Gathering community sentiment for a built-in nAsset auto-compounder vaults (not SPECTRUM)

Spectrum protocol recently delivered nAssets auto-compounder vaults allowing users to be paid their rewards in kind with an additional 6% SPEC incentive.

While this has been initially presented as a better and more lucrative approach for the users, I believe it is worth to explore this in greater details and potentially re-evaluate the benefits of having a built-in auto compounder within our friendly Nexus application environment and this not only for the benefits of the users but also for the treasury and Psi governance stakers.

The Problem

One of the reasons for pushing this feature I believe came from the general concerns over Psi price action and the constant need to harvest Psi rewards and compound or stake them manually to optimise the nAsset vault performances.

As a result, maintaining Nexus Protocol ended up quite time consuming which defeat the initial promise of “low risk” “automated” yield optimisation and in turn have a negative impact on user adoption.

Spectrum vaults “partially fix this”

Indeed, Spectrum protocol offered almost out of the box the solution to us in no time, demonstrating great collaborative potential within the ecosystem. Users can now deposits their nAssets into Spectrum vaults and get their rewards auto-compounded in their preferred assets and earning 6% extra on their results in SPEC token.

Spectrum yield incentive appears to be mis-leading as the below fee structure negates totally the additional SPEC incentive.

Deposit Fee : 0.1%

Performance Fees

Withdrawal Fee : 0%

Other disadvantage in using Spectrum

  • Less flexibility to go in and out of the vault, due to 0.1% deposit fee
  • Additional protocol security risks,
  • Additional exposure to asset volatility (SPEC token)
  • The value of the service is not accruing into Psi token nor re-directing value to the Treasury

Potential benefits for Nexus in building its own auto-compounder.

  • Predictable/Quantifiable revenue for Nexus based on Spectrum / Apollo data points
    • In less than a week, Spectrum attracted nearly 13% out of Nexus $100M TVL to its auto-compounder (nLuna + nETH only) proving the interest of the community for less exposure to Psi and higher capital efficiency on their nAssets.
    • Value accruing mechanism benefiting both Psi token holders and Psi stakers through better Gov APY %
    • With the upcoming nAssets (AVAX, Sol, Atom etc.) and EthNexus, the potential additional revenue that can be extracted from the auto-compounder will become quite significant over time for the entire Nexus ecosystem.

i.e.: ($13M TVL * 10% (average auto-compounder yield)) * 8%(fees) = $104K in nAsset

Assuming Nexus can attract $1B TVL thanks to more nAsset types, more volume and higher value per Assets

($130M TVL * 10% (average auto-compounder yield)) * 8%(fees) = $1.04M in nAsset
Currently the total amount of Psi token staked in governance = 175.54M
If my calculation is correct, applying similar 6%fee structure as SPECTRUM would lead to $0.057 additional yearly revenue for every Psi staked over 12 months period.

  • High flexibility to play between Nexus and Anchor to protect collateral bLuna position. (creating more fees in the future)
  • Increase in Treasury + Increase in governance APY = increase level of nAsset Depositors & Governance participation
  • Claiming the highest Luna yield strategy within Terra ecosystem is a great PR strategy that leads to more TVL (any % points counts considering the vast number of projects out there)
  • Auto compounding is Tax efficient in some jurisdictions which negate even further the perceived benefit of collecting SPEC token incentive (that would potentially create an additional taxable event)
  • Keeping our nAsset within Nexus app would make it a greater yield bearing asset that could potentially be collateralised again as part of other built-in yield strategies.

Arguments against in house nexus auto-compounder collected in previous discord conversations

  • the team has limited time and resources
  • does it make sense to focus on a product that will likely be built by yield optimising platforms that will compete with one another on fees
  • nVaults are popular enough to attract other protocols attention and build on top of is a good sign for Nexus
  • Spectrum makes sense if you’re keeping your nAsset in SPEC for the longer term

Conclusion

My intention is to create a conversation on this topic with a wider audience and feed the team with our experience on the ground based on real usage and experiences.

Nexus user friendly / easy to use interface and low risk / high capital efficiency approach are the core selling points of the protocol. To that end, a built-in auto-compounder while maybe not as innovative as other more risky strategies, should be part of the foundation of the nexus protocol, allowing maximum efficiency to all upcoming yield optimisation strategies and ensuring constant value accruing mechanism for the benefit of the treasury and governance stakers.

If EthNexus objective is to give the highest yield on ETH tokens without having to learn Terra ecosystem then Spectrum auto-compounder is not suitable in my humble opinion.

Some of the statements / calculation above may be incorrect so please contribute to this conversation so the team can evaluate the interest of the community, suggest alternatives or maybe push this to a governance vote.

Thanks to @Max and @somethingelse for the conversation started over on Discord

2 Likes

Thanks for setting this proposal up, @Cryptocainfri . I am in favour of Nexus developing its own auto-compounder, but only if the benefit outweigh its opportunity costs.

Firstly, from an opportunity cost perspective, that will definitely be from the time-taken by the team to develop the auto-compounder vs out-of-the-box solution from Spectrum/Apollo. Perhaps only the Nexus team will be able to shed light on the time and effort required on this.

From a revenue perspective, following your calculations (with minor changes to the terms):

($13M TVL * 10% (average nAsset yield)) * 8% (auto-compounder fees) = $104K in fees

Given that the point is to reduce the cost implications to the users, 6% is still rather high, and if we go ahead with the usual Nexus fee structure of 5%, that will yield $65k in annual fees for Nexus.
At the current PSI value and TVL in Spectrum, this will only yield $0.0003 in fees for each PSI in revenue, hardly able to move the needle.

However, if the TVL grows to $1bil, with your calculation with an adjustments to the fee structure to 5%:

($1bil TVL * 13% (auto-compounding userbase) * 10% (average nAsset yield)) * 5% (auto-compounder fees) = $650k in fees

Giving a revenue yield of $0.003 fees per Psi. Correction to your calculation above, it should be $0.0057 as opposed to $0.057.

While I agree with developing it in-house, we might want to tie in the consideration to:

  1. nAsset TVL > $1bil
  2. Auto-compounding segment of >80% (Currently only 11% of nAsset holders are participating in Farms)

With the above two scenarios, the fees generated will be:

($1bil TVL * 80% (auto-compounding userbase) * 10% (average nAsset yield)) * 5% (auto-compounder fees) = $4M in fees

The 2M will yield about $0.0228. This will not move the needle much, but its significant at today’s price ($0.035) at above 65% APR, however, it will drop to 10% when PSI recovers back to $0.3.

Unless the above two conditions are met, it’ll be hard to have this be priority over the other products that will bring in more TVL to the protocol.

P.S. $1bil TVL is not impossible given that Yearn Finance alone has almost $3bil TVL and Nexus has a similar biz model.

2 Likes

Thanks for your input, this is very helpful and much appreciated.

I totally agree that the benefits must outweigh its opportunity costs though we have to factor in all the pros listed rather than solely focused on the initial fee collected with the current model.

I also agree that a baseline of nAsset TVL > $1bil is the right target for this projection.

However, with an in-house auto-compounder segment, it should be activated by default hence 100% of the nAsset user base, including those participating in farms will contribute to generates performance fees. (if technically feasible)

*($1bil TVL ** 100% (auto-compounding userbase) * 10% (average nAsset yield)) * 5% (auto-compounder fees) = $5M in fees

The 5M will then yield about $0.0285. ==> 80% APR @ at today’s Psi price ($0.035)

You said “ it will drop to 10% when PSI recovers back to $0.3.”

Please correct me if I am wrong but so far we’ve seen Psi price increasing alongside its TVL, hence if the token price increase by 10x, we should expect the TVL to increase significantly more as we must also factor in the growing number of Psi token on the market. That said the TVL would have grown either by the number of additional nAssets deposited or their intrinsic value in USD.

In the case of Nexus, I think it is fair to say that an increase in TVL is attributable to increased popularity, usability, and liquidity and as a result the added 80% APR calculated above should be relatively constant imo.

It is also worth mentioning the cascading effects this new revenue stream will have on the Treasury and on the staking APY

Treasury

if 1% is redirected to PoL, this would mean an additional $1M (in nAssets) at our current 1bil TVL scenario

Staking APY

if 3% are redirected to Psi stakers, this would mean an additional $3M (spent in nAssets to buy Psi) at our current 1bil TVL scenario. We currently have 175M Psi staked, which would give them an extra $0.017 per Psi staked resulting in 48% APY (subject to dilution as higher APY will inevitably attract more stakers which is also an added benefit to be considered).

Psi governance APY is currently sitting at 8% which is not attractive at all imo.

Final thought.

This auto-compounder segment should be seen as a reusable building block for the protocol. While Nexus Team is currently developing multiple yield strategies with various risk appetites, I believe all these strategies should be auto-compounded by design, which would justify the need for prioritisation.

Once you apply the above performance fees to the other upcoming strategies, then the opportunity cost ratio become even clearer.

Perhaps we can continue to have the following as a benchmark for considering an auto-compounder.

Nexus Vaults TVL >$1bil UST

As for the auto-compounder by default, I have a differing view on this. Although anecdotally non-farm nAsset holders may want to auto-compound their yield, there is a fair share of nAsset holders who may not want to auto-compound like Cephii’s Tweet. I suspect there are quite a number of individual that may still want an option to accumulate Psi when the price is low and auto-compound when Psi is high. With an option, this introduces some technical considerations to it.

Please correct me if I am wrong but so far we’ve seen Psi price increasing alongside its TVL, hence if the token price increase by 10x, we should expect the TVL to increase significantly more as we must also factor in the growing number of Psi token on the market. That said the TVL would have grown either by the number of additional nAssets deposited or their intrinsic value in USD.

Yes, you’re right that Psi price action correlates to the TVL locked in the protocol, should the price of Psi increases due to the increased TVL and the revenue generated from the auto-compounder is fixed still at $650k (using my own example above), the amount of Psi that you’re able to purchase is lower, hence affecting the number of Psi tokens that be given back to governance stakers.

For example, at the current $0.035 price, a $650k will be able to have a buyback of 18.57mil Psi, however, if the price goes to $0.30, the same $650k will only be able to purchase 2.16mil Psi. Not factoring in the amount that will be transferred to the POL, the amount of Psi distributed back to the governance stakers will be lower. So in a weird way, Psi at this current price is actually beneficial for Psi stakers to accumulate larger share of the protocol governance rights.

Therefore, the 80% APR quoted above actually drops given that the price of Psi increases and the revenue from auto-compounder remains constant.

Revenue from auto-compounder will also fluctuate as it is subject to bAsset volatility, doesn’t it ?

I agree not every one will want to auto-compound and giving the option must be considered in the development costing of the module.
While I would probably follow Cephi on that one and accumulate Psi while possible, I have the feeling that the target audience for Nexus may not be the “degens” only. The bigger piece of the pie and long term vision for the protocol is in those who want to deposit their bAsset and forget, knowing they have the best yield strategy in place for their most valuable assets.

Would also be in favour of Nexus native auto-compounder, if the numbers add up and it benefits the overall growth of the protocol.

Additional functionality nice to see would be a option to allocate auto-compounding harvest option similar to Spectrum like auto-stake, auto-compound, stake in gov, or hold in wallet. That would accommodate all strategy appetites in-house.

I’m not in favor of having Nexus focus on this right now. There are so many other exciting vaults in their roadmap, I think this would be just distracting with only a small marginal gain compared to using Nexus as-is and compounding yourself of using the Spectrum Vaults

1 Like

Hi guys, I’m Anton. I’m new… but I’ll be with you a lot now…

  1. Opinion on SPECTRUM. Let them do what they do, they are very cool!!! According to their tokenomics steak SPEC distributes rewards in aUST it is very attractive to people including to our protocol!!! Just need to negotiate with them to allocate some SPEC to our treasure trove and stack them. Then we will get a portion of that income actually for us!!!
  2. I don’t really understand the NEXUS tokenomics yet, but I can see that you managed to grow PSI almost constantly… The thing is, when our farm works with autocompounding and PSI becomes more expensive relative to nETH for example, the magic happens and its amount starts to increase in a simply MAGIC way))) (this is very similar to the result of how MARS protocol works with their first strategies and leverage X2 but only in a growing market)!

Glad to meet you all! p.s. Sorry if the text is not very good, I’m Russian and I write only through a translator.

Thank you for your active suggestion and thoughtfulness towards resource allocation from the team to better serve the protocol.

Just to provide some more pictures in the resource perspective, native auto-compounder is quite simple task, that we in fact already have prepared a code and tests; thus if the community believe the native auto-compounder is in their benefit, the marginal resource required by the team would be limited

Additionally, reconsidering upon this options, I think native auto-compounder with zero fee (adjustable via governance) could be an effective solution for potential cross chain opportunities, offering cnLuna (compounding nLuna) tokens in other blockchains as the capital efficient version to hold luna

2 Likes

Hey guys, I’m thinking of raising a proposal on Mars Protocol for cnEth & cnLuna to be whitelisted as collateral. The value proposition will be cnAssets will swap between Anchor Borrow & holding bAsset to obtain the highest yield vs LunaX/stLuna which will only compound based on the Luna staking rewards APR. I’m looking for some information for the proposal:

  1. What is the average yield on nLuna/nEth for the last 30 & 90 days?
  2. What is the minimum LP pool depth of nLuna-Psi & nEth-Psi LPs?

Thanks, guys.

1 Like

what do you mean by minimum LP pool depth?

Since the value of the LP fluctuates, I’m looking for the lowest value the LP in the last 90 days . Would you have a snapshot of that?