Introduction to Liquid Pylon Pools
Pylon Pools allow protocol supporters to attain a high yield on their UST (above the already high Anchor Earn rate) while providing protocol teams with a source of funding over the medium to long term.
However, while users benefit from higher yields, there is opportunity cost incurred for locking up UST. This is not a new issue as the Pylon team had previously signalled the possibility for users to withdraw their UST deposits albeit with the consequence of forgoing a portion of their rewards.
The Nexus team believes that the implementation of Liquid Pylon pools will be a benefit to users, while still enabling the goal of funding our team.
Pool contribution to Nexus Community Treasury
The primary function of the pools is to fund the Nexus team so we can execute successfully on our product roadmap. This is the core function of all Pylon Pools.
However, we feel the use of Pylon Pools can be a great catalyst in helping us jumpstart the acquisition of protocol owned liquidity (PoL) for Nexus Protocol.
For the Nexus Pylon Pool, 50% of the funds generated will therefore go directly to the Nexus community treasury in the form of UST. This UST will be convertible to Protocol Owned Liquidity (PoL) at any point thereafter via a community vote.
Currently over 80% of the inflation in $Psi comes from ongoing LP incentives. As Nexus grows the treasury’s share of LP tokens as PoL, we can begin submitting governance proposals to steadily reduce the emissions rate on these LPs. We aim to take an aggressive approach to building up PoL so Nexus can weather all storms that the market may throw at it.
The team has come up with some PoL goals (noted below) to achieve before we can begin to taper LP incentives. Please note that these goals are based on existing figures and is subject to future amendments decided by the Nexus community. We plan to achieve these goals through a mix of 1) Protocol Buybacks, 2) Pylon Pool, 3) Bond Issuance program. We have already begun the first steps in amending the protocol buyback program towards protocol owned assets (PoA) through Proposal ID 5 & 6, and are today releasing information about our Pylon Pools. More detail around the upcoming bond issuance program will arrive at a later date.
Our current PoL goals are as follows:
The reason we are choosing to eliminate incentives for the $Psi-UST pool first is because those incentives have very little usage other than to encourage market participants to provide liquidity. In comparison, the nAsset-Psi LP emissions ensure that there will be a liquid pool for users to mint nAssets and participate in arbitrage opportunities; this activity is value accretive for the protocol.
Please note, that we are merely prioritizing reduction of Psi-UST LP incentives over nAsset-Psi incentives, not ruling out nAsset-Psi out of Protocol owned liquidity. Nexus team will be suggesting an optimal combination and transition between LP incentive programme and Protocol owned liquidity for currently existing and upcoming nAsset-Psi pairs, to aid Nexus community to make the most rational decision in the favour of the protocol.
Tokenized Pylon Pool Details
Users will soon be able to participate in a Nexus Protocol Pylon Pool, receiving $Psi tokens in exchange for depositing UST and having their aUST yield redirected to the Nexus Protocol and Nexus team.
After depositing, users will receive a ledger token (in similar fashion to how nLUNA and nETH works currently) which represents their UST deposit in the Pylon Pool; this will be known as $bPsiDP-24m according to Pylon Protocol nomenclature.
By holding these ledger tokens, regardless of whether they remain in the liquidity pool or held in the user’s wallet, users will accrue $Psi token rewards on a per-block basis. These rewards will become claimable according to the parameters of the Pylon Pool.
We are looking to apply the following parameters:
In conjunction with the deployment of Nexus’ Pylon Pools, we will also seed liquidity on Terraswap for users to trade Nexus Pool Tokens. We are targeting a total pool size amounting to $1mil UST to ensure that swaps can occur without high slippage but we still caution users to double-check quote prices before swapping.
While the healthy functioning of these pools is value additive to Nexus Protocol, we do not think allocating any $Psi token incentives for liquidity providers of Nexus Pool Token-Psi is prudent as we believe that arbitrage incentives are sufficient to maintain appropriate price levels. LPs will continue to earn swap fees from traders using the pool.
Why are we doing Pylon Pools?
Pylon Pools will give the Nexus team more resources to grow the protocol both on Terra as new protocols like Mars and Prism launch, and to pursue new cross-chain opportunities; thereby establishing Nexus Protocol as the true nexus of yield opportunities for native Terra users.
We also believe that Nexus Protocol has a duty to push the envelope for how DeFi can work harder for its users. Beginning in areas like developing Protocol owned Liquidity and now the tokenization of Pylon Pools, we want to bring additional benefit to users of Nexus Protocol, giving them a broader range of decisions they can make with regards to their assets.
In our previous community update, we have outlined our updated product roadmap and recent hiring efforts — the new contributions from Pylon Pool deposits will help us revv up for the exciting journey ahead.
How the Nexus community benefits
There are four primary ways the community benefits from a tokenized pool:
- Tokenizing our Pylon Pool will unlock liquidity for those invested in the Pylon Pool, allowing them to tweak their yield strategies in real time
- Arbitrage opportunities may materialize when Nexus Pool Tokens trade above fair value, arbitrageurs can then deposit UST into our Pylon Pool, receive Nexus Pool Tokens, and proceed to sell it in the liquidity pool; this grows the size of the Pylon Pool deposits thereby increasing our available resources to grow Nexus Protocol
- Where Nexus Pool Tokens trade at a discount, users can lock in future yields by purchasing the tokens via Terraswap
- Supercharging the growth of Nexus’ PoL will help reduce token inflation and benefit loyal $Psi token holders
While Nexus Pool Token will be openly traded on Terraswap, there are a few guiding principles on how Nexus Pool Token should be priced. From a fundamental perspective, Nexus Pool Token is simply worth the net present value (NPV) of the UST users can claim at pool maturity plus the implied yield from $Psi token rewards. While the former is deterministic, the latter is dependent on market forces.
The formula we are using for NPV is as follows:
We hope you are as excited as we are for the upcoming Pools. Use of the pools will directly correlate to growth in PoL which will in turn, directly correlate to a reduction in the emissions rate of $Psi.
We’re just getting started (Ψ,Ψ).