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Nexus Protocol is an incentive token yield optimiser and liquidation protector within the Terra ecosystem
It uses a front-run mechanism to maximise LTV to optimise rewards for its Nexus Anchor vault
It will have a total of 3 vault modes working simultaneously to protect against liquidation
Projected TAM of US$410.6b and SAM of US$383.3b
$Psi token stakers will earn a pro-rata share of protocol fees
At US$0.10 per $Psi token, Nexus' FDV is comparable to similar protocols but it has a significantly larger TAM than them
Nexus Protocol is an incentive token yield optimiser and liquidation protector within the Terra ecosystem.
Nexus has a total of 3 vaults that are scheduled to be released either on launch or after launch in 4Q21.
1) Nexus Anchor Vault
It is a vault where users can deposit bLUNA or bETH as collateral to earn optimised rewards from Anchor borrow.
How does it optimise rewards?
It will automatically maintain a high LTV ratio via smart contract logic so as to borrow as much UST as feasible to maximise Anchor rewards.
How does it prevent liquidation?
In order to manage LTV efficiently and safely against all possible failure scenarios, Nexus Vault will have 3 different modes – Optimal, Safe and Emergency, which will be activated based on different scenarios. The fully complete version (expected in 4Q21) will have all 3 modes running simultaneously but upon launch, only the safe and emergency mode will be activated.
Optimal mode will work based on front-running Anchor’s price oracle by updating Nexus’ price data every 15 seconds as opposed to Anchor’s 30 seconds. As a result, Nexus will know the exact prices of collateral slightly before it becomes visible on Anchor. Thus, Nexus is able to adjust to the ideal LTV level without putting assets at risk of liquidation.
In the event Nexus’ price oracle fails, it will automatically utilize Anchor’s price oracle. Since Nexus will no longer be able to front-run Anchor, the target TVL will be lowered to ensure users’ collateral positions are safe.
Should Anchor’s price oracle fail, Nexus will automatically decrease the target TVL to half instantly. This is to buffer against any depreciation of collateral assets while the liquidation market is paused which could cause the LTV ratio to be breached upon resumption of Anchor’s price oracle function.
In addition, Nexus has other fail-safe measures in the event of blockchain flooding and Anchor Earn blockage.
2) UST Vault
Nexus will be building an automated Mirror delta neutral strategy vault that aims to beat the yield on UST provided by Anchor Earn. The strategy revolves around hedging the impermanent risk of mAsset-UST LP (or sLP) staking with aUST-minted mAssets (or long position in mAssets).
It will position based on the highest weighted APRs on Mirror and then carry out automated Mirror mint LTV optimisation followed by automated MIR rewards claiming.
3) EthNexus Vault
The EthNexus Vault allows users to deposit ETH in a simple manner while earning significantly higher returns than alternative staking options for ETH native holders. In addition, Nexus will offer a separate bETH vault which will offer a higher yield than the EthNexus Vault.
This should have 2 effects – 1) migration into the Terra ecosystem for ETH stakers and 2) migration from ETH to bETH due to the higher yield on Nexus' bETH vault.
Total Addressable Market (TAM)
Firstly, I project the cumulative TAM of the Nexus Anchor and EthNexus Vaults at US$408.8b which is equal to the total supply of ETH and LUNA. Within this TAM, I project its serviceable addressable market at US$381.5b which is equal to the circulating supply of ETH less ETH staked in ETH 2.0 plus the total bLUNA collateral on Anchor.
Secondly, I project the TAM and SAM of its UST Vault at US$1.8b which is equal to the total deposit of UST in Anchor, given that the primary purpose of the UST Vault is to earn a higher yield than Anchor Earn. I expect this TAM to increase as more UST is minted with the increasing adoption of the Terra ecosystem's dapps.
This gives Nexus a significant TAM with just the release of its first 3 vaults and I expect it to grow as it releases more vaults.
Nexus will offer 2 types of native tokens – nAssets and $Psi tokens.
nAssets tokens represent the assets deposited in Nexus’ vaults and holders of nAssets will be entitled to Nexus vault’s yield.
On the other hand, the $Psi token is Nexus’ governance token which when staked will earn a pro-rata share of protocol fees. The yield collected will then be used for $Psi buybacks in the $Psi-UST LP Pool which are awarded to nAsset holders, $Psi stakers, and Nexus Community Pool. In addition, the $Psi-UST LP should encourage $Psi buy pressure due to the high vault yield while the nAsset-$Psi LP could minimise $Psi sell pressure due to the yield and LM rewards. These 2 factors when combined may help to support the $Psi token price.
At the current $Psi token price of US$0.10, Nexus' FDV is comparable to other protocols (except Ribbon Finance) that are either offering single-side ETH vaults or stablecoin staking/yield farming protocols on Terra. This is despite Nexus' larger TAM which could imply further upside for the $Psi token price should Nexus receive strong fund inflow and register a higher TVL and value accrual than the protocols listed above.
There will be a fixed total supply of 10.0b $Psi tokens which will be distributed according to the weights shown in the chart above over a period of at least 4 years.
Looking at the distribution schedule of $Psi tokens for private investors, it is important to note that there will only be a significant unlock of tokens starting in years 2 to 4. This is positive for long-term token holders as it ensures that the private investors will continue to have a strong alignment of interest with Nexus (i.e. work closely with Nexus' founders to see through the development of new vaults) which could lead to greater value accrual to $Psi token holders.
By analysing Nexus' discord channel, it is evident that the team is constantly engaging its users as seen from the 355 messages sent by Tundra V2 since 29 September 2021. In addition, the team has been quick to address issues (i.e. unable to see deposited LP tokens) and attended a call by Yield Labs to explain more about Nexus before the public token sale. This gives me confidence in the team as they are concerned with actively improving the user experience and have chosen to show themselves publicly during the Yield Labs call instead of staying completely anonymous.
Nexus is backed by a number of reputable funds which include DeFiance Capital (Asia's largest DeFi focused crypto fund) and BlockTower Capital. This strong investor backing could be an indication of the quality and potential of Nexus Protocol’s products and team.
1. Protocol Risk
In spite of the liquidation protection measures taken by Nexus, liquidation is still possible if the price collapse of the collateral during the period in between the LTV management check timing is greater than the buffer provided by the safe and emergency mode measures.
However, it must be noted that the initial liquidation protection parameters have been set with consideration of the worst price decline has ever had. Furthermore, should $Psi token holders believe that the current parameters are not conservative enough, they can vote for their ideal parameters using governance proposals.
Following the launch of its initial vaults, Nexus will be launching its Strategy Bounty Program which aims to incentivise community members to contribute to the research and development of new vault strategies. This will help to provide the initial foundation for the formation of a DAO which could help to spur continued growth and decentralisation of Nexus.
In addition, Nexus aims to build vaults on other Layer 1s as Terra expands its connectivity with other Layer 1s through new developments such as Cosmos chains via IBC. This should increase the TAM of Nexus significantly and accrue more value to $Psi token holders if the vaults gain adoption.
In summary, I believe Nexus' vaults have excellent product-market fit and I will be using them for my personal account. In addition, I believe there could be further upside for long-term token holders should Nexus become the leading yield optimiser and liquidation protector for the multi-chain future. Given the significant price appreciation of the $Psi token price from its public sale price of US$0.01, I have exited my principal investment in $Psi tokens and am LPing the remaining $Psi tokens with UST to earn yield (APR currently stands at 245.0%).
Thanks for reading,
Disclaimer: I am long the $Psi token. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.
Cover Photo by Nexus Protocol
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