Neutrino: The overlooked Waves ecosystem algorithmic stablecoin protocol, USDN issuance hits a new high
Waves is already a top ten smart contract platform by TVL, with a market cap of approximately $680 million for USDN, offering an annualized stablecoin staking yield of around 15%.Author: Jiang Haibo/PANews
Data from smart contract platforms like BSC, Solana, and Fantom have shown signs of fatigue, while the TVL of the public chain Waves, initiated in Russia, has reached a new high. As of March 16, according to DefiLlama, Waves' TVL is $2.6 billion, making it one of the top ten smart contract platforms. The majority of its TVL comes from the Neutrino Protocol within the Waves ecosystem.
What is Neutrino Protocol?
Neutrino is an algorithmic stablecoin protocol built on the Waves blockchain, using the native token WAVES as collateral.
By locking WAVES tokens in a smart contract, USDN (USD-Neutrino) stablecoins can be minted. For every X dollars of WAVES locked, X amount of USDN can be minted. Similarly, X amount of USDN can be redeemed for X dollars of WAVES through the smart contract. Arbitrageurs can maintain USDN around $1 through spontaneous operations.
When the demand for USDN increases and its price rises above $1, traders can exchange WAVES tokens for USDN via the Neutrino protocol's smart contract and sell them in the market to complete the arbitrage. The increased circulation of USDN brings its price back down to $1.
When the circulation of USDN is too high and demand is insufficient, causing the price to drop below $1, traders can buy USDN at a lower price in the market and redeem it for WAVES through the smart contract. Since there is a discount when users purchase USDN, this method can complete arbitrage and raise the price of USDN back to $1.
How Neutrino Works: Three Core Assets and Collateral Ratio
The entire operation of the Neutrino system involves three core tokens: WAVES, USDN, and NSBT (Neutrino System Base Token). WAVES is the native token of the Waves blockchain, used to pay transaction fees on the network. In Neutrino, WAVES also serves as collateral for the stablecoin USDN.
USDN is an algorithmic stablecoin pegged to the US dollar and also serves as collateral for other stable assets in Neutrino. NSBT is the asset restructuring and governance token in Neutrino. When USDN reserves are insufficient, NSBT can be minted and auctioned to replenish reserves, ensuring the value of USDN.
Neutrino does not adopt the over-collateralization method like MakerDAO. Oracles can only ensure that WAVES and USDN are valued equally at the moment of each exchange, but afterward, the price of WAVES will fluctuate with the market, potentially leading to insufficient or excessive reserves. The protocol uses the Backing Ratio (BR) to represent the ratio of reserve value to USDN issuance, i.e., BR = $R / S.
When the price of WAVES drops, the reserve assets may not cover the issuance of USDN stablecoins, resulting in BR < 1. When the smart contract detects insufficient reserves, it mints NSBT tokens and auctions them to acquire more WAVES to replenish reserves. When WAVES rises and reserves generate a surplus, with BR > 1, the smart contract repurchases NSBT using USDN to clear the excess NSBT.
Traders participating in the auction and liquidation process can purchase NSBT at a discount using WAVES through public auctions or sell NSBT for USDN. Participating in the auction to buy NSBT also bets on the rise of WAVES, with NSBT serving a bond-like function; the protocol will only repurchase NSBT when it generates a surplus and BR > 1.
Exchanging WAVES for USDN (or USDN for WAVES) requires waiting 60 minutes to 7 days (60 to 10080 blocks). The final settlement will occur at a random time within this interval.
The exchange rate may change during this period, and the settlement will be based on the rate at that moment, with no option to cancel the transaction midway. This exchange method ensures randomness, allowing the smart contract to execute fairly without being influenced by short-term manipulation of oracle prices, but it also introduces significant uncertainty for users.
Similarities and Differences Between Neutrino and Terra
The exchange relationship between WAVES and USDN in Neutrino is similar to that between LUNA and UST in Terra, but not entirely the same.
First, both Neutrino and Terra allow for the 1:1 minting of stablecoins using the native assets of the public chain, and 1 unit of stablecoin (USDN and UST) can also be redeemed for 1 dollar of the native token. When the demand for stablecoins rises, it promotes the price increase of the public chain's native tokens.
Essentially, Terra mints UST by burning LUNA, without the concept of collateral; whereas Neutrino mints USDN by collateralizing WAVES 1:1, without requiring a constant amount of collateral, nor distinguishing between individual debts.
When the price of LUNA drops, to ensure that 1 UST can be redeemed for 1 dollar of LUNA, more LUNA needs to be minted for users, making the issuance of LUNA uncontrollable; in contrast, in Neutrino, the redeemable assets are limited by the total amount of WAVES reserves. Even if NSBT can be minted and auctioned to supplement reserves, it is still constrained by the circulation of WAVES.
Although Waves has provided significant support for Neutrino, and most of Waves' TVL comes from Neutrino, Neutrino is merely a protocol built on Waves. The correlation between LUNA and UST is stronger, with UST having a greater impact on LUNA.
Applications of USDN: Staking Rewards and Forex Market
Neutrino also offers functionalities similar to Anchor's savings rewards and Mirror's synthetic asset trading in the Terra ecosystem.
Staking Rewards
Staking USDN can yield an annualized return of around 15%, with the actual yield influenced by the staking rate of USDN and the price of WAVES, comparable to the deposit rewards of UST in Anchor. The staking rewards for USDN come from the staking rewards of the LPoS (Leased Proof of Stake) consensus algorithm on the Waves blockchain.
LPoS allows token holders to lease their tokens to Waves nodes and receive a proportionate reward. All WAVES locked in the USDN smart contract participate in staking, but rewards are only distributed to USDN stakers.
The staking rewards in WAVES are transferred daily from mining nodes to the USDN smart contract and converted into USDN at the current WAVES/USDN exchange rate. Neutrino has also partnered with several DEXs and CEXs, including Waves.Exchange (a DEX on the Waves blockchain), Kucoin, MXC, and Hotbit, which all provide staking entry points.
DeFo Forex Market
DeFo (Decentralized ForEx) is a decentralized forex protocol built on Neutrino, allowing for instant price swaps between mainstream international currencies, indices, and commodities.
The trading interface for DeFo is implemented by Waves.Exchange, and users can already trade among ten forex assets: USDN, EURN, RUBN, CNYN, JPYN, UAHN, NGNN, BRLN, GBPN, and TRYN on Waves.Exchange.
USDN on Ethereum
Algorithmic stablecoins typically rely on Curve to ensure liquidity with other stablecoins, but there is no similar protocol on Waves, nor sufficient stablecoin assets. By locking USDN on Waves in a smart contract, ERC-20 USDN can be issued 1:1 on Ethereum.
According to Etherscan, the issuance of ERC-20 USDN is approximately 159 million, with 98.04% held in Curve's USDN+3Crv pool, which includes 156 million USDN and 117 million 3Crv. CoinGecko shows that USDN has a market cap of $683 million, and Curve's liquidity should ensure the price stability of USDN in most cases.
On Ethereum, as long as USDN is held in a wallet or in AMM liquidity pools like Curve, Uniswap, or Mooniswap, staking rewards are automatically earned daily and distributed in the form of ERC-20 USDN.
Conclusion
The mechanism of Neutrino is distinct from mainstream algorithmic stablecoins, showcasing strong innovation that is worth learning from and emulating. Compared to other algorithmic stablecoin projects, the demand for the utility token and governance token NSBT is limited; it cannot participate in the minting of stablecoins or be used for mining rewards.
NSBT is primarily used for establishing reserves, generating new Neutrino tokens, and governance voting, with holders earning transaction fees from DeFo and other trades. NSBT has no pre-allocation or pre-mining and is generated solely through smart contracts. When reserves are insufficient, it supplements reserves through an auction algorithm, with specific parameters depending on the deficit situation of USDN.
It is evident that the launch of Neutrino and USDN is primarily aimed at empowering Waves. Currently, holding USDN can also yield decent staking rewards, and DeFo offers functionalities similar to Mirror's synthetic asset trading. Given the project's Russian background, the recent surge of Waves and Neutrino may be driven by geopolitical conflicts in Russia, leading to increased demand or speculation for the USDN dollar asset.
