bAsset Vault
Liquidation-protected and LTV optimization vault strategy built on Anchor Protocol
Our flagship bAsset Vaults allow users to deposit their bAssets (e.g. bLUNA or bETH) into Nexus Protocol to earn yield.
We aim to outperform on two fronts: firstly, by providing a higher yield than if users were to execute the same strategy on their own, and secondly, by providing a superior user experience for our depositors through features such as liquidation protection, automatic LTV management and auto-compounding of rewards.
Summary of Strategy
By depositing their bAsset collateral into these vaults, users are in effect depositing their collateral into Anchor Protocol and borrowing UST on the collateral.
bAsset vaults derive their yield from two avenues:
Dynamic yield from depositing in Anchor Earn
Yield differential between Anchor Borrow interest rate and ANC borrowing incentives
The advantage of using Nexus Protocol is:
Users are protected from liquidation risk even if the value of bLUNA declines during market corrections; Nexus Protocol will automatically payback loans and readjust user's LTV ratio accordingly
Users enjoy much higher yield than if they executed the strategy themselves; Nexus Protocol has automatic repayments embedded in the vault strategy which will allow users to maintain a higher LTV ratio where otherwise users will target a lower LTV ratio due to the risk of liquidations
Users can expect increased yield due to auto-compounding; Nexus Protocol will sell token rewards and compound the resultant bAssets to grow user's deposits
Liquidation Protection
In order to manage LTV efficiently and safely against all possible 'fail' scenarios; our vaults will feature two different 'modes' which will be activated based on different scenarios:
Normal Mode: Allows users to achieve an optimum 80% max LTV ratio
Emergency Mode: activated when Anchor price oracles fails and liquidation market is suspended, protects users from liquidation by targeting 50% max LTV ratio
Normal Mode
In Normal mode, Nexus smart contracts utilizes Anchor’s price oracle. In effect, a healthy buffer between target LTV and liquidation LTV will be maintained to protect users' collateral positions from liquidation.
The initial parameters for Normal mode will be set such that the users would be covered even under the most dire of circumstances (i.e. these parameters will be set initially to cover users in line with the worst Luna price decline to date).
In the event of a failure in Anchor's price oracle, Emergency Mode will kick in.
Emergency Mode
In situations where the Anchor’s price oracle fails, Nexus Protocol will automatically change its LTV management logic to halve the target LTV instantly. Once the Anchor price oracle has resumed regular operations, Emergency mode will be deactivated and the protocol will resume operations according to Safe mode parameters.
Rationale
An Anchor price oracle failure will trigger a pause in Anchor Protocol's liquidation market. During this pause, no liquidations can occur regardless of changes in the price of bAssets.
However, in the interim, collateral assets continue to be actively traded on other exchanges. Therefore, if the value of collateral assets declines, once Anchor's price oracle resumes regular operations and the liquidation market reopens, these price deviations can cause user's collateral to become eligible for liquidations. This risk will only grow with time as usage of the Terra blockchain grows and as more users or protocols deploy liquidation bots.
To safeguard user's deposits albeit at the expense of temporary yield inefficiency, Nexus Protocol is programmed to treat an Anchor price oracle failure as a sign of significant market volatility. Emergency mode is therefore our way of ensuring user's deposits are safe from liquidation.
Other fail-safe measures
Blockchain Flooding
As transaction volume on the Terra blockchain grows, the risk of 'blockchain flooding' (the chain being unable to keep up with demand for transactions) grows. This may put depositors at risk of liquidation if repayment transactions are not pushed through in time.
To mitigate such a scenario, Nexus Protocol manages and operates an independent node and works closely with a number of validators to ensure that Nexus Protocol has the best chance to push necessary transactions for orderly vault operations.
The recent Columbus-5 migration has allowed Terra to grow its maximum bandwidth by ~33x, thus naturally 'future proofing' us against blockchain flooding. However, as every network will eventually face bandwidth limits as usage scales, Nexus is also preparing a fundamental fail-safe tool to actively address these issues. This will be vital for the smooth operation of Optimal mode.
This fail-safe tool aims to detect abnormal increases in on-chain transaction requests by tracking the traffic in the Terra mempool. If these increases materialize, Nexus Protocol will immediately activate Emergency mode to reduce the risk of network congestion resulting in liquidation.
Anchor Earn Blockage
As Anchor Protocol sources the UST required to operate Borrow exclusively from deposits in Earn, Anchor Protocol has an in-built mechanisms to maintain protocol solvency by limiting the withdrawal of deposits when borrowing demand grows too large relative to deposits.
This presents potential issues for Nexus Protocol as our loan repayment code will fail to execute when Anchor halts withdrawals from Earn.
To mitigate such a scenario, Nexus Protocol is designed to maintain a small portion of the borrowed UST as a vault buffer. As we also carry positions in Borrow, this small buffer should allow the vault to readjust position as much as the protocol needs.
Protocol Risk
It is important to note that while we have planned for all known failure points, liquidation is possible even in Safe Mode or Emergency Mode. If prices of collateral assets fall significant in a short period of time (less than LTV management check timings) resulting in drawdowns exceeding the buffer provided by Safe and Emergency Mode parameters.
While parameters at inception has been set in reference to the largest historical price decline for LUNA, these parameters can be adjusted by governance proposals.
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