Neutrino Enhancement Proposal: Base tokens Augmented Bonding Curve (ABC)
In this article, I present my personal proposal on the architecture, mechanics, and the technical implementation of the Neutrino Base tokens ($NSBT) tokenomics.
This proposal is published for consideration and public discussion to all teams working on Neutrino, large holders of $USDN, $NSBT, and $WAVES, as well as large market makers and system players in the Waves ecosystem.
The core idea of this proposal can be summarized as follows: decoupling of $NSBT market price from $WAVES volatility.
Neutrino, a protocol of real-world asset tokenization, is regularly improved and updated so that the services behind it remain as useful and safe as possible for users, the community, and investors.
The Neutrino System Base Token ($NSBT) is a critical component of the Neutrino system. Its primary role is to recapitalize reserves during a fall in the price of the reserve asset ($WAVES). Those actors who re-invest $WAVES during the fall of BR (backing ratio) and thereby stabilize the system should also be able to influence the development of the protocol and change various configurations of the protocol implementation. This is the governance function of $NSBT. When using base tokens as a payment tool in various extensions of the Neutrino protocol (for example, collider), $NSBT provides utility as a payment token. All of these proposals were drafted by the Neutrino R&D teams in the “2020 Vision article”.
However, today there are some difficulties in giving $NSBT an acceleration in the growth of its popularity, utility, and liquidity:
- The pricing of $NSBT is almost completely determined by the current BR (backing ratio) level, which mostly depends on the volatility of $WAVES itself.
- The exceptional liquidity of $NSBT only on the neutrino smart contract itself (Auction and Liquidation) severely limits massive accumulation and adoption of this token.
- $NSBT cannot be staked, unlike $USDN.
- Governance and payment utility functions of $NSBT can affect its market pricing only on a very long-term horizon due to the dominance of the BR dependency component.
- In the situation when BR>1, there is a risk of zero $NSBT supply and unresolved overcollateralization. That is, this surplus of capital does not participate in the development of the system in any way (except for the higher APR for $USDN staking).
This article will outline a proposal for improving the neutrino protocol that solves the problems described above.
I propose to consider several principles which form the basis for the technical solution and architecture for a NEP called “NSBT Augmented Bonding Curve”:
* NEP — Neutrino Enhancement Proposal
- The base token has to retain its main role in the system recapitalization when BR is going down, while motivating the actors to keep it around a certain target value, for example, 1.5.
- The price for the base token should be mostly determined by the demand for it (via governance and payment utility functions)
- The base token has to retain its system governance role through being locked on the smart contract during a voting process
- Locking of base tokens on a smart contract should bring more governance power to its holders (staking rewards)
- Staking rewards for base tokens must be determined from trading fees of base tokens on the smart contract
New token design
“Augmented Bonding Curve token sale model: an emerging crypto-economic primitive. This protocol is based on incentive systems that enable coordination of network participants to achieve shared goals. Tokens incentivize players in an economic game towards outcomes that are mutually beneficial. “
This blockchain primitive is very useful for implementing the so-called Automated Market Making on a smart contract. As the demand for the base token grows, so does its supply, which should be reflected as an increase in its price on the smart contract.
Let’s propose the following simple formula that implements market-making for $NSBT on a smart contract:
The more tokens are issued on the smart contract, the more expensive they become to buy in the future. This creates strong incentives for early Neutrino holders who carry the greatest risk of acquiring and accumulating base tokens in order to later vote with them or use them as a payment token in extensions of the Neutrino protocol.
Selling $NSBT from the Neutrino smart contract can work effectively according to this formula. The parameters of this formula can be changed by the $NSBT holders via voting to modify the configuration, as part of the decentralized monetary policy as it relates to the parameters of the curve and fees.
The sale of $NSBT is carried out for $WAVES tokens in order to replenish reserves and increase the BR. However, the price is nominated in $USDN for the convenience of market-making.
The sale of $NSBT from the smart contract is also subject to a purchase fee (for example: 0.5%), which in turn is distributed as a staking reward for $NSBT stakers. However, when BR is lower than 1, this fee is zero.
The minimum price for $NSBT is 1 USDN.
The liquidation of $NSBT by its holders on the smart contract also uses the same formula. However, while a purchase can be carried out directly using this formula, the liquidation contains several reasonable restrictions:
- Liquidation via the smart contract is possible only with BR 1
- The liquidation fee, in contrast to the purchase fee, depends on the BR, stimulating its support within a certain target interval (for example: 1.5).
The liquidation fee is calculated as follows:
As can be seen from the calculations, the lower the BR, the higher the liquidation fee which tends to 15% at BR = 1 and to 1% when BR grows above 1.5 (target BR).
Staking of $NSBT
Funds from received commissions are distributed among all base token stakers. Staking is a strong incentive to accumulate $NSBT and use them for their intended purposes (recapitalization, governance, and payments), instead of simple trading speculations. Due to fees, $NSBT tokenomics can have a network effect with a positive feedback loop for $NSBT stakers. Staking also allows for storing the token on exchanges that support staking.
The primary function of base tokens is to recapitalize the Neutrino system when the BR falls. Since recapitalization can serve as insurance for a smart contract against the volatility of the underlying asset, the owners of the base tokens should have the right to make decisions in the governance token system.
In addition to the governance functions, base tokens can play the role of payment tokens in the potential extensions of the Neutrino protocol (for example, collider). All these factors influence the additional demand for the protocol and the growth of utility in future updates.
Let us introduce the following terms:
1 — Target BR is a special value of the reserves indicator which the neutrino actors are trying to bring the system
2 — Collateral pool is the total pool of liquidity for swaps $USDN <-> $WAVES. Part of the BR calculation formula.
3 — Liquidation pool is a $WAVES pool formed from funds received when $NSBT is sold through the augmented bonding curve. Not included in the BR calculation. Provides $WAVES liquidity to liquidate $NSBT through the bonding curve. When BR < 1, this pool is empty.
Some of the funds from the liquidation pool automatically go to the collateral pool to recapitalize the system and increase the BR. A part of the funds remains to maintain liquidity of $NSBT -> $WAVES buyback through the smart contract.
When BR > 1, the liquidation pool is automatically replenished from the surplus of the collateral pool. How exactly balancing occurs between these pools is determined by voting of $NSBT stakers for the balancer parameter. For example, with a recapitalization of 0.5, half of the $WAVES can go to the liquidation pool while the other half to the collateral pool.
Since recapitalization is carried out both based on the growth of the collateral and the $NSBT curve sale, there are two important parameters, namely:
- Curve balancer parameter: the percentage of funds flowing into the liquidation pool from the collateral pool with an increase in the price of $WAVES.
- Surplus balancer parameter: the percentage of funds flowing into the collateral pool from the liquidation pool with an increase in demand for $NSBT.
By tweaking these parameters, the economics of the neutrino protocol can be optimized.
The $WAVES tokens in both pools are leased and used to define the staking rewards base for $USDN holders.
When BR < 1, all funds from the reserve pool go to the liquidity pool.
The design of the protocol ensures that the Neutrino system stays in the BR> 1 state most of the time, which is the most favorable state for the protocol to work and grow. This new proposed scheme may lead to the following positive consequences:
- The capitalization of $NSBT is mainly determined by the demand for it and its utility
- The possibility of $NSBT staking
- The possibility of decentralized management of BR and $NSBT economies without a direct influence on $NSBT itself
- Incentives to maintain BR> 1, leading to a positive side-effect in the form of a higher APR staking $USD
Looking forward to feedback from all Neutrino contributors and system maintainers about this proposal for an improvement of the $NSBT system.