Dutch Auction

Nuon v2 uses a Dutch auction to convert the base asset - USDC initially - into yield-bearing assets. In a Dutch auction, the asking price starts high and decreases until someone buys it.

Dutch auctions are well-established in DeFi, used by a variety of protocols including Frankencoin. When there is an excess of USDC in the buffer at the end of a weekly epoch, it is converted into vault tokens. The amount allocated to each vault’s strategy is proportional to the amount of votes it has (see Section 4.3 Vote Escrow Weights). This amount is calculated and a dutch auction is set up for each vault to acquire the required vault assets.

The Dutch auction as a design choice in Nuon v2 serves two purposes - firstly, using a Dutch auction to acquire assets abstracts away complexity, allowing users to deposit USDC and let the protocol decide which assets it should be allocated toward.

Secondly, using a Dutch auction to acquire assets allows the protocol to take in assets while paying the lowest premium. New assets are added through vault proposals by simply changing the proposed token address. This is described further in Section 4, Governance.

This Dutch auction process works the same for acquisition of vault assets, and their auctioning on redemption, bidding 200 USDC for 200 of Aave aUSDC, then 199.99, 199.98, and so on until aUSDC is supplied at the current asking price.

With a long enough auction period, arbitrage bots will provide all assets in order to make a profit. A 10 basis point (0.1%) discount on $100 million TVL transacted just once in a year would yield $100,000. Such discounts occur in the daily volatility of vault assets.

The particular assets that the new USDC is auctioned off for depends on which vaults have the most capacity, as set by vote-escrow governance weighted votes (described in Section 4, Governance).