Flood The Pools
Introduction to $Psi/nAsset Liquidity Pools
Overview of this article:
Under the surface of what may appear to be a simple yield optimizer lies dormant a feature product so powerful it could reshape on-chain liquidity for Eth and Luna across the entire Terra ecosystem.
The purpose of this article is to explore the rationale and usefulness of the yield architecture which is employed by Nexus Protocol, and gain a deeper understanding for how this architecture will change liquidity on Terra.
The deepest on-chain liquidity for $bETH and $bLUNA
Nexus’ yield architecture which was designed for two distinct purposes.
- Provide a medium for yield distribution across all vault strategies, thus creating powerful recursive token buy-backs.
- Enable the creation of an auto-compounding, intrinsically yield-bearing LP pool involving Nexus’ native governance token ($Psi), and arguably the most important assets in the Terra ecosystem.. bAssets.
While the first of these is fairly straightforward, the second requires a deeper dive, and slightly more critical thought — let’s dive in.
Current Luna Liquidity Pools on Terra
In order to understand the value of the $Psi/nAsset pools, you first need to understand how the current liquidity pools involving Luna and Eth on Terra function.
Let’s use Luna as an example (although the following holds true for all bAssets).
In the Terra ecosystem there are currently 2 pools involving Luna both can be found on Terraswap (Luna/UST and bLuna/Luna). In the Luna/UST pool there is no native yield that is being captured since unstaked Luna receives no block rewards or airdrops and UST has no native yield either. The other pool (bLuna/Luna) involves a liquid staked derivative of Luna (bLuna), this asset does bear a native yield. However, the yield that comes from bLuna in this pool is not compounded back into the pool, instead it is left in the void not to be claimed by anyone, ever.
In summary, the current liquidity pools involving bAssets do not capture any native yield that is being distributed by the underlying yield bearing assets.
This is where Nexus’ yield architecture comes in…
nAsset/$Psi Liquidity Pools
nAsset-Psi liquidity pool is designed such that the yield for the nAsset rewards for the nAssets in the LP pool is automatically placed back into the LP pool. This yield is specifically going to the $Psi side of the LP pool.
The result is that the pool becomes imbalanced on its own given nAssets in the LP pool will constantly be yielding additional Psi to increase the number of Psi in the pool. As the pool becomes imbalanced the nAssets will be at a premium to the underlying bAsset & normal variant.
Arbitrageurs will be able to take advantage of this by simply minting more nAssets (by depositing bAssets at Nexus vaults) with $Psi and pocketing the difference considering an equal pool.
This will have a couple powerful recursive effects which are worth noting:
- Forced constant upwards pressure on the TVL managed by Nexus.
- The more nAssets exist, the more native $Psi buybacks occur from the protocol itself.
Because the current liquidity pools for bAssets do not compound with yield, we expect that a great amount of liquidity will be sucked into these pools where the yield will be quite high, and arbitrage opportunities exist.
Anti-TVL effect may also exist in the opposite direction if the price of Psi decreases or the price of underlying bAssets increases. In such cases, this mechanism will insert buy pressure on Psi at the cost of TVL via the users who will be taking the arbitrage opportunities. However, such an anti-TVL effect is expected to be lesser than the positive TVL effect in the opposite direction as the arbitrage process for such a situation involves additional steps with potentially greater slippages.
Incentives for nAsset-Psi Liquidity Pool
For the initial four years of the protocol, $Psi incentives will be rewarded for those who provide liquidity to nAsset-Psi LP pools. We have allocated the largest portion of our token distribution to this to ensure the incentives to participate will be meaningful.
High exchange liquidity via nAsset-Psi LP pools such as the nLuna-Psi LP pool will enable users to easily swap their position between assets with less slippage, whilst maximizing the expansionary effect of the nAsset-Psi LP arbitrage opportunities.
We believe that this thoughtful architecture design will allow for the deepest liquidity pools involving bAssets on Terra to form within Nexus Protocol. Assuming this does happen, the benefits can be significant for $Psi holders.
nAsset-Psi LP pool will be a new exciting farming opportunity for the users to farm without suffering the opportunity cost of forfeiting yield, only bearing the impermanent risk as a liquidity provider.
However, it is also important to note that the risk of impermanent loss for nAsset-Psi LP participation should be carefully considered before providing liquidity as unlike the most LP pools in current Terra ecosystem, nAsset-Psi pair is made up with two volatile assets which will inevitably add more uncertainty.
Hope you enjoyed this deep dive. If you want to see some numbers that outline how this process can work, please see this spreadsheet:
https://docs.google.com/spreadsheets/d/1Qe9E4FHIKyKbfKEoZcS9K96xaxDItB9Cjtg1dXKxCGI/edit#gid=0
It was created by an active community member on Twitter: @Ernestasdob, and we verify it’s accuracy from a simple modeling perspective.
- Happy Terra Autumn
