Minting Caps Equilibrium

To maintain the sustainability of NUON's yield-generating mechanisms, it is essential to balance the demand for yield-bearing protocols with the supply of NUON tokens. Imposing limits on NUON minting helps ensure that the yield rate remains sustainable over time.

Consider the finite pool of borrowers willing to participate in a lending protocol like AAVE at a given interest rate. If the supply of NUON tokens representing loans exceeds the demand from borrowers, the yield potential of the protocol may be diluted. Similarly, in decentralized exchanges (DEX), the liquidity between two assets is limited. Increasing the supply of one asset could reduce the relative yield of the trading pair.

While the idea of unlimited NUON minting might seem attractive, it is important to recognize the finite nature of yield sources. To consistently outpace inflation, strategic constraints on minting may be necessary. This is especially important when considering the risk preferences of users who have veto power over yield-bearing strategies.

In the initial phases, it is advisable to keep these minting restrictions either uncapped or set at relatively high levels. This approach allows for the assessment of the protocol's impact on underlying yield sources and enables iterative adjustments based on market dynamics and user behavior insights.

By strategically managing the minting caps, Nuon can ensure that the yield rates remain attractive and sustainable, providing reliable returns to NUON holders while maintaining the protocol's overall stability.