LP Money Market

In this forum we will explain one of the newest concepts studied and researched at Nexus.
There are two important pieces of the puzzle that we need to highlight in order to discuss this idea.

A great and new type of collateral

  1. Within the Terra ecosystem at the moment there aren’t many options if you want to utilize your tokens as collateral to borrow against. One of the best forms of collateral that is not included in this small list are LP tokens. LPs are great as collateral for a number of reasons:
  • LPs are generating yield, thus your collateral is increasing over time while paying the debt interests. In other words, your debt won’t increase while your collateral will
  • LP tokens that contain UST are less volatile than the other token that constitutes that LP. e.g. if Anc price goes down 50%, Anc-UST decreases by roughly 30%
  • LP tokens also are great at preventing abuse of a money market compared to a single Token

Below is an example for how a money market using LP tokens can be resistant to abuse:

Ex. There is a Dao that have total control over the emission of it’s token; let’s call it SHT Coin

With a traditional Money market the malicious Dao can do a devastating damage with this strategy:

  • Manipulate the price of a small pool, for example SHT-UST in order to artificially set an high price for SHT

  • use newly printed SHT tokens as collateral to borrow UST before anyone notice this manipulations

This sort of attacks are prevented if the only accepted collateral is in the form of LP tokens, because no matter how much of your token you print, you have to pair it with UST

Providing liquidity has some foundamental limitations so far

  1. The other piece of the puzzle: being a Liquidity Provider was not for Holders, up until now.

In fact if you are a Liquidity Provider you are surely aware of what Impermanent Loss is.

Impermanent Loss is by its nature symmetrical for increase or decrease in price. For example consider the LP Psi - UST.

If Psi price 2x you will experience an IL of 5.72%, the same as if the price of Psi goes down by a factor of 2 (x½ or - 50%)

On the other hand, being a holder of Psi by definition implies that you think that the most probable scenario is that Psi will increase in value.
At this point we see a contradiction.

Impermanent Loss is symmetrical if we look at price action but on the contrary your evaluation of the token isn’t by any means symmetrical; you are an holder, you cannot be bearish and bullish at the same time.

How to align those things? How to solve this inefficiency?

Nexus protocol is going to build what we call an LP Money Market. A place where you can use your LPs as collateral in order to borrow liquidity that Nexus Depositors will provide. With that liquidity you can do numerous things.

Dominating Impermanent Loss

Here is just an example, but an important one for point 1. and point 2. :

You are bullish on Luna, so up until now you didn’t provide liquidity to Luna-UST because of IL.
Leveraging Nexus LP Money Market now you can collateralize your LP position Luna-UST, in order to borrow UST; with this UST you buy more Luna.
After all of this you would have :

  • the LP tokens Luna-UST

  • a debit which is in UST

  • some Luna bought with that UST

If Luna price is going to increase you will be able to repay your debt more easily. Now your risk profile is no longer symmetrical, in fact you are net Long on Luna.

The following graph shows the risk / reward profile of 3 strategies : Hold 50/50 (50% Luna, 50% UST), LP Luna-UST and LP Long, the strategy that I explained above.

In the x-axis there is Luna price (in UST). In the y-axis there is the total value of the LP position

The strategy above is what we call Long Farming and it is just one of numerous possible applications for this service. Further application that has been simulated also includes Hedged Farming, Leveraged Farming and all sorts of degen strategies. For structured products, utilizing LP Money Market, Nexus may offer an anti-liquidations service, letting our community’s imaginations explore new frontiers while fully protected from the most devastating effects of liquidations.

Little Side note: users would provide UST to Nexus UST Deposit simply because we are going to offer higher expected APR than Anchor. Market will decide how high this will be. We did some simulations and with the current productivity of LPs we are confident this service will be able to provide good returns for Lenders and utility to Borrowers.

Here is a simple visual summary of the LP Money Market

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For more liquidity and capital efficiency you guys should consider minting your own stable coin like Abracadabra mints mim, or like kinetic is planing on minting kust, that stable would be over collateralized by the LPs, so they should maintain the peg, you can talk to whale so they can arb the let’s say psiUST/UST. But this will allow PSI to capture more fees (no need to pay UST depositors) and you will get more capital efficiency. Otherwise, you might not have enough liquidity for lenders if there are not enough borrowers. Also Kujira could help with liquidation to avoid bad debt, and by extension, psiUST from losing the peg

Your idea will certainly be taken into accout, but at the moment UST is THE product of Terra ecosystem. I get your point for increased efficiency, but with a new stablecoin the possible points of failure massively increase

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@Pippellia , just for the sake of clarity:

  1. Nexus user deposits LUNA-UST LP as collateral at $500 worth of LUNA, and $500 UST.
  2. Nexus user borrows $500 UST to purchase more LUNA.

My question will be:

  1. Will there be a interest fee for borrowing $500 UST? How is this fee calculated?
  2. I assume that this UST will be coming in from UST depositors depositing into Nexus. What happens if there isn’t sufficient UST deposited into Nexus?
  3. Should the borrow be LUNA, will there be a LUNA deposit section just like UST deposits?
  4. Since the LP position are added as collateral, what will be the LTV for such liquidation and if so, how will the liquidation work, will it be in the similar fashion as Anchor?
  5. Will the Nexus user depositing the LP receive some of the % fee from the LP, or the entire fee will be transferred to Nexus as part of the service? Will Nexus keep the fee in it’s individual token? For example, if the fee generated is Luna from LUNA-UST LP, will it be kept as Luna in the Nexus treasury?
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  1. Yes exactly. Borrowers will pay a % of the fees coming from the LP to UST Depositors. There is also another component to take into consideration. With the UST borrowed you could do whatever you want. One options will be to utilize a built-in strategy (Long Farming) that does the following :
  • swap UST for Luna
  • utilizing this Luna (rather bLuna) in the Nexus Vault, having the benefit of an anti-liquidation service

Let’s put some numbers :
LP Luna-UST APR = 40%, bLuna Nexus Vault = 7%
So (without considering price movements) the max that Borrowers can pay to Depositors is 2 * 40% + 7% = 87%
(the 2 is because the max loan is half of the value of the LP position at the beginning )

With the current productivity of LPs we think that we can provide Depositors of UST better rates than Anchor Earn, but we are definitely not providing that 87% APR to Depositors. In fact this yield would be shared between Borrowers and Depositors and dynamically adjusted to balance Demand and Offer. Nexus is going to charge a small fee for this service, definitely not taking all of that yield. We are not greedy bastards ser :rofl:

  1. If there is no UST, then it is impossible to use the service. UST offer is key in this regard, but I think high enough APY would attract much liquidity
  2. Yep, LP Money Market will have the effect of turning many tokens/Coin in Terra into yield generating assets
  3. We are currently considering automated liquidation for LP. With automated liquidation there is always the possibility a black swan event : Suddent price movements will triggers liquidation, which sell some collateral, lowering the price, triggering more liquidation ecc…
    But in this case having LP as collateral improves stability.

Another things to take into consideration is that with Long Farming (and other build-in services), before liquidation, not the collateral but rather the newly bought Luna will be sold for lowering the loan.
This increase efficiency and minimize price fluctuation because your maxloan = LTV * collateralvalue is not decreasing. On the contrary if you are selling the collateral you are also decreasing the maxloan , which requires you to sell even more.

LTV and liquidation process is still under research; we will try to take all of this and more into consideration. If there is the necessity, we might shift to some Kujira-like model, but for now we are convinced with automated liquidation

  1. the fees coming from the LP Money Market will enter the Nexus Treasury in form of Luna, UST, ANC, Mir … Astro incentives and so on. How to utilize this liquidity is a HUGE topic, very much to be researched
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Thanks, @Pippellia . That explains it brilliantly. For point 5, this gives an opportunity for the Nexus team to morph the tokenomics of PSI. Since there will be various tokens accumulated as part of the treasury. Taking cue from the Liquid Driver token:

  1. Deposit PSI into staking contract and depending on the staking period (up to 2 years), you could earn a % of LUNA, UST, ANC and various other Terra tokens as yield.
  2. 50% of the treasury can be paid out to stakers depending on the weightage of staking periods, but 50% can be kept in the treasury to be deployed to various DeFi to generate more yields.

This can bring huge value for PSI holders especially PSI can provide yields in various tokens like LUNA (god token).

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Thank you for your really precise questions, I am sure these will help many people have a clearer understanding of this service.

This model that you suggest could effectively be a really nice way for utilizing the Treasury.

At the moment the Research Team is not actively working on Treasury uitilization for a simple reason :
Before that we need to think about a fee model. The fee model will effectively shape the Treasury. And before that, also we have to research an effective way for distributing the yield coming from the LPs to Depositors and Borrowers, because this will likely shape the fee model.

So the road ahead seams to be :
Distribution model → fee model → Treasury utilization

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As I mentioned in the discord section, here is an extract from the call between me and shimmy

Liquidation LTV

We initially discussed the simulations that I made for liquidations. Liquidations are very important for Lending protocols in general. With LP Money Market there is a pecularity. The collateral to be sold is in the form of LP tokens. The liquidation process will be like this :

  • When the liquidation LTV is met the position will be liquidated until the position reaches a safe LTV (same as what Anchor does)
  • the underlying liquidity will be withdrawn from the pool using the LP tokens; half of this liquidity is already in the form of the loan (UST or Token ), the other half needs to be sold (here consider slippage)

The problem is that for big enough positions, selling one half of the LP will experience massive slippage. That’s because, before selling the liquidation process is decreasing the liquidity of the pool because of the withdraw. A less “thick” pool, means an higher slippage

Taking that into consideration, we saw that ( if the simulations are 100% correct; we are double and triple checking them ) an appropriate and safe liquidation LTV would be around 70%
Note that the initial LTV is set to 50% ( not 69.9% ) for preventing some types of abuses.

The general approach that we have is building a solid and safe product, and once is live, gathering real word data to optimize the service and increase efficiency.

How big should be a pool in order to have that LP tokens in LP Money Market ?

We then discussed some other simulations. Basically I constructed a test that does the following :

  • compute how much liquidity is necessary to move the price of a Token so much that a newly opened position with full loan will be liquidated
  • compare that with a threshold value for liquidity ( we are still researching how to select such value, so maybe some statistics guy might help )

If the first is < then the second, then the LP token is not going to be accepted in the LP Money Market ( in this first implementation )

Maybe it is more clear with an example: Luna-UST LP
I open a new position in the LPMM: with 2000 UST worth of LP I am going to borrow 1000 UST (full loan)
The liquidation, with an LTV of 70%, will happen when value of the collateral will be 1000/0.7 = 1428.6 UST

  • How much should change the price of Luna in order to have the collateral value change from 2000 UST to 1428.6 UST ?
  • Having worked out this number then we ask : How much Luna (in UST value) should a big whale sell, in order to make the price drop by that % calculated before?

The idea of this test is to prevent abuses (like the following) by making them too costly : A big position is opened in the LPMM (as a borrower), a bot sees that, automatically selling the tokens until the position gets liquidated. When the position is liquidated the price drops even further, and finally the bots re-buys the original quantity of Tokens + an extra.

The next step is definitely Distribution model. If you have some good ideas we would love to hear that. We already have a sketch in mind but we are definitely open to new and different approaches.

This is an absolutely brilliant proposal. I think liquidity pools are the defining innovation of DeFi and creating products that build upon them is exactly the right strategy for Nexus going forward.

I have some ideas about the future of Nexus LPMM:

1. LPMM → LP Vault
Could LPMM incorporate the auto LTV management (and autocompounding) of Nexus Vaults? This would simplify the product for the users. Because the liquidation mechanics have to be figured out in any case for LPMM to be viable, wouldn’t it then be compatible with the vault mechanics?

LPMM could then be branded as LP Vaults for further simplicity. In my view Nexus should be the “smarter Spectrum”, with the same straightforward UX but higher yields due to the more complex mechanics that are hidden under the hood.

2. LP Vaults could be positioned as IL free investment vehicles
If LP Vaults are always entered with UST, impermanent loss effectively does not exist. IL only “happens” when you start with a 50/50 position in assets; if you start from cash (UST) any loss/gain is always real. (An excellent article on the subject here)

This is poorly understood by the community at large, which can work to Nexus’ advantage from a marketing perspective. An LP Vault should be positioned as a high-yield alternative to a simple long position: as a Luna-UST LP is effectively a 0.5x leveraged long Luna position, a Long Luna LP Vault can increase this effective leverage closer to 1.0.

3. Yields should be autocompounded into the LP Vaults

What this would accomlish is that compared to a simple long position HODL, the LP Vault would require no more cognitive load, but offer similar but lower volatility and a very strong yield component that’s independent of price action. Quite literally having your cake and eating it too!

4. Partnerships should be sought out with Anchor for the Deposit side

LP Vaults are limited by the demand for deposits. Anchor protocol has the opposite issue – they lack demand for borrowing, because the market has a dearth of strategies that create yield with leverage that are simple enough for the average user. nAsset Vaults are a good solution, I believe they have the necessary simplicity for the average user, but they fall short of mass adoption due to insufficient yields.

In contrast, LP Vaults would provide the level of returns necessary to entice investment, while also providing two benefits to the Terra ecosystem that it desperately needs: 1) sustainability for Anchor protocol, 2) and potentially shift billions of currently illiquid Anchor deposits into the Terra money markets.

None of the current protocols directly help Terra solve this existential challenge. Should Nexus offer a credible solution, it could gain the support of major players who would be incentivized to drive mass adoption of Nexus LP Vaults.


I’m very keen to hear your comments.

I want to clarify my propositions further.

I believe Nexus could become the Luna to Anchor’s Terra.

LP Vaults (creditors) would play the part of bAssets, because they need a more enticing replacement. Anchor depositors would also have other aAssets, like aLuna and aEth (but also aPSI) available on Earn, each with its own variable APR thats backed by the yield reserve.

Depositors would gain some of the leveraged LP yield and keep 100% long exposure to the asset. LP Vault investors (creditors) would have more than 50 less than 100 % price exposure, but suffer liquidation risk, modulated by automatic LTV rebalancing.

The depositors could be in Nexus too, yes. However the sheer traffic that Anchor commands is reason enough to cooperate, rather than compete. The yields with LP vaults will be incredible, and even if they are used to make Anchor depositors sustainably whole, there will still be a ton of money to share amongst the LP Vaults and PSI stakers and LPs. The Terra ecosystem owes everything to Anchor, and whomever can save it will be the saviour of the ecosystem, taking center stage for years to come.

Most of the profits should go to vault creditors, but also a good portion should be used to buy PSI from the market and provide incentives for staking and PSI liquidity providers.

This would make Anchor Earn’s sustainability dependent on the demand for LP Vaults. That demand depends on the yields of the Vaults, which depends on the volatility of the Terra/Luna pairs.

When sustainability is poor or the Earn rates drops too low, there is more volatility as people close positions, which drives LP Vault yields, which drives Earn yields, leading to higher value aAssets, leading to more volatility, and so forth. The yields will increase until the supply of deposits and demand for credit is exhausted, at which point the decay is modulated because any shift away from either LP Vaults or aAssets increases volatility, increasing yields.

What this effectively means is that LP Vaults would become the definitive counterweight that balances Terra on a sustainable course. Nexus would become the Luna to Anchor’s Terra.

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Hi @pebakesa and thank you for your contributions!

" 2. LP Vaults could be positioned as IL free investment vehicles
If LP Vaults are always entered with UST, impermanent loss effectively does not exist. IL only “happens” when you start with a 50/50 position in assets; if you start from cash (UST) any loss/gain is always real. (An excellent article on the subject here)"

I read the article and I partially agree with what it is written, but let me make some observations:

  • The comparisong between the strategies was not fair since considered that only the LP is producing yield. I did a comparison to account for that

    Tell me if you need the file for checking the formulas (apparently I cannot upload that here)

In the image above you can see I am comparing 4 strategies:

  • 100% cnLuna ( compounded nLuna - no fees )
  • LPing Luna - UST with daily autocompounding of the Astro Rewards
  • 100% UST in Anchor Earn ( assuming Anchor APY constant = 19.5% )
  • 50% in UST in Anchor Earn , 50% in cnLuna

With lpmm everyone will be able to “bend” that optimal region as they see fit

Honestly, I would not advertise LPing as a IL-free strategy only because you enter with UST.
IL is the difference between Hold50-50 and LPing without considering the fees.
So, because it is a comparison, somethimes it makes sense, somethimes it is out of context.

I only look at the risk profile of the strategy.
Looking only at the risk profile I can say that If someone wants to have a flat risk profile, then Hedge LP is something to consider
formu

As you can see the higher the loan (in Luna), the more the risk profile of the position is flat (compare that to UST_Anchor strategy).

For the other points that you have raised, I can tell you that lpmm is very much changed compared to the original idea. But do not worry, now it is way better imo.
The research team is working super hard for finalising some details, but I can guarantee you and the rest of the community that when I will have some more time I will finally update you.

Very true, the article is outdated in that respect – there were far fewer options for producing yield a year ago!

I admit calling it IL free is stretching it. But if you increase the leverage of your LP position (opposite to the Hedge LP your animation demonstrates, v nice btw) you can bend the optimal region to cover most of the probable price points, only underperforming at the extremes.

But that’s also beside the point. The problem with impermanent loss is that the average user doesn’t understand it or the yield curves of LPs, so I feel it’s become this boogeyman that’s stifling adoption. This is a marketing problem in my view.

I’d love to hear your thoughts on the rest of my proposal, but I understand if the R&D isn’t ready for daylight just yet. Don’t keep us waiting for too long! :slight_smile:

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Oh yeah, I think you are right saying that lack of comprehension is limiting adoption of non-zero risk strategies.
Although I think that in the long run the average level of investors will increase, I now get your point. I will talk with nic about that.

Talking about Anchor.
Anchor protocol wants to be a super-intuitive and easy to use platform for stable yield for UST.

Because of that I do not think that they would consider lpmm, at least for the moment.

Great! I’m glad I could offer you guys a new perspective, for what it’s worth.

Exactly! I think they are right to focus their brand on low-risk minimalism, but I think that’s also precisely why they are having so much trouble generating user interest in the Borrow-side of their platform. Making leverage plays with bAssets is about as far from the comfort zone of the average Anchor depositor as you can get. It is no wonder their protocol is not currently sustainable, it’s all due to poor product/market fit of the Borrow side.

That’s why I think Anchor/Nexus would be a great fit: your protocol provides leveraged positions that generate yield with the same level of simplicity and intuitiveness as Anchor Earn – at vastly more palatable risk levels due to automated anti-liquidation. The perceived risk of a Nexus Vault, LP or otherwise, is in my view a very good fit for Anchor’s userbase.

1. Anchor
++ great adoption, both user# and TVL
– lacks yield, due to non-viable Borrow product
= they are bottlenecked by an overflow of deposits and lack of creditors.

2. Nexus
++ can generate massive yield with LPMM
— lacks user# and TVL
= currently bottlenecked by the lack of adoption and the lack of credit to power the Vaults

This is what I mean when I say Nexus could be the Luna to Anchor’s Terra. Anchor needs someone to borrow their massive deposits, so that they can generate enough yield to make Earn sustainable. Nexus could generate that yield.

Just imagine what it would mean for Terra/Luna if Anchor was made sustainable and the yield reserve stopped hemorrhaging. Imagine if all those Anchor deposits were used to provide liquidity to the ecosystem, instead of doing nothing. Imagine if Nexus was the protocol that made this possible!

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It is surely very precious to us discussing ideas that comes from the most active part of the community.
Thank you for your contributions!

I defo agree that utilising UST deposited in Anchor would be a massive opportunity for a protocol and let me say, for the whole Terra community. How to do it precisely has not been fully explored yet.
There are many criterias that strategies that leverage the massive Anchor Earn deposit have to pass; for instance :

  • withstand a bank run : at any time lenders should be able to claim back their UST, so these strategies have to be closed at any time without creating damage. Without this we lose the aUST composability.
  • easy to determine the risks : otherwise we might lose the Ozone composability

And probably there are more (feel free to add them)

Let me say that the desing of this service will be way more clearer when we will finally release the evolution of lpmm. After that we will be able to discuss improvement with the full picture in mind. So stay up to date and keep thinking and sharing your precious ideas!

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Good points! I find I’m enjoying our discussion immensely.


I think LP Vaults could generate so much yield that the system would be resilient to runs and price shocks, because the high yield allows for a low LTV.

Suppose an LP Vault is invested into by a Nexian with $50 LUNA. This is matched from Anchor deposits with $50 UST. Suppose the LP Vautl generates an autocompounded APY of 50% (~current LUNA-UST Astroport vault on Spectrum). For an LP Vault position of $100, the yield would be $50.

Let’s split the profits.
$30 would go to the Nexian, for a cool 30/50 = 60% APY on her LUNA. Then we pay the Anchorist their ~20% APY, so $10. This leaves us with 20% of the yield, or $10. This could be used to pay another Anchorist who deposited $50 their 20% APY.

Therefore only 50% of aUST would have to be borrowed to LP Vaults. So even if 50% of Anchor depositors withdrew their money, no LP Vault positions would have to be closed.

The Nexian has 100% LTV on her LUNA in the Vault:
instead of having 0.5x leverage as in a traditional LP, she has 1.0x leverage – like she was holding pure LUNA. Any price action is directly translated into her position, so there are practically no impermanent losses.

The downside to the Nexian is that if their LP Vault position loses 50% of total value ie. LUNA price crashes by 75%, they suffer total liquidation. This is because the UST of the Anchor depositor is always guaranteed.

The downside risk could be mitigated by automated LTV management that decreases leverage when the LUNA price goes down, lowering the yield for the Nexian; an LP Vault would still generate enough yield to cover the UST depositors’ 20%APY even if the position lost 60% of its value. And if the LUNA invested in the Vaults are indeed pooled together, (instead of every position treated independently) the yield for Nexians can be dynamic but less volatile, and the liquidation risk substantially mitigated.


Effectively Nexus could generate 60% yield to a Luna vault and make Anchor Earn sustainable at 50% LTV!

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Let’s see if I understand correctly the idea of your proposed vault :

  • Nexus user would provide Luna
  • Anchor would provide UST

with Luna & UST Nexus would provide liquidity to the Luna-UST pool.
It seems that this is very similar to the Field of Mars, with the difference that the UST comes from Anchor.

Actually this is a nice idea, but here is a question : Why would Anchor needs Nexus for providing this service? Since the code is already avaiable and working, what can bring Nexus that is valuable to the table?

@pebakesa , your model looks a lot like the Mars Protocol Fields of Mars where you deposit Luna & it gets paired with UST to be added as an LP into Astroport to obtain yield up to 2x leverage. The model that you propose might make Nexus go head to head with FoM in Mars. Partnering with Anchor might be a monster of a task but I do agree that the borrow vs deposits are highly unbalanced.

Given that Nexus is looking to add functionality to attract Astro holders to deposit their Astro tokens to have boosts. Could the LPMM allow Nexus users to borrow Terra tokens (ANC, Luna, etc) and have the yield (+any boosted yield) self-repay the borrowing ? This is similar to Kinetic, but it allows the LP yield to pay off the borrowing without worrying about liquidations.

this model looking like Mars Fields is not necessarily a bad thing.
remember that what Nexus is offering is finely tuned management.

the Mars interface is very manual, there aren’t automatic strategies.
the standard Mars user is not likely to push their LTV to the edge due to management concerns.
Nexus will be able to provide an increased yield in comparison if it’s algorithm is as finely tuned as the bLuna/bEth loans.

Rather than emulating the FoM in Nexus, would it not make sense if you’re able to deposit ANC, Luna or Mir via Nexus and it’ll automate the LTV management on your behalf ?