A closer look at “Formation”

As we unveiled in the product roadmap, the NAOS Protocol comprises two components: the liquidity protocol “Formation” and the lending protocol “Galaxy”. Galaxy emulates the traditional banking process, allowing borrowers to tokenize and collateralize real world assets; and Formation provides the liquidity required to fund real world assets.

How does Formation work?

Formation, inspired by Alchemix, allows users to take loans that repay themselves over time. A new synthetic derivative “nUSD” that tokenizes future yield is introduced, which can be minted against the supported stable coins “SSC”. At the moment, the only supported SSC is DAI, more SSC will be launched soon.

Step 1: Deposit SSC into the Vault to mint nUSD

Lenders are able to mint/borrow nUSD up to 50% of the deposited SSC. For example, deposit 100 DAI to mint/borrow 50 nUSD.

Step 2: In the background, Formation deploys the deposited SSC in yearn.finance to earn yield

The yield from yearn.finance is used to pay down the nUSD debt. Over time, the nUSD pays itself off. If no nUSD is minted/borrowed from the deposited SSC, the borrowing limit will increase by the same proportion as the yield.

As the nUSD continues to be repaid, the collateralization ratio will exceed 200%, in this case the users could either withdraw the excess SSC or to mint/borrow more nUSD. This essentially provides users with a more efficient usage of their capital by adding leverage.

In addition to yearn.finance, we’ll continue to integrate with other DeFi yield strategies and launch RWA based yield strategies over time.

Step 3: Stake nUSD to earn NAOS tokens

Two nUSD pools are available for holders to stake and earn NAOS tokens: the single nUSD token staking pool and the nUSD:3CRV LP staking pool. More NAOS rewards will be allocated to the nUSD:3CRV pool as the pool maintains the 1:1 conversion between nUSD and SSC.

Step 4 (This will be launched with Galaxy): Stake nUSD for a longer duration to earn more NAOS tokens

Galaxy comes with another nUSD pool, which allows stakers to provide liquidity for real world lending. This pool requires locking in nUSD for various time periods, which is critical for lending operations and comes with greater NAOS token rewards.

This is the centerpiece that differentiates NAOS Finance from other DeFi lending protocols. The key metric for Naos Finance is Total Loan Disbursed (TLD), rather than Total Value Locked (TVL). Hence, we will focus on optimizing capital efficiency and maximizing fund utilization. More details on the mechanism of Galaxy will be shared at a later time.

Step 5: Convert nUSD to SSC in the Transmuter

This is the option for those who are looking to add leverage on the yield from yearn.finance. Convert nUSD to SSC in Transmuter, which can be added to the Vault to generate more yield.

In addition, harvested yield from yearn.finance will come directly into the transmuter in the form of SSC. The mechanism guarantees the value of nUSD and ensures 1:1 conversion between nUSD and SSC.

Step 6: Utilization of yield from yearn.finance

With the yield accumulated in Transmuter, an user has the flexibility to either recover the initial deposited principal or to compound yield by reinvesting the proceeds. For example:

1. 100 SSC deposited for 50 nUSD at 200% collateralization ratio
2. Over time, 20 SSC of yield from yearn.finance accumulated in Transmuter
3. The 20 SSC will automatically pay down 20 nUSD of the initial 50 nUSD loan at 1:1 ratio
4. In this case, the user can maintain 200% collateralization requirement by either

a. Recover part of the principal by withdrawing 40 SSC (60 SSC / 30 nUSD), or

b.Borrow another 20 nUSD to re-stake in the liquidity pools (100 SSC / 50 nUSD)

TLDR: What to do with nUSD?

There are several uses for nUSD:

Option 1:

Stake SSC for nUSD. This strategy allows the SSC to continually earn yield, which can be used to pay off nUSD over time.

Option 2:

Stake SSC for nUSD and convert nUSD to SSC in Transmuter. This strategy provides leverage to generate more yield from yearn.finance.

Next Steps

The journey of real world lending through DeFi has just begun, we’ll continue the quest to optimize token design and utilization along the way. We recognize that a more simplified and efficient funding structure is required for the mass adoption, but also realize that we must take a step forward so we know which step to take next.

After launching Formation, the team will focus on building Galaxy and further streamline operational flow. We’ll continue to onboard top tier real world assets and form critical strategic partnerships.

Most interestingly, we’ll start the ambitious plan to create multi-strategy yield generating vaults, similar to yearn.finance, but based on real world assets. We are extremely excited about the possibilities and opportunities ahead of us!

Needless to say, we will continue to work tirelessly to create value for our token holders and partners.

Finally, after the mainnet launch, we will have multiple staking pools available:

1. NAOS:ETH Sushiswap LP Pool: Stake to earn Sushi
2. NAOS:ETH Uniswap LP Pool: Stake to earn NAOS
3. nUSD:3CRV LP Pool: Stake to earn NAOS
4. NAOS Single Token Pool: Stake to earn NAOS
5. Formation DAI Single Token Pool: Stake to get nUSD

About NAOS Finance

NAOS Finance is a DeFi lending protocol allowing lenders and SME borrowers to facilitate permission-less and borderless loaning/borrowing transactions on the blockchain. Built on Ethereum, our platform lets users tokenize real-world assets and subsequent lending.

We operate compliantly and legally in top markets around the globe, maintaining safety as a top priority and fostering enhanced trust in the lending/borrowing process.

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