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Base Forth

Approaching the launch of decentralized Forex (DeFo), it is time to tweak the mechanics of Neutrino System Base Token (NSBT).

Financial instruments often come in pairs, such as, for instance, USD and treasuries, stable assets and their governing tokens etc. There is a “target” instrument whose behavior we’re trying to control through the “sister” token. The value locked in the supplementary token is meant to help control the main token’s behavior.

The Neutrino protocol works in a similar manner. There is a main token, USDN, which tracks the US dollar, and there is Neutrino System Base Token, NSBT, which ensures USDN’s stability. On top of USDN, we are about to build an ecosystem of stable assets, including national currencies. We call it DeFo(rex), as it is meant to offer an alternative to the traditional Forex infrastructure, providing an instant frictionless swap between different currencies.

More on that to come closer to the launch of the first digital Euros, liras and rubles! What I want to discuss now is the new mechanics for NSBT. It has ensured USDN’s stability during the initial stages of Neutrino launch, but now it’s time to tweak its mechanics, taking into account protocol governance and DeFo.

Let me explain how the Neutrino protocol works. An introduction would be appropriate here, since it’s very different from other stablecoin projects. Neutrino taps into the underlying blockchain economy, wrapping it into the stablecoin format. Unlike the majority of DeFi stablecoins on Ethereum, it is not based on p2p lending and margin call mechanics. The logic is different: it turns WAVES staking into interest paid on USDN holdings, thus creating a financial instrument with an annual interest in the range of 15%. As a 100% decentralized high-yield instrument, it appeals to the general audience. In a nutshell, it is “a bank deposit on steroids,” a unique innovative financial product.

Therefore, we have demand for USDN, which, in turn, creates demand for the underlying asset, the WAVES token. There is positive feedback that stabilizes the underlying asset’s value. But it wouldn’t be still smooth enough, as the crypto space is volatile, and we need another token to make the value locked in collateral more stable. Thus, we created NSBT, which is basically a bet on the USDN collateralization. It has a bond-like architecture: when the value of WAVES locked in the USDN backing goes down, you can buy NSBT, which effectively becomes USDN with a discount, and redeem it later when the collateral’s value rebounds. Demand for USDN creates buy pressure and pushes the reserves’ value back up.

So, the mechanism is two-fold: you have demand for USDN, as well as for a more speculative bond-like instrument, which backs USDN’s stability. Systemic risk is still there, and, if WAVES’ value crashes due to some external reasons, USDN will fail, as well. But USDN is one of the factors that increase the underlying asset’s stability.

Of course, we need to make USDN as stable as possible. This is why it would be nice to have some surplus in the backing reserves. Maker, the biggest stablecoin on Ethereum, has x2 compulsory collateralization, meaning that when it goes below that, a margin call situation occurs and the collateral is liquidated. I find this approach a little excessive, as our goal is to provide stability, and margin calls don’t help to achieve that.

What we need is a flexible monetary policy and complementary token pricing mechanisms that will allow USDN to be overcollateralized and stable. We are constructing a so-called “bonding curve” connecting the value of reserves with NSBT’s price, and we are doing it in such a way that balance is achieved in a state of surplus, but not excessive surplus. If we locked excessive funds in the collateral, it would be a waste of value. We need to lock as much as is needed to ensure the stability of USDN.

When NSBT is bought from the contract, it increases the value locked in the USDN contract. At a certain value of BR (backing ratio), the reserve price starts to rise, so users have an incentive to buy cheaper, at the targeted BR value.

But why should users buy NSBT at all, you would probably ask me. We enhance NSBT with governance functionality. Holding NSBT, you’re able to vote for specific bonding curve parameters, for future DeFo stable assets built on top of USDN and eventually for underlying assets, other than the WAVES token. NSBT is a synthetic instrument that combines bond-like and governance functionality.

It has an interesting price dynamics: if USDN gets under-collateralized, you can buy it with a discount (when BR is 0.9, NSBT costs $0.9), and redeem it through the contract later, when the balance is restored to $1. In surplus, NSBT’s price initially grows linearly and then sharply increases for BR>1.5. Thus, we target the stable value of backing ratio of around 1.5, that is 50% surplus in reserve funds. It corresponds to NSBT’s price of around $3. It can go even higher, if there’s still demand for NSBT when USDN is overcollateralized. But the redemption can only be done on the open market rather than through the contract.

I believe this is the first attempt to target certain collateralization levels in DeFi. It is a two-pronged approach, as we use the system token utility and speculative interest to guarantee that. It should become an interesting token to hold (especially when DeFo is launched, since there will be DeFo pools backed by it) and to trade.

Originally published at https://medium.com on September 8, 2020.



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