dollars at the current exchange rate ($R). Knowing how many Neutrino tokens have been issued on the main smart contract via swap operations and are currently in circulation (which is called supply), one can calculate the BR parameter as follows:
BR = $R / S or BR% = 100 * (R $ / S)
The Neutrino deficit (D) is connected with BR via another simple formula:
D = 1 — BR or D% = 100 — BR%.
In principle, the backing ratio can take values from zero to infinity. In a state of complete equilibrium between supply and reserves, BR is equal to 1 or (100%). If the reserves are insufficient to cover the entire supply of the stablecoin exactly by half, then BR is equal to 0.5; and if the capitalization of reserves is higher than supply by 50%, then BR is equal to 1.5.
To successfully trade NSBTs, it is important to identify and follow three major factors that influence the growth of BR:
- Increase in the market value of WAVES
- Increase in the number of WAVES tokens in reserve as a result of WAVES -> USDN swap operations
- Increase in the number of WAVES tokens in reserves as a result of issuance of base tokens (NSBT) at the auction
Conversely, there are three factors that can affect the BR decrease:
- Decrease in WAVES market value
- Decrease in the number of WAVES tokens in reserves as a result of USDN -> WAVES swap operations
- Liquidation of NSBT tokens provided that BR is greater than or equal to 1 (i.e., surplus state)
Auction and liquidation mechanics
By analogy with market orders and limit orders, the Neutrino smart contract system supports two transaction execution modes: “instant”, where an instantaneous execution occurs in accordance with current conditions (current BR) and “on condition”, where an execution occurs when the expected backing ratio (BR) is achieved. Auction is a mechanism for generating NSBT tokens by exchanging them for WAVES tokens, which are received as backing for USDN. Liquidation is a mechanism for exchanging base tokens (NSBT) for the USDN stablecoin in the proportion of 1 NSBT for 1 or more USDN. Liquidation is only possible when the BR is equal to or more than 1, that is, the system is in a state of over-collateralization.
Below we will consider examples of working with the auction and liquidation for traders. In all examples, the simulated situation is in which the price of WAVES is $1. Also note that the number of WAVES required to generate 100 NSBT tokens is determined by the formula:
BR = (B — Ne) / Ne or B = Ne * (2 - BR), where B is the number of NSBT tokens and Ne is the dollar value of the number of WAVES sent on the smart contract.
Example 1: instant issue and instant liquidation
In a state with a BR of 0.5, a user purchases 100 NSBT tokens for 67 WAVES (calculated automatically according to the formula described above). These tokens can be used for payment within the Neutrino system or as a voting instrument for governance. In addition, these tokens can be sent to another Waves address or even to an address of an exchange where NSBT is traded. In the future, when the situation changes and BR has values higher than 1 (for example 1.5), the user will be able to place an order to liquidate 1 NSBT for 1.5 USDN, and this request will be processed instantly. For 100 NSBT tokens, the trader will receive 150 USDN. In USDN terms, the profit from such operations will amount to 100 * (150–67) / 67 ~ 124%.
Example 2: instant issue and liquidation on condition
Similarly to the first example with BR equal to 0.5, a user acquires 100 NSBT tokens for 67 WAVES (calculated automatically according to the formula described above). In the future, when the market situation changes and BR has values higher than 1 (for example 1.5), the user can place an order to liquidate 1 NSBT for 1.5 USDN, and this request will be processed instantly. For 100 NSBT tokens, the trader will receive 150 USDN. In USDN terms, the profit from such operations will amount to 100 * (150–67) / 67 ~ 124%. However, with the new approach the user would not have to wait for the right moment and constantly monitor the situation, instead they can simply use liquidation on condition, and this action will be automatically processed on the smart contract. This feature is very similar to placing a limit order on exchanges.
Example 3: issue and liquidation on condition
Similarly to examples 1 and 2, the user has the opportunity to put conditions on future issue and liquidation of base tokens no matter what the current BR value is (for example, if BR = 1). All ROI calculations for these transactions are similar to the scenarios described in examples 1 and 2.
Example 4: base token issuing during surplus state (BR>1)
In this case, the user can purchase NSBT tokens even during the surplus state of the system. For example, with BR = 1.1, the user can buy 100 base tokens for 111 WAVES and put them to liquidation at a future target value of BR = 1.5. When such situation occurs, the user will record a profit of 100 * (150–111) / 111 ~ 35% in USDN tokens.
It should be noted that the liquidation of NSBT tokens is only possible if the system is in a state with the BR value greater than or equal to 1.
Conclusion
This new scheme of auction and liquidation gives the NSBT tokens a floating rate, which is determined by the speculative potential of the mechanism of Neutrino reserves recapitalization and is going to be influenced by an increasing demand for new features such as creating collateral positions (long margin trading of waves tokens) or new assets with Collider (many different types of Neutrinos — Gold, EUR, S&P etc), as well as the governance functions of base tokens. At the same time, with this new update we can expect popularity and liquidity of NSBT tokens on different kinds of centralized or decentralized exchanges.
You can read more about the new developments of the Neutrino protocol in the vision article.
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