How does Nolus solve the issue of liquidity?
As the world of decentralized finance continues to expand, one of the biggest challenges that protocols face is maintaining liquidity in their money markets.
The ability to quickly and easily borrow and lend cryptocurrency is essential to the success of any financial system, but ensuring that there is always enough liquidity to go around can be incredibly difficult.
In traditional financial systems, central banks are responsible for providing liquidity by printing money or adjusting interest rates. However, in the decentralized world of cryptocurrency, there is no central authority to step in and provide liquidity when it is needed.
This can be particularly problematic in money markets, where borrowers rely on being able to quickly access the funds they need and lenders need a steady stream of borrowers to earn returns on their capital. When liquidity is low, borrowing costs can skyrocket and lenders may struggle to find enough borrowers to lend to, causing the money market to grind to a halt. At Nolus, we understand the importance of liquidity in a money market, which is why we have developed a few unique solutions to this problem.
Interchain Accounts
Through the use of ICA, Nolus can inherit liquidity from the source chain. IBC Accounts enable the creation of an account on one blockchain (the “host network”) from another blockchain (the “controller network”). Unlike regular wallet addresses, these accounts do not need private keys for a transaction. This allows a user to swap tokens, add liquidity, farm tokens e.t.c. on another network without manually signing a transaction there.
With access to all the largest DEXs in Cosmos, we can tap into those with the most liquidity for our supported tokens. This means we can provide our users with a wide range of tokens to borrow and lend at competitive rates while maintaining a healthy money market with adequate liquidity. More liquidity results in increased trade efficiency due to lower slippage, and access to borrowing more tokens.
Moreover, Nolus itself does not have to consider building its own decentralized exchange and attempting to maintain liquidity. If we can simply utilize existing assets on Cosmos appchains, our developers do not need to focus on attracting users to move, and instead spend their time optimizing our products. This also means we do not need to provide inflationary $NLS tokens to reward liquidity providers on a native DEX so that our tokenomics can be designed to attract lenders.
Revenue Streams
To begin with, Nolus will launch with the ability for lenders to supply stablecoins only. Due to current market conditions, liquidity within crypto is generally low and most market participants have a portion of their capital in stables. With stablecoins in abundance, users will want to put this capital to work and earn passive income through various revenue streams provided by Nolus.
Lenders are paid from two separate revenue streams:
- The Incentives pool — Through swap fees and spreads, revenue generated within Nolus is funneled to lenders.
- Borrowers interest — Nolus operates via a cash-basis model which improves cash flow throughout the money market, ensuring that borrowers pay their interest to lenders in regular installments.
If lenders can achieve sustainable rewards for their stablecoin deposits, Nolus will acquire lots of liquidity and lenders’ deposits that can be accessed by borrowers.
Concentrating Lenders
In the future, Nolus plans to integrate with EVM-based chains to expand our cross-chain presence. Luckily, we can utilize Axelar’s revolutionary technology to integrate with EVM chains without needing to deploy our own codebase there.
Without Axelar, Nolus would need to maintain stablecoin deposits on each individual EVM chain, threatening the resilience and scalability of our cross-chain products. By concentrating lenders under one money market, we can maintain a large stablecoin reserve for borrowers to access and be used in integrated DEXs on any network.
Conclusion
In conclusion, maintaining liquidity is a critical challenge for money market protocols that deal with lending and borrowing. However, interchain accounts and various future DEX integrations will offer a powerful solution to this issue by allowing Nolus to inherit liquidity from the source chain itself.
In fact, we expect the utilization rate to be high as Nolus can reliably provide capital to borrowers at a competitive rate. Although this means that all lenders may not withdraw their stables temporarily, the APR will increase sharply to ensure they are compensated. By prioritizing liquidity and efficiency, we are committed to providing our users with the best possible UI/UX in DeFi.
