Nectar Dollar v2

Nectar Dollar v2 takes all of the pre-built components for v1 and integrates with Frax's Borrow AMM architecture.

BAMM stands for Borrow Automated Market Maker. It allows users to borrow part of their own LP from a Uniswap V2 pair. This system is unique because it doesn't require external oracles to determine the price of assets; all necessary information is self-contained within the BAMM system.

In the BAMM model, the liquidity pool's value and the price of the assets are intrinsically linked (xy=k, where the value must always equal k). If the value of the collateral drops, BAMM initiates a soft-liquidation process, selling the collateral gradually to prevent bad debt. This process ensures that the system remains solvent, maintaining the equilibrium where the total pool value always equals k.

The introduction of a dual-sided lending market within BAMM allows for both assets in a liquidity pool to be borrowed, enhancing capital efficiency. For instance, if an ETH/FRAX pool only requires a small percentage of its assets for swaps, the remaining assets (like 80% of the ETH and FRAX) can be made available for borrowing, creating additional yield opportunities.

Nectar Dollar leverages the BAMM model to build an entirely new way for building liquidity with a hedged stablecoin.

In the Nectar model, we use a BAMM LP to create a ETH/necUSD LP. At launch all of the necUSD is considered out circulation. This is the k value and must be capitalized with protocol owned liquidity. The LP must be of a sufficient size to keep slippage values low for new purchasers.

Once a user purchases necUSD, they add more ETH to the LP and the protocol is now able to borrow 50% their deposited ETH out of the BAMM LP, transfer it to an on-chain perp DEX like GMX or Vertex, and then the ETH is hedged out.

The strategy works because In an xy=k AMM, k is a constant. If asset A is added, and hedged with perp B, the value will always be k + $value of Asset A at time of swap.

Let's give an example so you can see how the math works. Assume we have a protocol owned ETH/necUSD pool with 1000 ETH and 3.8m necUSD. If a new buyer comes in and purchases 10 ETH of necUSD, they add the ETH to the LP and remove 38k necUSD.

The LP now has 1010 ETH and $3,762,000 necUSD.

After the ETH is swapped for necUSD, Nectar protocol is now able to borrow 5 ETH out of the LP as a loan and then transfer it to a perpetual DEX where it can hedge the value of the ETH that was swapped into the LP.

The net value of the LP position is now k + the dollar value of the ETH swapped into the pool, so k + $38,000.

If the price of ETH goes up, the original 10 ETH is hedged, so if when the holder of the necUSD goes to sell, they will receive $38,000 worth of ETH when they swap back. If the price of ETH falls, the profits from the hedge can be unwound and then used to buy ETH that can be bought with necUSD.

Because the protocol is able to borrow the ETH out of the LP and hedge the delta risk, functionally there is no impact of the price of ETH due to the impermanent loss of the underlying BAMM LP. The only requirement for this to work is that the LP must be collateralized with a sufficient amount of assets before launch to reduce slippage, but otherwise it remains safe for issuing necUSD through.

When borrowing ETH from the LP with BAMM, Nectar pays an interest rate to the ETH side of the BAMM LP based on utilization. This interest rate functions similar to the perp funding rate. When new purchasers of necUSD are adding high inflows, the utilization rate will drop until the protocol borrows and mints enough necUSD to rebalance. Additionally the executed price of ETH in dollar terms will push lower. When necUSD experiences significant outflows, less ETH will be available to borrow and utilization rates will rise, spurring traders to swap ETH back into the contract.

From the start, all necUSD LP pools will be able to fully redeem the entire supply at all times within an extremely short period of time. The only limiting factors are the speed and security needed to transfer the collateral and adjust the hedged positions. As necUSD grows, so too does the BAMM LPs linearly. There is ALWAYS liquidity to swap back in every market condition.

necUSD can be created against any type of collateral with access to token margined perp futures. Using GMX and Vertex we can create necUSD v2 pools for ETH, BTC, and ARB.