Economic Primitives

Beyond these technical foundations, NEPRI TFA’s stablecoin system underpins NEPRI TFA collateral. While a full discussion of NEPRI is beyond the scope of this paper, it is important to outline the basic operation.

The economic foundations of NEPRI TFA are similar to today’s central bank monetary policy. Using the US as an illustrative example:

1. During economic booms, the economy expands, driving demand for the US Dollar. The Federal Reserve responds by raising rates, and/or auctioning off new US Treasury Debt (bonds). Both of these have the effect of reducing the supply of the US Dollar, and slowing down the economy.

2. During economic busts, the economy contracts, reducing demand for the US Dollar. The Fed responds by dropping rates, and/or buying back US Treasury Debt from the market (Quantitative Easing, Yield Curve Control, etc.). Both of these have the effect of increasing the supply of the US Dollar, stimulating" the economy.

The NEPRI FINANCE Protocol functions in a similar way to the "Central Bank Protocol" described above, instead the central bank is replaced by the supply of the native token NEP and the currency is replaced with nYUSD:

1. When the NEPRI Protocol economy is growing, demand for nYUSD rises, causing the stablecoin to trade at a premium. The Terra Protocol responds by minting nYUSD and buying back NEP. This increases the supply of nYUSD and thus restores the peg back down to parity. The NEP "bought back" by the protocol is called seigniorage, the value captured by printing and selling a currency at zero cost. The seigniorage gains are partially burnt, making NEP scarcer, and the remaining portion is sent to the protocol treasury.

2. When the NEPRI Protocol economy is contracting, demand for nYUSD falls, causing the stablecoin to trade at a discount. The NEPRI Protocol responds by minting NEP and selling for nYUSD. This has the effect of decreasing the supply of nYUSD, restoring the peg back up to parity. In this case, all the repurchased nYUSD is burnt, and none is sent to the treasury. This economic design is a simple yet elegant adaptation of modern monetary policy. It creates the foundation for permissionless stablecoins. NEPRI TFA is launching with support for nYUSD.