Introducing NXUSD — The Innovative Fully-Collateralized Stablecoin on the Nereus Protocol
After just one month, Nereus has become one of the fastest growing DeFi lending protocols on the Avalanche blockchain. The team at Nereus wants to sustain this momentum and continue working to create a market leading & customer orientated Decentralised Finance Protocol. The next step towards this goal is phase 2 of the Nereus protocol, which will be focused around the NXUSD Fully-Collateralized Stablecoin. In this article, we will introduce the fundamentals of stablecoins and briefly introduce some of NXUSD’s innovative features.
Stablecoin Fundamentals
Stablecoins were initially designed in a whitepaper by J.R Willet of the Mastercoin foundation (renamed the Omni foundation) in 2012. This research laid the foundations for the first Stablecoin USDT Tether (originally RealCoin) to be released in 2014. The initial objective of Stablecoins was to provide a solution to the volatile and low liquidity characteristics of the early cryptocurrency markets. These characteristics made cryptocurrencies suboptimal as a medium of exchange and ill-adapted for capital efficiency. USDT and other Collateralized off-chain stablecoins achieved this by pegging their value to more stable traditional reserve assets such as the US Dollar at a 1:1 ratio. At the time of writing, Stablecoins have become a fundamental component of the cryptocurrency markets, with a total market cap of $186 Billion and USDT dominating as the cryptocurrency with the highest daily trading volume.
There are three distinct types of Stablecoin, each utilizing differing mechanisms and levels of decentralization to maintain their Peg.
Collateralized off-chain Stablecoins
Collateralized off-chain stablecoins are the most popular form of Stablecoin. They are backed by Fiat currencies such as the USD, EUR, and JPY or fixed against commodities such as Gold, Silver, and oil. Collateralized off-chain stablecoins such as USDT introduced the minting and burning mechanisms now widely implemented by many DeFi protocols, where users deposit specific collateral assets and receive an equal amount of minted Protocol native Stablecoins in their on-chain wallet: US Dollars for USDT minus fees. The deposited assets are then held in reserve off-chain, with users able to unwind their position by repaying the Stablecoin denominated debt. In this case the protocol would burn the issued amount of Stablecoin denominated debt and repay the collateral, maintaining a 1:1 peg.
The primary utility of collateralized off-chain stablecoins is to act as a ‘on/off-ramp’ for the crypto-currency ecosystem. They let market participants easily transfer capital on-chain. They also provide market participants with a cash-equivalent option, meaning traders looking to de-risk their positions can move to cash whilst remaining on-chain. The reserves backing the Stablecoin are held off-chain and are typically audited by an independent third party. Although, this has been the foundation of significant controversy over the previous year with widespread speculation that Tether (USDT) did not retain adequate reserves in prior periods.
Collateralized on-chain stablecoins
Collateralized on-chain stablecoins are backed by decentralised assets held on-chain, the reserves of these stablecoins are composed of various cryptocurrencies and governance is typically run by a decentralised autonomous organization (DAO). DAI is the leading collateralized on-chain Stablecoin and is historically backed by Ethereum collateral. DAI allows its market participants to deposit ETH as collateral and mint DAI. The community’s debt in DAI is overcollateralized by a mix of cryptocurrency assets such as ETH and WBTC. Users can unwind their debt positions by repaying their DAI denominated debt, with the protocol burning the repaid DAI balance to maintain its dollar parity. Any positions which fall below their pre-determined liquidation threshold are liquidated and users incur a liquidation penalty. The DAI denominated debt that is redeemed is burned to maintain the stablecoins peg. Users incur interest for utilizing DAI’s borrowing services, which would accrue upon their DAI borrowing, slowly raising the debt and the liquidation threshold of the position.
The primary utility of collateralized on-chain stablecoins is to provide market participants with the ability to maintain exposure to their cryptocurrency assets and unlock additional liquidity to spend (provided their account remains in good health). The introduction of Collateralized on-chain stablecoins like DAI has greatly improved the capital efficiency of hodling cryptocurrency assets.
Algorithmic stablecoins
Algorithmic Stablecoins are the DeFi 2.0 iteration of the traditional Stablecoin model. They use automated mechanisms based upon the established TradFi concept of Seigniorage shares to offer DeFi participants an innovative solution to the capital efficiency limits of collateral based Stablecoins. Algorithmic stablecoins can exist in either an overcollateralized, part-collateralized or even un-collateralized state and are indicative of the fractional reserve central banking model utilized by the US Government in the post gold standard era. There are numerous variations of the classic algorithmic Stablecoin Ampleforth, which will be covered in greater detail over our next medium articles. Ampleforth will be used as an example below to explain the fundamentals of algorithmic stablecoins.
The Ampleforth algorithmic Stablecoin model mimics the simplest monetary policy of a central bank via its ‘Policy Smart Contract’. It adjusts the supply of the internally generated AMPL Stablecoin every 24 hours to ensure the system maintains a 1:1 parity with the US dollar. If demand is high, AMPL will be above $1, and the system will rebase its supply by minting more of AMPL tokens (Expansionary monetary policy). If demand is low, AMPL will be below $1, and the system will rebase by burning some of the internally generated AMPL (Contractionary monetary policy). AMPL position holders maintain a proportional share of the AMPL total supply through expansionary and contractionary rebasing phases. Only the quantity of AMPL tokens they hold in their account will fluctuate. Akin to all the above-mentioned stablecoins, Ampleforth allows market participants to deposit cryptocurrency assets and borrow their internally minted Stablecoin AMPL. AMPL remains fully redeemable for position holders, with the standardized minting and burning mechanisms employed on deposit & withdrawal.
The primary utility of Algorithmic stablecoins is to further increase the hodlers capital efficiency, by providing them with low or even zero rate borrowing services. The passive and algorithmic mechanisms employed to maintain the system peg are the key functions behind maintaining protocol health and optimal ecosystem conditions to facilitate this behavior.
More recently Terra/Luna and Fei have also devised their own algorithmic Stablecoin models with innovative features. These algorithmic stablecoins can be undercollateralized. They rely on their reserves to absorb the Stablecoin price volatility. The result is a more efficient peg: even if the collateralization ratio is lower, capital is in fact decisively deployed to re-peg the Stablecoin in a timely manner. The peg is also achieved through a set of mechanisms, hard or soft, that we intend to use for Nereus.
Introducing NXUSD — The Innovative Fully-Collateralized Stablecoin on the Nereus Protocol
The Nereus team is excited to introduce our new innovative Fully-Collateralized Stablecoin NXUSD, which will be the basis of Phase 2 of the Nereus protocol. Over the coming weeks, we will release medium articles detailing the current composition of the Stablecoin marketplace, NXUSD’s utility & systems, and our plans for further development of the Nereus ecosystem. In this article, we will introduce some of the key concepts that will be implemented within Phase 2 of the Nereus protocol and NXUSD.
NXUSD will offer a 0% interest rates
Upholding the core principle of DeFi 2.0, NXUSD will be highly capital efficient for all protocol participants that borrow from the platform, offering 0% interest rates on all NXUSD borrowing with a 0.5% origination fee with competitive LTVs. Phase 2 of the Nereus protocol can provide 0% lending due to NXUSD being an internally minted asset, meaning it comes at nominal cost for the protocol. This protects the protocol from having to incur lending costs on acquiring assets, which would have to be passed on to position holders. A 0.5% origination fee is charged on all borrowing transactions, with the proceeds accruing to the protocol treasury. This fee structure positions Nereus phase 2 amongst the most competitive Lending Protocols on the Avalanche blockchain.
NXUSD will be spendable at 50m merchants in 200+ countries
The Nereus team has leveraged its longstanding business relationship with the cryptocurrency payment platform Wirex to enable the NXUSD Stablecoin to be spent via its multicurrency Wirex card. This service will be available from day 1 to all Wirex’s 4.5 million users and will provide market leading synergy between Nereus and Wirex. Offering instantaneous exchange at over 50 million vendors worldwide will exponentially increase the utility of the NXUSD Stablecoin. By contrast, comparable stablecoins have limited utility and are typically instantaneously exchanged within an LP after being received.
NXUSD will employ risk managed isolated markets
Phase 2 of the Nereus protocol will employ the market leading risk management framework of isolating each asset/token market within the protocol. Isolating market risk should ensure that the protocol can withstand token-specific tail-risk events. This will also provide additional flexibility to users, who will be able to select their position risk tolerance on an asset/token specific basis within the protocol. The isolated markets mechanism is akin to the Isolated-margin feature offered to traders on Centralized exchanges. The isolated-margin feature lets the trader restrict the margin allocated to a position. Therefore, it prevents additional drawdown on the trader’s capital and protects the remaining capital if a single position which is operating on margin takes heavy losses. This lets protocol participants create customized token-specific risk positions and provide traders with flexibility when building a diversified portfolio.
Nereus Phase 2 will Heavily Incentivise Liquidity Providers
Liquidity pools are a crucial element of any Stablecoins ecosystem, as they allow position holders to exchange their borrowed Stablecoin tokens for more liquid tokens (this can also be used for recursive borrowing). Nereus phase 2 will provide WXT incentives to all Liquidity providers who stake LP Tokens from the WXT/NXUSD and NXUSD/3CRV liquidity pools within the Nereus Protocol. This should ensure sufficient liquidity exists within the NXUSD Liquidity pools to ensure position holders can exchange tokens without substantial erosion of their capital base. Furthermore, Wirex is considering the possibility of transferring its WXT transaction volume to the WXT/NXUSD pool, to boosting volume and farming. Wirex is also considering listing the pool’s token on the Wirexapp to let any user easily participate and potentially benefit from the growth of the Nereus ecosystem.
In conclusion, the team at Nereus want to maintain our current momentum and position the Nereus protocol as one of the leading DeFi protocols on the Avalanche Blockchain. We believe the innovative features of our new fully-collateralized Stablecoin NXUSD paired with our existing product offering will cement Nereus’s position amongst the leading DeFi protocols. Over our coming medium articles, we will delve much deeper into the world of Algorithmic stablecoins and disclose the innovative mechanics NXUSD will employ within Nereus Phase 2, so stay tuned.
