New Pool Mechanics of Neutrino Assets on DeFo

Neutrino Protocol and Waves.Exchange are releasing new mechanics for investing in Neutrino asset pools on Decentralized Forex (DeFo).

Users can now invest in the pool to ensure its stability, through securing Neutrino assets’ holders from the collateral deficit caused by currency rate fluctuations. By investing in a pool, the user receives interest from Liquidity Provider Fees paid through the DeFo interface, in proportion to their share of this pool. Additionally, the user also receives staking rewards.

How does it work?

All stablecoins listed on DeFo are backed by USDN tokens. Up until now, each Neutrino asset was collateralized only by the aggregate value of funds accumulated in its contract through USDN swaps into the asset (let’s call this primary collateral). These funds were used to swap this asset back into USDN. However, under certain circumstances, these funds may not be sufficient to cover all issued tokens. The new mechanic enhances the stability of assets with secondary collateral — it allows users to invest in the asset pool with additional funds that can be used for a reversed USDN swap in a situation where primary collateral is not sufficient.

Exchange rate fluctuations of the national currencies to which the Neutrino stablecoins are pegged is one of the factors affecting collateral. As an example, we observe the Euro currency, to which the EURN stablecoin is pegged. If the Euro depreciates against the US dollar, the total value of USDN in collateral for the EURN pool will increase and the contract will be in a state of surplus. If the euro appreciates against the US dollar, the aggregate value of USDN in collateral for the EURN pool will decrease and the contract will be in a state of deficit.

By providing additional collateral into the pool, the user insures against the shortage of those who issue and hold Neutrino assets. In the first stage, you can only invest USDN in the pool of any asset traded on DeFo. Rewards are paid daily in the pool’s asset at the expense of DeFo Liquidity Provider Fees paid for each asset swap. The user also receives interest on his provided USDN from staking, which is also accrued daily.

In the event of a deficit, the invested funds may be used to replenish the collateral. Part of the funds will be locked (withdrawals from the pool will be temporarily unavailable) in the amount that is required to cover the deficit and in the same proportion for everyone. The funds will be unlocked once the pool collateralization ratio returns to 100% (by decreasing the exchange rate of the currency to which the asset is pegged or additional USDN investments into this pool). While funds are locked, the user will continue to receive rewards from staking and Liquidity Provider Fees.

What influences the ROI of a liquidity pool?

The amount of remuneration is influenced by 3 factors:

• The user’s share of funds invested in the pool in comparison to the total pool size.
• Trading volumes on DeFo. The Liquidity Provider Fee for one operation (token swap) on DeFo is 0.02% of the transaction amount.
• The current APY% of USDN staking. 90% of the USDN invested is staked.

What are the risks for a pool investor?

Investing in Neutrino asset pools carries a number of risks. In case of a shortage of the primary asset collateralization, your funds can be used to compensate for the difference in exchange rates. Also, if there is a shortage of the insurance reserve, part of the funds can be frozen on the contract to maintain the stability of the pool. This is a temporary measure and the assets will be unfrozen when exiting the deficit.

The higher the surplus in the pool, the lower the risk of temporarily blocking any funds. Yet since there will be more people willing to invest in such a pool, your share in this pool is likely to be less than in a deficit pool or a pool with a slight surplus. It’s important to bear in mind any potential exchange rate volatility of the chosen Neutrino asset against the US dollar.

More in-depth information on any risks associated with the use of tokens and smart contracts on the Neutrino protocol can be found here.

How to invest in a DeFo pool?

You can invest in a DeFo pool on the Waves.Exchange website. Do you still have questions? Check out this FAQ prepared by the Waves.Exchange team.

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