Analysis of Nirvana: virtual AMM innovative algorithm stable currency on Solana

Nirvana Finance is a dual-token algorithmic stablecoin architecture protocol built on Solana, including metastable Token: ANA and stablecoin Token: NIRV. Relying on NIRV’s so-called zero-risk lending gimmick, it attracted users to participate in it. ANA gradually transitioned to ordinary pricing after undergoing a “reverse” auction similar to Copper LBP’s Dutch auction, and was subsequently FOMOed by the community.

When I first came into contact with it, the innovative spirit of the algorithm was impressive. I saw the shadows of LUNA/UST, MakerDAO and Olympus, and then took their own essence to integrate and innovate. The relationship between ANA and NIRV is like Luna and UST. The valuation of ANA will increase with the growth of NIRV demand; and ANA is used as collateral for NIRV loans, just like depositing ETH in MakerDAO and casting and lending DAI; The liquidity of ANA is completely controlled by the agreement, similar to Olympus, which can bring continuous transaction income. The premise of realizing all this comes from the innovation of the AMM mechanism, which creates another shortcut in the mainstream constant asset ratio pool.

Statement of interest: The author has no interest relationship with the project, and this article is only for research and sharing.

The Perspective and Path of Nirvance Finance

From the perspective of users, investors buy ANA through UST, NIRV, USDC, USDT or USDH, pledge ANA and earn pledge rewards paid in prANA instead; use the base price of pledged ANA as collateral to mint and lend NIRV, Then continue to use NIRV to buy ANA to repeat the cycle. Among them, prANA is similar to an option, which allows investors to exchange it into ANA at any time through prANA + the ANA floor price denominated in USD and paid (floor price) and destroy prANA. The value of prANA, that is, the investor's pledge profit is the market price of ANA- ANA reserve price. In addition, investors can also obtain ANA after the vesting period by purchasing trANA with USD stable currency, which is similar to a discount bond.

From the perspective of the agreement, it is not so much that the agreement controls the liquidity of ANA. It is more accurate to say that the agreement directly controls the right to mint and destroy ANA. Only when investors convert USD stablecoins into ANA will the new ANA Only then will it be minted immediately and exchanged for the USD stable currency in the hands of users, that is, the newly minted ANA is exchanged for the liquidity of the stable currency. In this exchange process, part of the liquidity of the stable currency obtained by the agreement will be used to form the reserve price of ANA, and a fee of 0.1% for buying and 0.3% for selling will be charged in ANA during the transaction, the transaction fee Directly into treasury instead of AMM pool. When ANA is sold, the stablecoin will be withdrawn from the AMM pool and the ANA will be destroyed. Therefore, the AMM pool only has stable currency assets without any ANA.

Afterwards, investors pledged ANA and received prANA rewards, and the pledged ANA withdrew from the market circulation. When investors convert prANA to ANA, they will pay prANA and the corresponding base price of ANA denominated in USD to the agreement, and the agreement will obtain stablecoin liquidity again and destroy prANA. When an investor cancels the ANA pledge, the agreement will charge a 0.5% unstaking fee denominated in ANA and flow into the treasury. If investors obtain ANA at a discounted price by purchasing trANA, a 0.2% purchase fee denominated in ANA will also be charged and flow into the treasury.

If the investor casts and lends NIVR with the reserve price of the pledged ANA as collateral, a 3% loan fee denominated in NIVR will be charged and flow into the national treasury. However, the single maximum exposure that investors get from NIVR, that is, the borrowing limit, is the amount of ANA * the base price of ANA * 97%, then the exposure that investors can get in a circle will be infinitely close to 1 + 1/n + 1/n² + 1/n ³ +... < 1/(1-1/n) times, n=1/(ANA quantity * ANA reserve price * 97% * 1/ANA market price). Based on the current ANA market price of 13.71 and the ANA reserve price of 3.4, the maximum exposure that can be obtained is no more than 1.32 times.

From the perspective of different parties, it can be found that Nirvance Finance’s unique AMM mechanism not only provides buying and selling transactions, but also provides a base price support for ANA so that the ANA base price can be used as collateral to mint the corresponding NIRV, and NIRV is supported by multiple stable coins NIVR is always anchored at $1 by the algorithm, but as the depth of the stable currency in the AMM pool strengthens, NIRV will be more stable and secure.

It can be seen that the special AMM mechanism in Nirvan Finance is an important engine in the whole link, and this special AMM mechanism is named "vitrual AMM". The next paragraph will focus on the details of the issuance and operation mechanism and liquidity in vAMM.

Nirvance Finance's innovative virtual AMM mechanism

When Nirvance was launched, the protocol did not have any ANA, and only when USD flowed into the AMM pool, ANA would be minted. NIRV is algorithmically anchored at $1, which means that the reserve price of ANA must be at $1 first, so in the first USD liquidity injection stage, the market price of ANA must be higher than $1. Of course, when the project was launched, it cleverly guided the entry of liquidity through a "reverse" auction similar to the Copper LBP Dutch Auction. The increase or decrease in the market price of ANA will decay exponentially until 0 enters the normal pricing stage, but regardless of ANA No matter how the market price changes, it must be higher than $1. Similarly, it is also in this process that a part of USD liquidity can be accumulated in excess, and enough USD can be accumulated to provide guarantee for the subsequent increase of ANA reserve price.

From the perspective of users in the previous chapter, it can be found that the vAMM mechanism is different from the mainstream constant asset ratio pool AMM mechanism. There are two kinds of Tokens in the liquidity pool of the mainstream AMM mechanism. The ratio of the two kinds of Tokens is approximately maintained at 1:1 at the time of creation, and the price of Token A is quoted by Token B. If Token A is more favored by the market, investors are willing to spend more Token B to obtain Token A in the AMM pool, and the supply of Token A in the pool will become relatively less, which will drive up the price of Token A. Therefore, in mainstream AMM pools, the AMM price curve is a function of the relative supply of Token.

However, there is no ANA liquidity in the vAMM mechanism itself. When ANA is purchased through USD, ANA will be minted; when ANA is sold for USD, the AMM pool will pay investors the corresponding USD stable currency flow ANA will also be destroyed immediately. The purchase of ANA through the AMM pool has brought more liquidity to AMM, and will allocate part of the liquidity to the ANA reserve price, so as to ensure that the ANA reserve price will continue to be pushed up under the premise of the ability to repay and users to withdraw at any time; otherwise, sell When ANA is released, the return of stablecoin liquidity will not change the bottom price of ANA. It is the instant minting and instant burning that ensures that ANA can always be supported by the reserve price. There is also the ANA floor price, and it is impossible for anyone to buy any ANA at a price lower than the ANA floor price, so the price curve of vAMM is an arbitrary function with a minimum value.

It is worth mentioning that since the liquidity has entered the agreement since its creation, that is, the agreement owns the market itself, so it does not require any LP incentives and does not require the treasury to participate in management. The essence of liquidity management and taxation in the AMM pool is Allocated by the protocol algorithm, it truly achieves decentralization and permanent liquidity.

(https://www.desmos.com/calculator/8ke6glnrut?lang=zh-CN)

The slippage problem caused by liquidity is also the innovation of the vAMM mechanism. In the mainstream AMM model, when Token A in the liquidity pool becomes scarcer than Token B because the buyer is more bullish on the target, the smaller trading volume may bring about greater volatility, which affects price changes The slippage is the result of the supply balance between the two parties in the liquidity pool being broken. In vAMM, the Nirvana slippage is encoded in this arbitrary function about the minimum value itself, that is, the price curve can be regarded as the slippage itself of ANA buy and sell orders, and has nothing to do with the actual liquidity. To put it simply, when buying ANA, the price function will report a higher price for the transaction; when selling ANA, the transaction will be slightly lower than the current market price. The final result is that as the demand for ANA increases and the base price of ANA continues to rise, more trading volume is required to drive the price up.

Risk Points of Nirvance Finance

To some extent, the relationship between ANA and NIRV is similar to Luna and UST, but UST is an important part of the entire Terra ecology, and the adoption rate of UST by chain projects will increase with the development of Terra ecology, but NIRV's current actual demand still comes from nesting dolls inside Nirvance, and the real use case is still unknown. There is still time to further test whether it can be extended to the outside world. In addition, after NIRV expands to other Solana projects, it still faces the ceiling of Solana, and there are also big difficulties in whether it can expand to heterogeneous chains.

In addition, for early ANA participants, the sooner they participate in staking, the greater the bonus they will enjoy. With ANA being FOMOed by the community, the market price of ANA has reached a position that is more than 4 times the reserve price.