Nereus Rewards Mechanisms

The risk and reward parameters implemented by a protocol like Nereus are the fundamental drivers of all community behaviour. In the DeFi Lending Marketplace, many different risk and reward profiles exist, each possessing unique characteristics. This has created a competitive market where DApp participants offering analogous services can differentiate themselves with their individual risk & reward parameters. Optimal risk & reward parameters should enhance a protocol’s ability to build long-lasting liquidity, a strong community, and prudent protocol behaviour: This is our intention for Nereus.

Emissions

The reward emissions rate is the rate of distribution of the protocol’s rewards to its users. Rewards are usually earned in the protocol’s native token. They can also be complemented with the liquidity mining incentive program of the protocol’s underlying blockchain (e.g., the Avalanche Rush Program). The reward emission rate is used to incentivise early interactions within its ecosystem. Emissions are usually distributed between Lenders, Borrowers, Liquidity providers, Marketing programmes, the protocols treasury, and the founding team. Emissions are typically governed by one of three conventional emission models:

Constant Emission Model

Constant emission models are optimal for Protocols that have already built strong liquidity and community foundations, like the Aave protocol. A constant distribution model is executed by distributing the same amount of tokens over a particular time period, to incentivise specific interactions within a protocol. Aave v2 in particular distributes 2200 stkAAVE per day as liquidity rewards. BENQI also chose to distribute constant QI rewards per week over a renewable period of 90 days. The 90-day periods would give the protocol time to observe its user’s behaviour and adapt the emission rate accordingly.

Linear Emission Model

Linear emission models offer time-decreasing rewards that incentivize early participants. The Fei Protocol used a linear emission model for its TRIBE native tokens to promote its Stablecoin and incentivize behaviour for the stability of its peg.

Exponential Decay Emission Model

Exponential decay distribution models have become the industry standard introductory emission distribution mechanism for DeFi protocols. This model initially distributes a high amount of native token rewards to protocol participants, effectively growth hacking the total value locked, transaction volume and liquidity within the protocol. The high rate of native token emission diminishes exponentially. This model favours early adopters more aggressively. Geist emissions are set to decrease at (1/1.0904) ^m over five years, where m is the number of months since launch.

Nereus Protocols Emission Model

As mentioned in the prior Nereus Medium articles, Nereus plans to distribute 1 billion WXT tokens to subsidise lending, borrowing, and staking within the protocol. Nereus’ plan to distribute WXT tokens will develop upon the aforementioned distribution models, the constant distribution model and exponential decay distribution model. For its first iteration, the emission rate model adopted by Nereus is comparable to BENQI. It is a simple model with constant emission rates set for four distinct time periods (phases). Each phase is triggered by an essential development step:

Phase 1

Phase 1 will take place in weeks 1–6 of the Nereus Protocol. 50,000,000 WXTs will be emitted per week.

• In the first 3 weeks of the protocol, 100% of WXT emissions will be allocated to Lenders and borrowers.
• In weeks 4–6, as soon as the WXT liquidity pool is operational, 75% of the emissions will be allocated to lenders and borrowers, with the remaining 25% being allocated to incentivise liquidity providers.

Nereus will emit a total of 300 million WXTs in Phase 1. This has been decided upon as an estimated equilibrium point between overly incentivising short-term participation (which will attract mercenaries) and providing sufficient incentives to instigate the building of a strong community. Additionally, during phase 1, Nereus will offer very competitive rates on both its borrowing and lending markets. The rewards distribution across markets has been calibrated to ensure that borrowing remains profitable on all markets, provided total liquidity & usage rate (Variable Debt /Total Liquidity) remain reasonable. As a reference, if total liquidity remains below 50,000,000 and the usage rate remains below 50%, the rewards APR will cover the unincentivized borrow APR cost in phase 1.

Phase 2

Phase 2 will take place in weeks 7–12 of the Nereus Protocol. 37,500,000 WXTs will be emitted per week.

In this period, 75% of the emissions will be allocated to lenders and borrowers, with the remaining 25% being allocated to incentivise liquidity providers. Nereus will emit a total of 225 million WXT in phase 2.

The end of Phase 2 will signal the release of the highly intricate Nereus V2. The plans for Nereus V2 cannot currently be disclosed as it is still in a testing phase, although Nereus V2 will look to further Nereus’ competitiveness with the most successful Dapps on the Avalanche Blockchain.

Phase 3

Phase 3 will take place in weeks 13–48 of the Nereus Protocol. 12,500,000 WXTs will be emitted per week.

In this period 75% of the emissions will be allocated to lenders and borrowers, with the remaining 25% being allocated to incentivise liquidity providers.

Phase 4

Phase 4 is the mature phase of the protocol. It will take place in weeks 49–96 of the Nereus Protocol. 520,000 WXTs will be emitted per week.

In this period 75% of the emissions per second will be allocated to lenders and borrowers, with the remaining 25% being allocated to incentivising liquidity providers.

In phases 3 and 4, the scheduled WXT emissions are lower than in prior phases. But the distribution of the protocol’s revenues as incentive rewards will take over if we succeed in our long-term objective to build a self-sustainable and competitive ecosystem, where WXT is valued as its key utility, equity, and governance token.

With Nereus V2, Nereus clearly outlines intent to develop into much more than just a traditional DeFi Lending protocol, exploring cutting-edge DeFi offerings that would also appeal to large CeFi entities. We hope this will be the driving force behind building a diversified community, with motivated, independent, and qualified members who operate in a Pareto optimal way.

Emissions distribution between lenders and borrowers

The reward emissions distribution between lenders and borrowers is a key parameter that drives early capital and community growth for a protocol. Allocating more rewards to borrowers will increase leverage by incentivising recursive borrowing within the protocol. Whereas allocating more incentives to lenders should drive sustainable organic liquidity growth. The emission distribution between lenders and borrowers is typically governed by one of three conventional models.

Preferential Borrower Distribution Models

Preferential borrower distribution models distribute more incentives to borrowers then lenders in an effort to inflate total liquidity within the protocol. This model is short-term orientated and encourages users to utilise recursive borrowing to leverage their positions and farm incentives. This has the effect of attracting Mercenary capital and lowering the overall health factor of the entire protocol. Blizz Protocol utilises this model, distributing on average 75% of emissions to borrowers and 25% of emissions to lenders.

Zero Borrower Distribution Models

Zero borrower distribution models do not incentivise borrowing within a protocol, only incentivising lending to boost the protocol health factor. Aave v2 employs a Zero borrower distribution model on risky assets, allocating 100% of incentives to lenders.

Equal Borrower and Lender Distribution Models

Equal borrower and lender distribution models allocate incentives equally to borrowers and lenders. It is rewarding early users, regardless of their activity. This model is a mix that still favours healthy adoption but lowers the mercenary risk compared to the preferential borrower distribution. BENQI employs an equal borrower and lender distribution model, allocating the same amount of rewards to borrowers and lenders.

Nereus splits Emissions equally between Borrowers and Lenders

As mentioned in Nereus’ Prior medium articles and whitepaper, Nereus’ emission model will adapt to the activities of the community within the protocol. As such, In Phase 1 Nereus will allocate all WXT emissions equally between lenders and borrowers. These parameters will be reviewed at the conclusion of each phase, to enhance user behaviour. Consequently, Nereus will not unjustly encourage recursive borrowing to draw temporary liquidity (mercenaries), at the expense of loyal community members.