The Nuon Protocol is the only place where Nuon can be minted, and every single Nuon flatcoin is always overcollateralized with cryptocurrency on the protocol. Anyone can mint Nuon on the protocol if they have the required collateral.
Everything within the Nuon Protocol is automated and governed under smart contract transactions. Users connect their wallets and deposit collateral to mint Nuon. To withdraw collateral, users must return the Nuon they minted, which is burned. It is necessary to use the same wallet to both deposit and redeem collateral.
Fees are described in the Governance and Treasury sections.
When minting Nuon, proper collateral management is of the utmost importance. Improperly collateralized positions are quickly liquidated in order to protect Nuon’s peg. Users minting Nuon on the protocol should understand how collateralization works.
The ratio between the amount of Nuon a user has minted and the amount of collateral they have locked on the protocol is called the Collateral Ratio (CR). For each collateral type, the CR is determined by comparing the target peg price of Nuon with the market price of the collateral obtained via an oracle. The CR is displayed as a percentage, and will always be over 100%.
For added transparency and trust, it is also possible to view the CR for the entire protocol on the Analytics page of the Nuon Protocol app. In this case, the CR displays the ratio between all the Nuon minted and all collateral locked on the entire protocol.
The CR will vary with the volatility of the collateral market value and, to a lesser extent, the target price of Nuon. Users who have minted Nuon should keep an eye on the market prices of their collateral assets and their CR on the Nuon Protocol to avoid automatic liquidation.
The other highly important number for protocol participants to pay attention to is the Liquidation Ratio (LR). This number represents the collateral ratio at which a user’s position becomes insufficiently collateralized — the Collateral Ratio must always be higher than the Liquidation Ratio. The LR is different for each kind of collateral asset, and is a dynamic number that changes according to market conditions.
Both the CR and LR are dynamic: if a user’s CR ever equals their LR in any of their collateral positions, their position will be liquidated. As such, users must make sure that their CR always remains higher than the LR for each collateral asset they have locked on the protocol — it is recommended to overcollateralize by as much as possible to minimize the risk of liquidation.
The Liquidation Ratio is made up three different components that work together to allow it to dynamically react to changing market conditions and maximise protection of the peg:
Liquidation Ratio = Peg Target + Volatility constant (CVB) + Peg Gap (DPR)
- Collateral Volatility Buffer (CVB): The CVB is a constant number that is different for every cryptocurrency used as collateral, and is set based on the historical volatility of each crypto asset. It is added to the base peg to help maintain the overcollateralization of Nuon when collateral prices suddenly drop, causing liquidations. This ensures that the Nuon platform will be able to sell off the collateral quickly enough to maintain Nuon’s value. The CVB constant for each collateral asset may be changed via a proposal to the Nuon DAO.
- Dynamic Peg Ratio (DPR): The DPR is a dynamic number that represents the difference between Nuon’s target peg and market price. The DPR accounts for potential movements in the soft peg, protecting against peg fluctuations. The DPR increases when the Nuon market price is below the target peg, and decreases when the market price exceeds the target peg. The DPR variance formula is:
(On chain price - Target Peg) / On chain price
The Liquidation Ratio is dynamic based on a number of factors:
- LR will change with fluctuations in daily inflation rates when Truflation supplies a higher or lower base peg.
- LR changes when the market price of Nuon strays too far in either direction from its soft peg.
- LR will be impacted if the DAO votes to raise or lower the Collateral Volatility Buffer for a specific cryptocurrency. For example, if a certain collateral asset suddenly becomes too volatile, the DAO may vote to increase the CVB.
Nuon’s liquidation policy is optimized to maximize protection of the peg all the while boost capital efficiency for users:
- If a collateral position’s CR drops too close to the LR (within a certain threshold), the owner of that position will receive a warning notification on the Nuon app.
- If a position’s CR ever drops to the LR or lower, any user can trigger liquidation of that position.
- Once liquidation is initiated, 100% of the collateral is liquidated.
- The collateral is used to buy Nuon on the market. Purchased Nuon is burned, which maintains the peg.
- Leftover collateral is moved to the Nuon treasury.
- Users who trigger liquidation earn a percentage of the liquidation profit.
In order to limit risk for the protocol and all participants, the Collateral Hub only accepts whitelisted, blue-chip crypto assets as collateral. At launch, the assets are: Bitcoin (BTC), Tether (USDT), Binance USD (BUSD), wrapped Ethereum (WETH) and Avalanche (AVAX).
The Nuon protocol team and community may decide to allow additional assets to be used as collateral in the future. When considering new assets to whitelist, the risk of each asset will be assessed by a team of advisors, discussed by the community and put to a vote through the Boardroom governance system. The collateral ratio may be set separately for each asset depending on the associated risk and volatility.
One of the main unique safety features of the Nuon Protocol is an Automatic Liquidity Pool contribution every time Nuon is minted.
The automatic liquidity pool contributions prevent bad actors from minting more Nuon than the liquidity available in the market, thus ensuring that Nuon retains its value and utility. This feature also grants triple benefits to all users of the protocol:
- It adds an additional security layer.
- It builds Nuon liquidity.
- It generates yield for the minters.
When users mint Nuon, the protocol automatically buys an equal amount of Nuon on the market and pairs it with a portion of the user’s collateral in a liquidity pool on a DeFi site such as Uniswap, Pancakeswap, etc. This impacts the user’s Collateral Ratio, as an equal value of collateral as Nuon minted will become locked in the liquidity pool.
The user will automatically be rewarded as a Liquidity Provider (LP) with yield in the form of respective LP tokens from the associated DeFi site.
As the protocol gains in popularity and liquidity is stable, it may be possible to reduce or eliminate this feature by a vote to the DAO.
Once a user has deposited collateral and minted Nuon, it is easy for them to manage their position. The user can increase their Collateral Ratio by depositing additional collateral without minting further Nuon flatcoins, or by burning a portion of their Nuon without withdrawing collateral. It is also possible to do the reverse, lowering their CR (and accepting more risk) by minting Nuon flatcoins without depositing additional collateral, or by redeeming a portion of the user’s collateral without burning Nuon. The user’s liquidity pool contributions can also be managed by locking or unlocking additional collateral in a liquidity pool.
Another easy way to manage collateral positions is through Nuon Liquid Positions. Whenever a user mints Nuon, they will receive an NFT receipt representing their position, indicating both the amount and type of collateral deposited and the amount of Nuon minted. This “Nuon Liquid Position” NFT (or NLP for short) will dynamically update whenever their position changes, whether more collateral is added or part of the Nuon is burned. When the entirety of the Nuon is burned and collateral withdrawn, the NLP will also be burned and disappear from the user’s collateral hub.
Nuon Liquid Positions serve as a useful way for users to keep track of their open positions. They also have intrinsic value, allowing users to trade NLPs on the market with other protocol participants. When an NLP is traded, collateral stays locked in the protocol and changes ownership to the wallet the NLP is transferred to.
For example, someone may want to trade an ETH/NUON position valued at $1000 for an AVAX/NUON position worth the same amount. By simply trading NLPs, the collateral and minted NUON also trades ownership, changing from wallet to wallet automatically. Nuon Liquid Position NFTs are integrated with the OpenSea NFT marketplace for easy listing and trading of positions.
Currently, only full positions may be traded. Partial position trades may be added at a future date.
People will find many different ways to use Nuon and the Nuon Protocol to their advantage. While advanced yield strategies will certainly evolve as the protocol grows, here are some of the anticipated ways that participants will be able to benefit from minting Nuon:
- Asset Preservation: Because Nuon appreciates with inflation rates, minters can use the Nuon Protocol as a means of preserving assets that they aren’t currently using while also generating yield. In addition to interest protection, the Nuon Protocol’s automated liquidity pools grant users yield on collateral, while Nuon can be used on other DeFi sites to also generate yield.
- Over-leveraged Yield Farming: By using Nuon as collateral on other DeFi sites and staking the Nuon which will increase in value, thus augmenting their positions to mint even more cryptocurrency and their yields can be multiplied. This is a more risky strategy that will return higher yields but this approach will nonetheless appeal to some investors.
- Provide Liquidity: By minting Nuon and depositing it in liquidity pools-based DEXes, it is possible to earn yield and transaction fees. With the current high demand for a safe inflation hedge, it is anticipated Nuon will also be in high demand. Nuon will also continue to appreciate with inflation levels, generating further yield opportunities.
- Arbitrage: Arbitrageurs will be able to profit both from buying and selling Nuon on the market and by minting Nuon and selling it on the market. It is expected that there will be greater peg variation within the first few days to weeks after Nuon launches as liquidity is slowly built up in the market, making for even greater arbitrage opportunities.
To redeem collateral, minters must burn the same amount of Nuon as they originally minted. The price of Nuon may have risen in the interim, but the quantity of Nuon flatcoins to be burned remains the same.
When users keep the Nuon they mint and supply it to liquidity pools or stake it in other Defi protocols, there will be no negative impact on their position due to rising inflation when collateral is redeemed. In fact, quite the opposite, rising Nuon prices can allow them to over-leverage on an increasing asset that will return higher yields while retaining purchasing power.
For short-term positions in which Nuon is quickly minted, sold and redeemed, inflation loss in the short term has an imperceptible slow impact so will not affect arbitrageurs who are minting and burning in quick bursts.
For long-term positions in which minters sell or spend their Nuon, inflation loss is a possible outcome when they will have to buy back the same amount of Nuon in order to close their position and redeem their collateral. Nuon’s automated liquidity pools will alleviate inflation loss, but may not cancel it.
For this reason, it is not recommended that users sell the Nuon they mint on the protocol. There will be other strategies smart traders can engage in to create yield with Nuon by using it instead of selling it, making it far easier to return Nuon and redeem collateral with little or no impact from inflation.
In all scenarios, the overcollaterization level required by the protocol ensures that liquidation is extremely unlikely to happen due to inflation.