An Introdcution to Nirvana: virtual AMM innovative algorithmic stablecoin on Solana
Disclaimer: We have no interest in the project and this article is for research purposes only.
Nirvana Finance is a dual Token algorithmic stablecoin architecture protocol built on Solana, consisting of a metastable Token: ANA and a stablecoin: NIRV. After a “reverse” auction similar to the Copper LBP Dutch auction, the ANA gradually transitioned to normal pricing, and then the community FOMO all the way up.
When I first encountered it, the innovative algorithmic spirit was striking, and I saw shades of LUNA/UST, MakerDAO, and Olympus, taking the best of them and innovating. The relationship between ANA and NIRV is like that between Luna and UST, with ANA’s valuation increasing as the demand for NIRV grows. ANA acts as collateral for NIRV lending, just like depositing ETH in MakerDAO and minting and lending DAI. The liquidity of the ANA is completely in the hands of the protocol, similar to how Olympus can generate ongoing trading revenue. The premise of all this comes from the innovation of AMM mechanism, which is a shortcut to the mainstream constant asset ratio pool.
Nirvance Finance’s Perspectives and Pathways
From the user’s perspective, investors buy ANA via UST, NIRV, USDC, USDT or USDH, stake the ANA and earn staking rewards paid in prANA; mint and lend NIRV using the floor price of the staked ANA as collateral, and continue to buy ANA with NIRV in a recurring cycle. The prANA is similar to an option, allowing investosr to convert into ANA and burn the prANA at any time at prANA + the floor price of the ANA in USD. prANA is therefore worth the investor’s staking rewards, equal to the ANA market price — the ANA floor price. Alternatively, investors can acquire ANA after the vesting period by purchasing trANA with USD stablecoins in the form of a discounted bond.
From the perspective of the protocol, rather than holding the ANA liquidity, it is more accurate to say that the protocol directly controls the right to mint and burn ANAs, and only when investors exchange their USD stablecoins for ANAs, new ANAs will be minted and exchanged for USD stablecoins in the hands of users, i.e. the newly minted ANAs are exchanged for the liquidity of stablecoins. During this exchange process, a portion of the liquidity of the Stablecoin received from the protocol will be used to form the floor price of the ANA, and a ANA fee of 0.1% for buying and 0.3% for selling, which goes directly to the treasury instead of the AMM pool. When an ANA is sold, the stablecoin is removed from the AMM pool and the ANA is burned, so the AMM pool has only stablecoin assets and no ANAs.
Then，the investor stakes ANA and receives a prANA reward, and the staking ANA is taken out of circulation. When an investor realizes prANA to ANA, prANA and the corresponding USD denominated ANA floor price are paid to the protocol, which again gains stablecoin liquidity and burns prANA. When an investor cancels an ANA stake, the protocol receives a 0.5% ANA denominated unstaking fee that flows to the treasury. If an investor acquires ANA at a discount by purchasing trANA, an ANA-based purchase fee of 0.2% will also be charged and will be credited to the treasury.
If an investor makes a loan to NIVR with the ANA floor price staked as collateral, a 3% NIVR-denominated loan fee is charged and flows into the treasury. The maximum single exposure of the investor to NIVR, i.e., the borrowing limit, is the number of ANAs * the floor price of the ANA * 97%, so that the exposure available to the investor will be infinitely close to 1 + 1/n + 1/n² + 1/n ³ +… < 1/(1–1/n) times, n=1/(ANA quantity * ANA floor price * 97% * 1/ANA market price). At the current ANA market price of 13.71 and ANA floor price of 3.4, the maximum exposure available is approximately no more than 1.32 times.
From the perspective of different parties, it can be found that the unique AMM mechanism of Nirvance Finance not only provides buying and selling transactions, but also provides floor price support for ANA, so that ANA floor price can be used as collateral to mint corresponding NIRV, and NIRV is a stablecoin supported by multiple stable coins. The algorithm keeps NIVR anchored at $1, but as the depth of stablecoins in the AMM pool increases, NIRV becomes more stable and secure.
It can be seen that the special AMM mechanism in Nirvan Finance is an important engine in the whole process, and it 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
At the time of Nirvance’s launch, the protocol did not have any ANAs, which were only minted when USD flowed into the AMM pool. The NIRV is algorithmically anchored at $1, which means that the floor price of the ANA must first be at $1, so the market price of the ANA is bound to be higher than $1 during the first USD liquidity injection phase. Of course, at the start of the project, liquidity was skillfully guided into the market through the “reverse” auction similar to Copper LBP’s Dutch auction. The increase or decrease of ANA market price will be exponentially attenuated until 0 enters the normal pricing stage, but no matter how ANA market price changes, it is bound to be higher than $1. Similarly, it is in this process that part of USD liquidity can be overaccumulated and enough USD can be accumulated to guarantee the subsequent rise of ANA floor price.
Looking at the user perspective in the previous chapter, it is clear that the vAMM mechanism is different from the mainstream constant asset ratio pool AMM mechanism. The mainstream AMM mechanism has two Tokens in the liquidity pool, and the ratio of the two Tokens is approximately 1:1 at creation, with Token A’s price quoted by Token B. If Token A is more favored by the market, investors are willing to spend more Token B to get Token A in the AMM pool, and the supply of Token A in the pool becomes relatively smaller, which drives up the price of Token A. Therefore, in the mainstream AMM pool, the AMM price curve is a function of the relative supply of Token.
While there is no ANA liquidity in the vAMM mechanism itself, ANA is only minted when ANA is purchased via USD; when ANA is sold for USD, the AMM pool pays the investor the corresponding USD stablecoin liquidity and ANA is immediately burned. Buying ANA through the AMM pool brings more liquidity to the AMM and will allocate a portion of that liquidity to the ANA floor price in order to ensure that it keeps pushing up the ANA floor price as it can be repaid and users exit at any time; conversely, when selling ANA, the stablecoin liquidity is returned and no change is brought to the ANA floor price. It is the instant minting and instant burning that ensures that ANA is always backed by the floor price. It is also the existence of the ANA floor price that makes it impossible for anyone to acquire any ANA by buying it at a price below the ANA floor price, so the price curve of vAMM is an arbitrary function with a minimum value.
It is worth mentioning that since liquidity enters the protocol from its creation, i.e. the protocol owns the market itself, there is no need for any LP incentive, no need for the treasury to be involved in its management, and the management and taxation of the liquidity in the AMM pool is essentially allocated by the protocol algorithm, truly decentralized and perpetual access to liquidity.
The issue of slippage due to liquidity is also an innovation of the vAMM mechanism. In the mainstream AMM model, when Token A becomes scarcer in the liquidity pool compared to Token B due to the bullishness of the underlying by the buyer, a smaller trading volume may lead to greater volatility, and the slippage affecting the price change is the result of the supply balance between the two sides of the liquidity pool being broken. In vAMM, the Nirvana slippage is encoded in the arbitrary function of the minimum value itself, that is, the price curve can be regarded as the slip point of ANA’s buy and sell orders, and has nothing to do with the actual liquidity. In simple terms, under intuitive vision, when buying ANA, the price function will quote a higher price to close; selling ANA, it will close at a price slightly below the current market price. The end result is that as demand for ANA grows and the ANA floor price continues to rise, it takes more trading volume to drive the price up instead.
Nirvance Finance’s risk points
To some extent, ANA and NIRV are similar to Luna and UST, but UST is an important part of the entire Terra ecosystem, and the adoption rate of UST by on-chain projects will increase with the development of the Terra ecosystem, but the actual demand for NIRV is still from the internal nesting of Nirvance, and the real use cases are still unknown. It still needs time to further test whether it can be extended. In addition, after the expansion of NIRV to other Solana projects, there is still a ceiling of Solana, and it is difficult to expand to heterogeneous chains.
However, for the early participants of ANA, the earlier they participate in staking, the bigger dividend they can enjoy. Along with the FOMO of ANA by the community, the market price of ANA has come to more than 4 times of the floor price.