WXT — NXUSD Nereus’s New Native Liquidity Pool & Nereus Market Updates
The WXT/NXUSD Liquidity Pool (LP) is the fundamental element of the Nereus and WXT ecosystem. It has become the most liquid decentralised market for WXT and will serve as the means of access for WXT holders to the highly capital efficient and fully collateralized Stablecoin NXUSD. Additionally, the WXT/NXUSD will offer WXT holders the ability to generate substantial rewards by providing liquidity and then staking their LP tokens within the Nereus Protocol. The Nereus team see this as a natural next step for all WXT lockers & stakers within the Nereus Ecosystem, as participating as a liquidity provider within the WXT/NXUSD Liquidity pool will both provide substantial returns for Liquidity providers and support the Nereus & WXT ecosystems.
Liquidity Pool Fundamentals
The Nereus team have covered the mechanics of Trader Joe liquidity pools in significant detail in prior medium articles, including covering some of the opaque risks such as impermanent loss. As a brief reminder, Liquidity pools resolve the liquidity issues within thinly traded markets, as they do not rely on matching buyers and sellers to trade. LP’s utilize pooled asset reserves which are held on smart contract-owned addresses with a converter contract which enables traders to switch one asset to another. LPs should always be available to be traded against, provided sufficient capital is present within the LP, which should significantly reduce transaction slippage. Specifically, Trader Joe liquidity pools operate upon the Uniswap Invariant function, which employs the constant product formula K=Y*X (seen in the graph below).
Impermanent Loss Fundamentals
Impermanent loss is the risk that all Liquidity providers are subject to. Impermanent loss is caused by a unidirectional price movement, and it is exacerbated by market volatility. As an example, imagine a scenario where traders swap in a frictionless market where the demand & price for Token X soars in the external market. Arbitrageurs, looking to make short term profits will deplete the Token X reserve (selling token X on the external market). In this case, if a liquidity provider were to exit the pool, she would mostly retrieve Token Ys from the LP as she can only redeem her proportional share of the pools tokens she deposited. In this case, she will collect less of the significantly appreciated token than deposited, meaning a Buy & Hold strategy would have been more economically viable than providing liquidity. Liquidity providers are compensated for the Impermanent loss risk via 0.25% transaction fees & incentives. LPs should always consider that providing liquidity to positively correlated asset pairs is the optimal way to mitigate impermanent loss risk without undertaking more complex hedging strategies. The graphic below shows the percentage of impermanent loss that will be incurred when the WXT & NXUSD tokens change price (based on the price of these tokens on 13/05/2022). The percentage loss an individual investor will incur will vary based upon the market price of the WXT & NXUSD on the day they deposit & withdraw from the LP. The below graphic does not account for LP token staking fees or % fees received by LP participants.
The WXT — NXSUD Liquidity Provision & LP Token Staking
As previously mentioned, the Team at Nereus want to encourage WXT holders, WXT lockers & WXT stakers to become Liquidity Providers in the WXT/NXUSD liquidity pool. The Nereus protocol will adjust its current emission schedule to emit 57% of the remaining WXT Emissions to the WXT/NXUSD Liquidity providers, ensuring that the Liquidity providers that stake their LP tokens within the Nereus Protocol will receive >50% base reward when the LP’s liquidity is under $6.5 Million TVL. In the graph below you can see the percentage APR of Liquidity Providers who stake WXT/NXUSD LP tokens based upon the current TVL of LP tokens staked within the Nereus Protocol. Liquidity Providers will also receive 0.25% fees on all transactions, this will provide LPs with a long volatility position as periods of high activity will generate substantial fees within the LP.
This System will be enhanced by the FIFO Liquidity Provider Model, which will actively adapt to assign proportionally higher rewards to the longest standing liquidity providers that stake LP tokens, rewarding providers that have been present in supporting the WXT/NXUSD LP for the longest period.
The Nereus team want to provide the loyal WXT ecosystem participants with significant compensation for participating in the WXT/NXUSD LP whilst allowing them the opportunity to support the WXT ecosystem long-term. The team has ensured at LP participants will be adequately compensated for Impermanent Loss, with the Return Matrix below showing the return that liquidity providers will generate from Base-rewards before the FIFO Liquidity Provider Model assigns proportionally higher rewards to the longest standing liquidity providers. The Return Matrix shows that after incurring the Impermanent loss, liquidity providers will stand to make significant returns.
WXT — NXSUD Liquidity Provision VS Buy & Hold
The Nereus team would like to further extend the above case for liquidity Provision within the WXT-NXUSD LP by clarifying the situation where WXT is valued at $0.02 exactly 1 year from today and each below participant invested $2,000 in the trade:
The buy & holder would have full exposure to WXT price Fluctuations, his $2000 is now worth $4000.
The buy & holder would have Gained $2000 USD (In WXT) from the 1-year Holding Period
If the buy & holder had instead become a liquidity provider (depositing $1000 WXT & $1000 NXUSD into the LP & staking the LP tokens for the equivalent period). Over the same period, he would have experienced an impermanent loss of 5.72%, meaning he would redeem $1885.62 worth of tokens from the LP. Additionally, the Liquidity provider would receive interest from LP Staking of $3120.
The Liquidity Provider would have gained $2948 USD (in WXT) from the 1-year holding period
Assumptions: $4.2 Million Liquidity in the WXT/NXUSD LP, Frictionless Markets, WXT@ day 1 = $0.01, NXUSD = $1, WXT @ day 365 = 0.02):
The irregular payoff is attributable to the LP Staking interest payments being paid in WXT. When the holder decides to remove his liquidity from the LP, he can sell his WXT at the higher prevailing market price. This provides an irregular payoff as he technically does not lose his exposure to WXT provided he participates in the LP for a long enough time period to recover his Impermanent loss, after this, he only multiplies his WXT exposure. This can be seen in the 1-Year LP P&L vs the 1-Month LP P&L; the short-term LP does not benefit from the multiplying effect of a long-term LP provider. This is a very unique case, as this payoff profile is only possible when a token is within the LP and is paid out as an incentive for participating within the LP. This Graph clearly illustrates that Liquidity Provision (paired with LP staking within Nereus) will allow all LP participants to receive an enhanced return profile when compared to WXT Buy & Hold strategies.
WXT Incentive Re-allocation
As mentioned in Nereus’s prior medium articles, the Nereus dynamic APR product offering will continually adapt to the consumer activity to safeguard the protocol’s health and its long-term sustainability. As such, the Nereus Team has restructured the WXT incentive allocations to steer participant behaviour within the protocol, this will ensure that incentives are allocated to participants whose behaviours are deemed positive and constructive for the Nereus Protocol & its community.
Firstly, the Nereus team has re-allocated 32% of the remaining WXT incentive rewards from the Nereus Variable interest rate markets to the NXUSD/3CRV & WXT/NXUSD Liquidity Pools. This has been done by reducing the WXT incentive rates to all markets via a priority weighting system. This new WXT reward allocation system prioritises forcing the variable interest rate markets into an interest rate equilibrium, which will maintain the system health of the entire protocol. The New WXT reward allocation has also been implemented to ensure that all participants within the Nereus protocol receive parallel rewards when acting optimally within an asset market, hence why the AVAX market’s WXT incentives have been reduced to align with the WBTC & WETH markets.
Allocating proportionally more WXT rewards to the LP staking facilities within Nereus should ensure that the NXUSD/3CRV & WXT/NXUSD Liquidity Pools are sufficiently capitalised to facilitate normal operations even during periods of significant market volatility. This is incredibly important to the Nereus community as undercapitalised LPs would mean that participants would encounter significant slippage when transacting within the LPs. The Nereus team has carefully designed the return profile of the Liquidity providers with the Nereus protocol to ensure that LP’s will be able to re-gain & multiply WXT exposure by participating as liquidity providers within the Nereus Protocol. LP staking within Nereus has also been designed to offer Nereus participants significantly higher rewards than Locking & staking WXT.
Additionally, the allocation of WXT incentives to the UST Stablecoin market has been removed after last week’s UST de-pegging event. The Nereus team promptly halted all new UST deposits & borrowing activities within the protocol to ensure that the protocol was not susceptible to attack from malicious actors looking to profit from the UST de-pegging. This market will now no longer receive any WXT incentives.
Finally, the Nereus team is eager to hear the community’s feedback regarding the above changes to the Nereus protocol. The above coverage regarding LP staking will ensure that the Nereus community fully understand LP staking within the Nereus Protocol, for a guide on how to become an LP on Trade please use the links below. In the coming weeks, the team will release additional articles outlining market insights into the Participant trends of the NXUSD Stablecoin. So, stay tuned!
Trader Joe LP Guide: https://docs.nereus.finance/farming/staking-trader-joe-lp-tokens
Nereus LP Guide: https://docs.nereus.finance/farming/staking-curve-lp-tokens
