Tokenized Fractional Assets (tAssets)

tAssets are blockchain tokens that behave like "reflector" versions of real-world assets by reflecting the exchange prices on-chain. They give traders the price exposure to real assets while enabling fractional ownership, open access, and censorship resistance as any other cryptocurrency.

Unlike traditional tokens which serve to represent a real, underlying asset, tAssets are purely synthetic and only capture the price movement of the corresponding asset.

Properties

A tAsset can be described by the following properties:

Name & Symbol

Describes the underlying asset the tAsset is supposed to track.

Minimum Collateral Ratio

A CDP that mints the tAsset cannot have a collateral ratio below this value, lest it be subject to liquidation through auction.

Auction Discount Rate

For a CDP subject to liquidation, describes the discount for which its collateral can be purchased.

Price

The current registered price as reported by its Oracle Feeder. This is mainly used for determining collateral ratio for CDP and does not affect the tAsset's trading price on NEPRIswap directly.

Prices are only considered valid for 60 seconds. If no new prices are published after the data has expired, Mirror will disable CDP operations like mint, burn, deposit, and withdraw until the price feed resumes.

For instance, the price feed is halted when real-world markets for the asset are closed. The market hour used to track the price of tAssets is based on Nasdaq trading hours. This does not affect the ability to trade on the asset's NEPRIswap pool.

Oracle Feeder

The Oracle Feeder is a NEPRI account that can change the registered on-chain price for a tAsset. They are responsible for reporting an accurate and up-to-date price so that the tAsset's trading value is kept in sync with its reflected asset. Each tAsset has its own dedicated feeder, which can be reassigned through governance. The oracle feeders for the genesis tokenized assets will be owned by Band Protocol, but the community can assign oracle feeders to other providers to newly whitelisted assets through governance.

Lifecycle

Whitelisting

To whitelist a tAsset is to register it with NEPRI TFA Protocol, which involves several operations, including:

• creating the tAsset token and assigning its oracle feeder

• creating the tAsset-nYUSD trading pair on NEPRIswap and its LP token

• registering the new tAsset with all relevant NEPRI TFA Contracts

Whitelisting is approved by governance and is automatically implemented if the whitelisting poll receives enough votes. Once a tAsset has been whitelisted, it will be mintable through opening a CDP and tradeable on NEPRIswap. In addition, LP tokens for the corresponding NEPRIswap pool will begin to earn NEPT inflation rewards when staked.

Deprecation & Migration

In situations where the tracked asset undergoes a corporate event such as a stock split, merger, bankruptcy, etc. and becomes difficult to reflect properly due to inconsistencies, a tAsset can be deprecated, or discontinued, with the following migration procedure initiated by the oracle feeder:

1. New replacement tAsset token, NEPRIswap pair, and LP tokens contracts are created, and the present values of properties of tAsset will be transferred over

2. The oracle feeder sets the "end price" for the tAsset to the latest valid price

3. The tAsset's min. collateral ratio is set to 100%

At this stage:

• CDPs may no longer mint new tokens of the tAsset

• Liquidation auctions are disabled for the tAsset

• Burns will take effect at the fixed "end price" for withdrawing collateral deposits

• LP tokens for the tAsset will stop counting for staking rewards

Deprecation will not directly affect the functionality of the tAsset's NEPRIswap pool and users will still be able to make trades against it, although the price is likely to be very unstable. Users are urged to burn the tAsset to recover their collateral if they have an open position, and are free to open a new CDP / d in liquidity provision for the new, replacement tAsset. The old tAsset will be retired and marked as "deprecated" on front-end interfaces.

Collateralized Debt Position

New tokens for a listed tAsset can be minted by creating a collateralized debt position (CDP) with either NEPRIYieldUSD (nYUSD) or other tAsset tokens as collateral. The CDP is essentially a short position against the price movement of the reflected asset, -- i.e. if the stock price of AAPL rises, minters of tAAPL would be pressured to deposit more collateral to maintain the same collateral ratio.

Collateral Ratio

The collateral ratio (C-ratio) is simply the ratio of the value of a CDP's locked collateral to the value of its current minted tokens.

The CDP is required to always maintain a C-ratio above the tAsset's minimum, otherwise, the protocol will initiate a margin call to liquidate collateral in an attempt to restore the position's C-ratio. The protocol is able to determine whether a position is underneath the required threshold by re-denominating all tAsset values into nYUSD via their oracle-reported prices.

Let the tAsset's minimum C-ratio be $r_{\text{min}}$. Given a CDP's current quantities of collateral and minted tAssets $Q_c,Q_m$ and their current prices $P_c, P_m$, the effective collateral ratio at any time $t$ is:

$$r_t = \frac{P_cQ_c}{P_mQ_m}$$

A CDP should strive to always maintain $r_{t} \ge r_{\text{min}}$, otherwise, the collateral will be subject to liquidation.

Opening a new position

Users are allowed to set the initial C-ratio for their CDPs as long as it meets or exceeds the mandated minimum value for each tAsset. The selection of the initial C-ratio $r_{0}$ along with the choice of collateral is used to determine how many tokens are minted during the creation of a CDP.

$$Q_{m} = \frac{P_{c}Q_{c}}{r_{0}P_{m}}$$

Depositing / withdrawing collateral to position

With an existing CDP, the user can deposit additional collateral $Q_c'$ to raise its effective C-ratio. The total amount of potential mintable tAsset tokens is then increased by the marginal value $Q_m'$.

$Q_c'$ can be negative, which is equivalent to withdrawing collateral. The user can only withdraw up to however much is needed to maintain the tAsset's effective C-ratio above the tAsset's minimum. The user will receive $Q_c' - \text{fee}_{\text{protocol}}$ upon withdrawal due to the protocol fee.

$$Q_m + Q_{m}' = \frac{P_{c}(Q_{c}+Q_{c}')}{r_\text{min}P_{m}}$$

Minting / Burning tAssets

In addition to depositing and withdrawal collateral, the user can also mint and burn tAssets against the CDP to adjust the value of their CDP's effective C-ratio.

Let the quantity of newly minted tokens be $Q_m'$(negative if burned). The minimum collateral required to keep the CDP position above the tAsset's min. collateral ratio is:

$$Q_c \ge \frac{r_\text{min} P_m (Q_m+Q_m')}{P_c}$$

Anything above that amount can be withdrawn from the CDP.

Closing a position

If a user wishes to collect all their collateral from their CDP, they must close their position by returning the outstanding balance of minted tAssets, which the protocol will burn. The user will then be able to withdraw their locked collateral.

Protocol Fee

The NEPRI TFA protocol fee is charged whenever a withdrawal from a CDP is made (including closing the position). This fee is then converted into NEP through NEPRIswap and distributed to NEP token stakers as a staking reward.

Margin Call & Auction

Maintaining a lower C-ratio allows you to mint more tAsset tokens for less collateral, but obviously does not come without its risks. A CDP can be margin called when it falls below the min. collateral ratio. At this stage, if the owner does not quickly act and deposit more collateral or burn tAssets to deleverage their position, other users may purchase their CDP's collateral at a discount.

The protocol will try to raise the CDP's C-ratio by burning tAssets it recovers from liquidating its collateral. Let $a$ be the amount of the tAssets paid (up to the amount minted by the CDP) and $d$ be the tAsset's auction discount rate. The buyer can expect to receive:

$$\min\bigg(\frac{a}{1-d}\times\frac{P_m}{P_c},Q_c\bigg)$$

The remainder of the collateral not sold is returned to the CDP's owner.

The auction process continues until either the CDP's C-ratio is restored to a level above the tAsset's minimum collateral ratio OR the quantity of minted tAssets is completely burned, which closes the position. Because this provides almost risk-free profit, participants are incentivized to liquidate the entire margin-called position when possible to maximize their profits.

Example

To illustrate, let tXXX be priced at 1 nYUSD, and tYYY at 2 nYUSD. Assume that both assets have a min. collateral ratio of 120% and an auction discount rate of 20%. A user has opened a CDP to mint 100 tXXX at the C-ratio of 120%, depositing 75 tYYY as collateral.

If the CDP is being liquidated with the auction participant paying 100 mXXX to totally liquidate the position, one should receive:

$$\min\bigg(\frac{100\text{tXXX}}{ 1-0.2}\times\frac{\text{1nYUSD/tXXX}}{2\text{nYUSD/tYYY}},75\text{tYYY}\bigg)$$

Working over the math, one should receive 62.5 tYYY tokens, totaling 125 nYUSD, making a 25% profit. The CDP owner would receive the remaining 12.5 tYYY.

Note that the owner would still retain his 100 tXXX, meaning along with the 12.5 tYYY they would keep around 125 nYUSD of value out of their initial 150 nYUSD deposit.

To avoid liquidation, users should aim for a C-ratio that factors in the known price dynamics of the reflected asset. A safety buffer of at least 50% above the tAsset's minimum is usually recommended. Users with open positions should actively monitor price activity that threatens the safety of their CDP and respond accordingly either by burning tAssets (or closing the position altogether) or deposits more collateral to reduce the possibility of liquidation.