Energy($NRG) is an under-collateralized algorithmic stablecoin of EntropyDAO. In order to ensure the circulation supply of $NRG can be steadily increased, remains under-collateralized, and most of the $NRG holders can redeem their $NRG back into $USDC at 99% of the time, a series of mechanisms have been created to ensure this can occur. These mechanisms are:
Mint & Redeem
BOND
Mint & Redeem provides a long-term stable primary market 1:1 exchange scenario. When the secondary market price is higher or lower than 1 USDC, arbitrageurs can always use the mechanism to equalize the exchange rate between the primary and secondary markets which keeps the $NRG price stable at 1 USDC for a long time. But where does the liquidity of the $NRG primary and secondary markets come from? To this end, EntropyDAO introduces the innovative $NRG BOND mechanism.
Investors who pursue low-risk and stable returns can buy $NRG Bond NFT in $USDC. EntropyDAO promises to return the principal (paid with $NRG) and certain interest (50%$NRG+50%$ENT) when Bond NFT reaches its Maturity Date. EntropyDAO uses 100% of the $USDC funds to add liquidity to the $NRG primary and secondary markets. At the same time, 50% of the promised interest ($NRG) is used to buy $ENT immediately from the secondary market and reserve it as the $ENT part of Bond interest which will be paid in the future.
In this way, EntropyDAO solve the following three problems through the Bond mechanism: Who is $NRG assigned to during expansion?
Low-risk appetite investors who are willing to buy long-term bonds to obtain stable returns. How to support the $NRG redemption problem in an under-collateralized situation?
Investors who purchase long-term bonds will pay cash to the protocol to supplement the existing liquidity and obtain the rights and benefits of earning new stablecoins in the future. How will the added interest (currency) be paid in the long run?
By buying $ENT from the secondary market, the protocol continuously adds 50% of the freshly minted stablecoin($NRG) into the $ENT secondary market, attracting more high-risk appetite investors to invest and stake $ENT through the price mechanism. More investors choose to hold and stake $NRG, ensuring that the $NRG circulating in the market can still have enough collateral for short-term redemption, forming a positive cycle.
$USDC (and some ETH as the gas fee) is the only thing needed to mint a $NRG. There is no tax fee for mint action so $NRG could be minted by $USDC 1:1 without any limit. After that, all the $USDC will be stored in “Energy Reserve” for redemption.
Why hold $NRG and what can it do? $NRG will host the stability and payment functions of the EntropyDAO protocol. Governance token Entropy($ENT) will be priced by $NRG and LP BOND of $ENT will only be purchased by $NRG too. Besides, more infrastructure for $NRG will be introduced into EntropyDAO in 2022 Q3 and Q4. For example, the Marketplace of $NRG BOND will launch for swapping $NRG BOND NFT and use $NRG as the payment medium.
There is also no limit to redeem the $NRG. $NRG can always be exchanged for $USDC on Uniswap v2, or at a 1:1 ratio to $USDC through the redemption mechanism.
For the initial launch of EntropyDAO, only $USDC will be the collateral token.
The Bond mechanism of OlympusDAO is definitely one of the most impressive designs in 2021. It not only solves the problem of who(users) and why(bond discounts) provide the liquidity, but also the concept of protocol owned liquidity (POL) was introduced to solve the death spiral problem of the previous LP farm module when the token price fell. However, it doesn't mean their designs are 100% perfect. Users still have to add the LP by themselves through a series of complicated processes which makes it not user-friendly enough. Also, the formula of Bond discount is hard for the public to understand.
Based on OHM’s excellent LP bond design, some adjustments will be added to EntropyDAO：
Pay only with $USDC: Investors only need $USDC instead of creating LP tokens to buy the $NRG bond NFT.
BOND NFT: Investors will receive a Bond NFT after payment, it will record bond terms like when and how much they buy. All of the principles and 50% of the interest, which is called the $NRG Face value in total, will be paid by $NRG. And the remaining 50% of the interest will be swapped into $ENT from $NRG immediately based on the market price and stored on contracts until the bond NFT matures.The $ENT amount that the user will get is the $ENT Face value.
Maturity Date: After the bond reaches its maturity date, investors can use Bond NFT to claim the principal and interest back.
Protocol Owned Liquidity(POL): Half of the $USDC investors provide will be used to mint $NRG automatically, and then all these $NRG will be added into the liquidity of $NRG-$USDC with the remaining half of $USDC by contracts.
Long-term & Low-risk: As half interest will be paid directly by $NRG, it will give the Bond NFT a long-term stable value and reduce the risk for users to hold it.
Based on the Overview part, the freshly issued $NRG is distributed to $NRG Bond NFT holders. Some key indicators need to be introduced here to measure the expansion condition and quota. Besides that, contraction of $NRG based on certain conditions is also considered in EntropyDAO.
Short-term Supply is an indicator to measure the $NRG supply which will be circulated on the market in the short-term (less than 7 days). 100% of the supply provided as liquidity of NRG-USDC LP ( SN ) and 70%(TBD) of the supply provided as liquidity of ENT-NRG LP ( SE) are regarded as stable enough and will not be redeemed in the short term. Also, for different vesting term of $NRG bond, (Ti-7) / Ti of the bond debts are regarded to be paid in a short time frame. Thus, the Short-term Supply (S0) of $NRG is calculated as below:
S0 is the Short-term Supply of $NRG
St is the total supply of $NRG
Sn is the supply of $NRG provided as liquidity to NRG-USDC LP on a DEX (Uniswap, Sushiswap, etc.)
Se is the supply of $NRG provided as liquidity to ENT-NRG LP on a DEX (Uniswap, Sushiswap, etc.)
Bi is the total bond debts based on the different vesting term i
Ti is the vesting term (days) of different bonds.
The current ratio is a general indicator of the business's ability to meet its short-term financial commitments. For EntropyDAO, the current ratio is defined as the indicator of the protocol’s ability to meet its short-term supply.
Ct is the total collateral stored by EntropyDAO, including the $USDC stored on $NRG Reserve and provided as liquidity on NRG-USDC LP
S0 is the Short-term Supply of $NRG
Every 8 hours, EntropyDAO checks the levels of the Current Ratio and decides whether to expand the supply of the $NRG token. The freshly issued $NRG will not be distributed directly to any address but allocated to different vesting term bonds in the form of new quotas of $NRG BOND. Besides, only if the remaining quota of each bond is lower than 10%, the expansion of the $NRG bond quota will succeed.
Unlike expansion, EntropyDAO doesn't directly contract the supply of $NRG, but increases the market demand for $NRG by burning the reserve of $ENT. Every 8 hours, EntropyDAO will check the current ratio level, and use the $NRG accumulated by $ENT BOND to complete the contraction mechanism through buying $ENT by $NRG and burning $ENT.
In the EntropyDAO roadmap, the BOND expansion smart contracts will totally be held and managed by the DAO which is not only for a few managers but for all $gENT holders. Actually, the indicators and formulas presented above still have the space to be better. Thus, EntropyDAO decides to list all the key parameters of Bond expansion indicators for $gENT holders to vote for adjustment. There is no doubt that the more people truly understand and participate in the EntropyDAO, the more possibility that it can be an actual evolving protocol.