AJNA Burning Secrets
an ELI5 version of how the different burning mechanics work
Intro
There are several mechanisms that the AJNA protocol uses to burn AJNA. Most of them, unknown to the users. We would like to use this space to explore them so everyone is familiar with the BURN.
What are the pool reserves?
Every AJNA pool has a reserve pot. Think about it as a separate accounting, where quote tokens (tokens borrowed against collateral) are set apart to be sold and burn AJNA.
The most basic example is:
An AJNA pool’s reserves have 100 DAI.
The reserve auction is kicked, and those 100 DAI are sold for AJNA and then, the AJNA is burned by the pool.
How pools increase reserves?
Now that we know how reserves are used, let’s understand how reserves are accumulated. There are three different inflows.
1 — Deposit/move fees
These fees are paid by lenders.
Every deposit has a deposit fee of 8 hours of interest at the borrowing rate. Let’s say a pool has a borrowing rate of 10%, a user who deposits 100 DAI would pay 8hs of 10% rate. Their final deposit is less than 100 DAI. The remainder, goes to reserves.
Similar situation with lenders moving the position to a cheaper bucket. A simple example, a user is lending DAI on the WBTC/DAI pool. Bucket price is 40k and it’s moved to 38k, user pays 8 hours of the borrowing rate, which, again, goes to the reserves.
2 — Origination fee
These fees are paid by borrowers.
Every time there is a borrow, there is a fee which goes to the reserves.
The fee is the lowest between, one week of interest or 5 bps multiplied by the loan’s new debt.
A borrower increasing their borrowing position also pays the origination fee.
3 — Net Interest Margin (NIM)
NIM is the portion of the interest accrued by borrowers which is not credited to lenders.
The pool uses the Meaningful Actual Utilization (MAU) to calculate the amount. The more utilization, the less percentage of interest goes to reserves.
An easy mental model is thinking that reserves is the gov. The NIM is a tax on the lenders’ profit and reserves charge it without providing any liquidity.
L2 pre-burn mechanism
There is some important information to understand about L2 burns. To claim L2s reserve auctions, competitors need to pre-burn their AJNAs in mainnet.
Let’s say Alice and Bob both want to participate in an auction for 100 USDC.e in a polygon AJNA pool.
Both AJNA holders need to BURN their AJNA tokens, and bridge what the protocol calls “burned wrapped AJNA”.
Alice burns 1000 AJNA and bridges 1000 BWAJNA. Bob does the same. In polygon, Alice is faster than Bob and takes the full auction with exactly 500 BWAJNA.
The end result is Alice holding 500 BWAJNA and Bob holding 1000 BWAJNA. Both would need to wait for the next auction or bridge to another L2 to take advantage of other auctions in different chains.
In short, a reserve auction in an L2 might cause a greater amount of AJNA burns just because competition exists.
