Terra Project Spotlight — Nexus Protocol
In our newest issue of Terra Project Spotlight, we’re pleased to introduce Nexus Protocol — risk-minimized vaults for Anchor borrowers and Mirror delta-neutral strategies to maximize yield and eventually, serving as a gateway to yield-generating products in the swelling Terra ecosystem.
The Nexus team has moved very quickly in their road to mainnet deployment, so let’s dive into precisely what they’ve been working on and where they envision Nexus’ future heading.
Background on Nexus’ Team
Nexus is currently a team of 6 passionate community members who initially started working together on Nexus after reviewing an Agora post written by one of their core contributors.
“Our ultimate vision as a team is to expand the Terra Ecosystem and bring UST to the masses,” says Shimmy, Nexus’ Head of Research. “We believe in the future of programmable money and the utility that will bring to improve the fundamental financial system.”
Nexus’ team has implemented their design rapidly, preparing for mainnet deployment after the Columbus-5 mainnet goes live, already under audit via a Terraform Capital auditing partner. So what exactly is Nexus, and what is the problem that they’re offering a solution to?
First, we need some background on Anchor’s design mechanics.
Setting the Stage — Augmenting Anchor Borrow Demand
Anchor’s unique design as a money market that accepts yield-bearing assets as collateral on the supply side, specifically staking derivatives of major PoS chains, creates some unique effects.
The ~20% APY Anchor UST deposit rate is possible because it’s subsidized by the staking yields of deposited staking derivatives like bLUNA and bETH. Borrowing incentives are mediated by the ANC token incentives, which swing to more lucrative when borrowing demand falls to stimulate inflows of yield-bearing collateral to subsidize the deposit rate.
However, during extended or volatile bearish market conditions, the demand for borrowing, whether to trade on margin or yield farm, naturally falls.
The ANC token incentives have proven to help stimulate borrower demand to a certain extent. Still, the Anchor utilization ratio remained low for much of the 2 months following the May crypto market crash. The result was a depleting yield reserve as the protocol drew from the excess UST pool to subsidize the deposit rate. It’s essentially a backstop against the low borrow capital inflows relative to the size of deposits during extended bearish conditions.
The 20% deposit rate is clearly enticing. Especially as the Anchor SDK gains traction for third-party integrations and Orion Money becomes a UST liquidity black hole on other chains, depositor inflows will increase. Throw in versions of Anchor on other chains like SolAnchor, EthAnchor, and BSCAnchor, and the pathway for ballooning demand-side TVL is apparent.
Borrower demand needs to scale concurrently with demand for depositing.
Basically, as long as borrower collateral is sufficient to subsidize the deposit rate with a utilization ratio of ~ 60–65% or higher, Anchor’s yield reserve gradually increases with excess yield, ANC buybacks on the open market ratchet up, and the protocol is generally more healthy.
To sustain Anchor’s trajectory towards its planned integrations to augment borrowing demand, TFL recently capitalized the yield reserve with $70 million. The capital deployment helped maintain Anchor’s highly appealing deposit rate for UST on the demand side, which unlocked more time for major integrations and improvements to bolster the protocol’s borrow-side robustness.
Primarily, this involves instituting a multi-collateral model on the supply side. First up, bETH recently joined bLUNA as the newest form of borrower collateral on the protocol via collaboration with Lido Finance.
The incentive for stETH holders is distinct. Anchor unlocks one of the few avenues to borrow a stablecoin against bonded staking positions, and ANC token borrowing incentives provide some of the most attractive yields for staking derivatives. The incentives will be similar for other forms of collateral like bSOL and bATOM, also currently in the works to be added as collateral.
The recent integration of bETH on Anchor has played out phenomenally.
Within 2 weeks, the total amount of bETH deposited on collateral on Anchor is ~76K stETH (~$245 million at current prices) at the time of writing, comprising roughly 8% of Lido’s stETH.
Anchor’s utilization ratio has subsequently increased substantially to the healthy 60–65% range, as more yield from stETH collateral inflows to Anchor (in the form of bETH) are wielded to subsidize the deposit rate with more abundant inflows to the yield reserve. Healthy market conditions for LUNA don’t hurt either as more people are willing to borrow against a rapidly appreciating asset.
Excluding some recent ancillary improvements, such as raising Anchor’s borrow LTV to 60%, there are other ways to help improve the demand for borrowing on Anchor beyond the protocol’s inherent goals to expand collateral types and implement upcoming V2 changes. More diverse collateral options create more robust borrowing inflows and reduced concave effects (i.e., not relying on a single collateral type), and more effective utilization changes amplify supply-side demand.
Additionally, dampening liquidation risk is also critical for Anchor. It helps deflate downward reflexivity in the underlying collateral’s price (e.g., bLUNA) as cascading liquidations follow volatile market conditions.
From the borrower’s perspective, another issue is always at top of mind — managing an open position. Managing open borrow positions can be a labor-intensive ordeal, continuously checking the LTV ratio to ensure collateral is safe and having adequate liquidity to pay down parts of the loan should the liquidation threshold approach.
Why not make borrower position management and liquidation risk management easier?
Enter Nexus Protocol.
Nexus Protocol — Simplifying & Increasing Borrow Demand
Nexus’ concept was conceived during the brutal crypto market downturn in May of this year. As asset valuations plummeted across the board, bLUNA liquidations accelerated into a cascading wave, applying downward pressure on the LUNA price and causing several exogenous effects on Terra.
Many of those developments were covered extensively by the Anchor team at the time.
Put more succinctly here, outstanding loan positions for bLUNA on Anchor with an LTV above the (previous) minimum ratio of 50% were liquidated, causing massive sell pressure on the bLUNA/LUNA pair on TerraSwap. Liquidators offloading liquidated collateral created a large premium for LUNA relative to bLUNA, compounding sell-offs of the collateral as users bought bLUNA and sold LUNA for profit.
Reflexivity ensued, causing network congestion as the liquidation queue flooded mempool space on the Terra blockchain.
“Following the liquidation collapse that happened in May, Nexus opted to first solve what we considered to be the most immediate need in the Terra community — a safe vault for Anchor Borrow which maximizes users yield while eliminating the risk of principal liquidation,” says Nick, Nexus’ Head of Marketing.
Simple, one-click vaults for borrowing on Anchor rely on Nexus’ strategies to minimize the risk of liquidation while maximizing capital efficiency. Nexus’ concept technically applies to all types of collateral, such as bLUNA, bETH, and future collateral. It’s designed to simplify the borrowing process for newcomers or users not as attuned to protocol parameters, LTV ratios, and how to borrow safely.
Nexus primarily accomplishes this for Anchor vaults via principal-protected single-asset staking. But it also infuses Mirror V2 into the mix, utilizing a distinct method for outpacing the Anchor deposit rate.
Initially, there will be two vaults in Nexus’ Initial Phase:
- The bLUNA Vault
- The UST Vault
The bLUNA Vault
There are 3 primary functions of the bLUNA vault, detailed below.
First, Nexus will deploy a bot that essentially front-runs the Anchor price oracle smart contract via a bot. The bot mimics the weighting logic of the price oracle to attain the exact prices fed into Anchor from the oracle a few seconds before the Web App is updated.
It’s known as the “Automated Anchor Liquidation Level Optimization” function of the vault.
Due to the ability to aggregate price data before it’s reflected in the Web App, Nexus can optimize borrowing capacities and protect open borrow positions from liquidation for bLUNA depositors in the vault before liquidation is triggered by automatically paying down at-risk loans where necessary. Nexus can subsequently maximize yields close to the LTV while reducing liquidation hazards since Repay and Borrow activity occur at the smart contract level — offering a window to re-calibrate outstanding borrow position parameters by paying down loans close to liquidation and increasing borrowing capacity.
Enter the second bLUNA vault function, the “Automated Borrowed UST” function.
The Automated Borrowed UST function serves as the backstop for paying down positions in danger of liquidation on Anchor. Borrowed UST is deposited into the vault and deployed in low-risk, yield-maximizing strategies and is only diverted to repaying loans in danger of liquidation when the hazard manifests.
The final function, known as the “Automated ANC Rewards Claiming and Interest Balancing” function, executes automated claiming of ANC borrower rewards. A portion of the rewards is used to pay off interest accrued from borrowing positions to stave off liquidation sustainably.
Overall, the bLUNA vault is designed to offer borrowers a one-click avenue to maximize yield from borrowed UST, reduce liquidation risk for open positions, and scale ANC rewards claiming by eliminating the need for manual airdrop claims.
The UST Vault
While the bLUNA vault requires opening a borrow position on Anchor, the UST vault is more straightforward. Quite simply, Nexus plans on outpacing the Anchor deposit rate (~20% APY) by focusing not on Anchor, but Mirror.
At a high level, Nexus hedges the Impermanent Loss (IL) risk of provisioning liquidity to mAsset/UST pairs (liquidity on TerraSwap) with mAssets minted using aUST as collateral or taking long positions in mAssets. Nexus plan includes 3 components:
- Impact of Weighted APR
- Automated Mirror Mint Liquidation Level Optimization
- Automated MIR Rewards Claiming
Nexus wields a combination of all 3 components to optimize risk-adjusted yield for UST vault depositors above the Anchor rate, with some similar mechanisms as the bLUNA vault used.
Without diving into the explicit details, Mirror enables users to mint mAssets (e.g., borrow) against them using aUST (Anchor UST) as the collateral for minting synthetics and deploying the yield from aUST elsewhere. Nexus deploys the excess yield into a buffer pool to manage liquidation risk while counterbalancing the weighted APR of open LP positions to maximize yield.
Be sure to check out their upcoming whitepaper for the mechanism design on the UST vault.
Looking Ahead
Nexus is targeting a mid-late September launch of its Initial Phase, which includes the bLUNA and bETH vault products. Currently under audit via Halborn Security, Nexus will go live after Terra’s looming Columbus-5 mainnet — an approach taken by many Terra projects on the cusp of launching.
The official launch will be preceded with a public sale on Star Terra, Terra’s upcoming gamified IDO platform, and Pylon — a payment-in-cashflow generalized framework built on Anchor that includes Pylon Gateway, an IDO launchpad. Stay tuned for further details from the Nexus team.
Nexus’ vision beyond V1 is not explicitly limited to bLUNA or bETH yield-optimized vaults either.
The team is exploring a concept known as ETHNexus, a yield-optimized vault for bETH on Anchor that derives its cross-chain functionality from ETHAnchor, the Ethereum-side version of Anchor protocol.
Interestingly, Nexus’ nstETH is a tokenized derivative of the wrapped stETH on, the yield-bearing ETH2.0 staking asset deployed as bETH collateral on Anchor via Lido Finance. Why is this interesting?
Any stETH form beyond Lido’s bETH implementation functional with ETHAnchor can be deposited into the ETHNexus vault. Currently, Lido Finance’s stETH comprises roughly 13.61% (~973K ETH on Lido) of all outstanding stETH. If a liquid staking derivative of ETH 2.0 (e.g., stETH) is compatible with ETHAnchor, then Nexus can incorporate it into its ETHNexus vault.
Deposited stETH from Ethereum will be swapped to bETH and operated within the Nexus ETHNexus vault, offering optimized yields for stETH on Terra higher than many incumbents on Ethereum — helping Terra absorb more value from the stETH market.
Tokenomics
Nexus’ token design is split into 2 buckets:
- PSI token
- nAssets
nAssets are tokenized representations of assets deposited in Nexus vaults, entitling them to vault yield and can be swapped back to the original asset freely.
The PSI token is a governance and protocol fee token that enables pro-rata shares of excess yield generated by Nexus vaults. Recently, Nexus announced that PSI tokens would be airdropped to ANC governance stakers on Anchor, rewarding Anchor users that lock-up their tokens to participate in Anchor’s governance.
Stay tuned for more information from the Nexus team about the official release of their whitepaper, the upcoming public PSI sale, and airdrops to Anchor ANC stakers.
If you’re interested in learning more about Nexus, check out their socials below and the recent demo of the web app announced during a live session with Terra Bites:
Nexus Socials:
Twitter — https://twitter.com/NexusProtocol
Medium — https://nexus-protocol.medium.com/the-anti-harpoon-protocol-nexus-protocol-71376dfabfa1
Telegram — https://t.co/09hATjh3Fe?amp=1
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Application form to build on Terra — Terraform Capital:
https://airtable.com/shrN4ydO8nZcMa0ku
Terra community pool + Agora research forum:
Mirror community pool + community forum:
https://forum.mirror.finance/latest?order=activity
Anchor community pool + community forum:
