The mainnet is officially launched. How does NAOS Finance facilitate real-world asset lending through the sub-protocols Formation and Galaxy?

Written by: angelilu

Kevin Kelly, the author of the book "Out of Control," said in 2014: "Traditional banks will disappear within 20 years."

The development of the internet and financial technology has indeed posed challenges to traditional banks, but many banks have actively embraced new technologies while innovating, claiming to be internet banks, seemingly having weathered this storm. In reality, what can truly shake the status of traditional banks is not the technology that can be absorbed by them, but the breaking of their centralized structure.

DeFi, with the concept of decentralized finance, once again challenges traditional banks, directly targeting the Achilles' heel of their centralized architecture.

DeFi is developing rapidly but is still in its early stages. The recently emerging DeFi 2.0 concept also aims to push DeFi into a broader circle. Currently, the total locked value in DeFi across the network has exceeded $260 billion. To impact traditional banks, DeFi's breakout is unstoppable.

As the connection between crypto assets and real-world assets becomes easier to achieve, there is no doubt that DeFi will create greater economic benefits. The DeFi lending protocol NAOS Finance is working towards this direction.

NAOS Finance is a decentralized real asset lending protocol aimed at bringing more stable, high-quality real-world assets into DeFi lending as collateral. It provides flexible and convenient funding for businesses from the real world, leveraging the global circulation, decentralization, and permissionless characteristics of crypto assets. This not only addresses the issues of poor liquidity and low capital utilization in global funding but also builds a bridge connecting the DeFi world with the real world.

NAOS Finance includes sub-protocols Formation and Galaxy

How to connect with real-world assets in a decentralized manner has always been a challenge. NAOS Finance's solution is to refine the lending logic through two sub-protocols: the liquidity protocol Formation and the real-world asset lending protocol Galaxy.

Liquidity Protocol Formation

The liquidity protocol Formation is closer to the DeFi form understood by most users, where users can earn returns by depositing stablecoins. Currently, the stablecoin supported for deposit in this protocol is DAI, with plans to support more stablecoins in the future. In addition to basic liquidity incentives, Formation has upgraded its gameplay, allowing users to mint synthetic assets nUSD equivalent to 50% of the value of the deposited stablecoin. nUSD is pegged 1:1 to DAI and can be used to stake within the Formation protocol to earn liquidity rewards. Additionally, nUSD can also be invested in Galaxy's insurance fund pool Beta Pool to earn higher lending returns or used for insurance payouts in the Alpha Pool. Meanwhile, Formation will deploy the stablecoin assets deposited by users into yield aggregation protocols like yearn.finance, and the generated returns will automatically repay the debt incurred from minting nUSD, indirectly reducing the over-collateralization rate of the assets.

For a detailed operational mechanism of Formation, please refer to: 《In-depth Analysis of Naos Finance Mainnet Formation》

Real World Asset Lending Protocol Galaxy

The real-world asset lending protocol Galaxy is part of NAOS Finance's connection with real-world assets. Users with borrowing needs in the real world use real-world assets as collateral. Each specific real asset is assessed and then collateralized on-chain in the form of NFTs, with interest paid back periodically.

DeFi users providing stablecoin funds in Galaxy's lending pool not only receive interest from the loans but also earn NAOS token rewards. Additionally, 20% of Formation's earnings will enter the NAOS Treasury, with part of the funds used to subsidize Galaxy's returns. It is clear that Galaxy's multi-revenue mechanism aims to provide DeFi users with a competitive stablecoin investment return.

The two sub-protocols work in synergy, enabling NAOS Finance to achieve a full suite of liquidity + lending + insurance functions

After a brief understanding of the basic functions of the two sub-protocols, users may wonder why a liquidity protocol Formation is needed when the Galaxy protocol can achieve lending with real assets on-chain.

Running NAOS Finance with the structure of the two sub-protocols is one of the highlights of the protocol design. The relationship between the two sub-protocols and their respective functions can be understood in terms of the functional division of traditional banks.

Lending Protocol Galaxy corresponds to the part of lending that interfaces with institutions. Galaxy has a real-world asset lending pool, which is divided into two parts: the lending fund pool Alpha Pool and the insurance fund pool Beta Pool. The Alpha Pool presents the real-world assets collateralized on-chain in the form of a fund pool, allowing KYC-verified users to provide funds based on the assets in the pool. The Beta Pool is composed of user-deposited nUSD, serving as insurance for defaults by borrowers in the Alpha Pool. When a default occurs, the platform will automatically liquidate and use funds from the Beta Pool to compensate users.

On the other hand, Liquidity Protocol Formation corresponds to the part of traditional banks that gathers deposits, capable of aggregating idle funds from individual investors in the DeFi world. The principal deposited by users will be invested in yield-generating protocols to earn fixed returns, and the minted nUSD can be invested in the insurance pool Beta Pool to earn returns. In this case, even if the Alpha Pool incurs a payout, the user's principal remains safe, and the principal continues to be stored in Formation, with the fixed returns generated from yield aggregation protocols compensating for any losses of nUSD in the Beta Pool.

Additionally, a Boost Pool will be launched simultaneously with Galaxy. The Boost Pool provides single-token staking for NAOS, allowing users to earn returns by locking up NAOS. By staking NAOS in the Boost Pool, users can receive a 1 to 2.5 times bonus on their rewards in the Alpha Pool, with the specific multiplier determined by the ratio of the user's staked NAOS to the total funds in the Boost Pool.

Just as banks establish different departments based on varying user needs, with each department operating in coordination, the two sub-protocols work together to achieve the functions of deposit gathering, lending, and insurance in a decentralized manner. In other words, the complex structure of NAOS Finance aims to create a DeFi protocol that combines the functionalities of MakerDAO, Aave, and Nexus Mutual.

Can NAOS Finance solve the trust, risk, and capital allocation issues faced by traditional bank lending?

It is undeniable that traditional banks, as the main source of indirect financing for enterprises, face issues in actual lending operations due to their centralized mechanisms and singular credit review processes, leading to difficulties in global capital circulation and challenges for small and medium-sized enterprises in obtaining loans. So, can the decentralized lending solution provided by NAOS Finance address these issues?

Does it solve the lending difficulties for enterprises?

Traditional banks, as credit intermediaries, charge higher interest rates to reduce bad debt risks and prioritize lending to enterprises with lower default risks. As a result, large enterprises that can borrow funds face high capital costs, while more capital-needy small and medium-sized enterprises struggle to obtain loans.

The characteristics of DeFi, which do not require intermediaries or permissions, are key to solving this real-world problem. NAOS Finance is a DeFi protocol that connects real-world assets, with a vision to use blockchain technology and leverage the differences in capital costs across different regions to bridge the global funding gap for enterprises, allowing large enterprises to access lower-cost global funds and providing small and medium-sized enterprises with opportunities to borrow the funds needed for development. Furthermore, NAOS Finance has advantages in compliance and the scale of real assets, having obtained financial licenses in multiple countries and partnered with over 2,000 small and medium-sized enterprises, with nearly $300 million in real-world cooperative assets.

Does it solve the trust issue?

In traditional enterprise financing, the trust crisis caused by information asymmetry is alleviated by institutions like banks acting as intermediaries. Both parties in the lending process need to pay certain intermediary fees to the bank, and the control over the funds lies with the bank, reducing the efficiency of capital utilization. Decentralized finance has an inherent advantage in solving trust issues. NAOS Finance's Formation and Galaxy deploy smart contracts, allowing investors to see investment strategies and fund flows. Decisions regarding funds and the listing of real assets will be conducted through community voting via decentralized autonomous organizations (DAOs), placing control in the hands of community members.

Moreover, breaking the traditional credit rating system is also an urgent trust issue to be addressed. Traditional lending has gradually transitioned from secured loans to credit loans, with users' accumulated repayment data and financial data becoming the standard for credit scoring. However, some small and micro enterprises cannot provide sufficiently credible financial data or asset proof to meet credit scoring standards. NAOS Finance collaborates with the IoTeX IoT blockchain platform to incorporate non-financial data into credit risk assessments, providing friendlier credit evaluation solutions for small and micro enterprises seeking loans. In addition to IoTeX, NAOS Finance is also working through strategic partnerships with other protocols to ultimately provide the community with a comprehensive decentralized credit rating system, creating a more intuitive decentralized asset on-chain and lending process.

Is it effectively addressing risk issues?

NAOS Finance entrusts the management of collateralized real assets to independent trusts or special purpose vehicles (SPVs). When defaults reach the liquidation threshold (currently set at 10%, which will be determined based on asset risk predictions and funding needs in the future), the independent committee of the trust or SPV will initiate liquidation procedures. To mitigate potential risks, Galaxy also includes an insurance fund pool Beta Pool, from which the value not covered by collateral liquidation after a borrower's default will be drawn to cover bad debts.

Conclusion

The NAOS Protocol mainnet (Formation + Galaxy) officially launched on the Binance Smart Chain (BSC) today, marking the introduction of NAOS Finance's complete DeFi lending architecture based on real assets. This will expand the boundaries of DeFi by introducing real assets, indicating that DeFi can attempt to address the demands present in the real world, bringing decentralization into a larger financial system.