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NEP as a governance token for nYUSD

NEP as a governance token for nYUSD

NEP will be the governance token for the nYUSD protocol, giving holders the ability to vote for proposals that can define the future of nYUSD. Any value created from future fees that may be generated through nYUSD growth and usage will accrue to NEP holders.
Here are several ways that NEP holders will be able to participate in governance in nYUSD by creating proposals for:
  • Adding/removing new types of yield-earning strategies
  • Allocating capital across a basket of strategies
  • Determining what fees are charged by the protocol
  • Determining what incentives (e.g. NEP rewards for liquidity mining) are offered on an ongoing basis
  • Allocating engineering and business efforts towards protocol improvements
  • Forming new partnerships (e.g. integrations with traditional financial institutions years down the line)
Protocol fees
Today, the NEPRIDAO will be focused on building the best product possible: a safe and secure nYUSD that has a strong risk-adjusted return. We believe growth (measured in nYUSD circulating supply and users) is far more important than monetization at this stage.
In the short term, we should intentionally be trying to minimize the fees required to interact with nYUSD, whether that’s during the mint/redeem processes or buy/sell processes on third-party exchanges.
With success in increasing the circulating supply and usage of nYUSD, there will naturally be opportunities to introduce lightweight and thoughtful monetization strategies that will benefit NEP holders.
In the future months and years, there are multiple ways that the protocol can create value for governance token holders:
  • Exit fees
  • Performance fees (similar to Yearn and Set Protocol) after target APYs have been reached (e.g. 10% of profits above 10% APY)
  • Gas subsidization fees (as popularized by Yearn)
  • Trading fees (e.g. 0.05% of trades once NEPRI launches an automated market maker to support dozens or hundreds of nYUSD pairs)
Again, we want to stress that we do not necessarily believe that fees should be implemented right away even if we add variables to our smart contracts to potentially support these fees at a later date.
Fees will both be more palatable to users and lucrative to NEP holders when nYUSD has reached hundreds of thousands or millions of users and has crossed hundreds of millions or billions in circulating supply. Over time, we trust that the community will self-govern and decide what fees, if any, should be put in place. The fees generated by DeFi protocols can be breathtaking. On September 1st 2020, Uniswap trading fees exceeded the fees generated by the entire Bitcoin network, with the protocol collecting over $1 million dollar a day.
Once protocol fees are generated, there are multiple ways to transfer that value to governance token holders. For example, buybacks have been popular since Binance and other centralized exchanges launched buyback and burn models in 2017. Other protocols like Kyber simply send ETH usage fees directly to token holders’ wallets. There are also newer models like the Buyback and Make model proposed by Placeholder VC that are untested but intriguing. After nYUSD is fully governed by the community, we will let governance token holders determine the long-term monetization strategy.
Incentivizing nYUSD growth with NEP
Above we outlined how nYUSD growth will benefit NEP holders. Of course, we also want to accelerate nYUSD growth with NEP rewards. Users that help grow the NEPRIDAO platform should be rewarded in a compelling way, earning more NEP as they create more value just like miners on Ethereum earn more ETH over time. In this way, the two tokens will work together in a virtuous cycle. nYUSD will deliver value to NEP holders while NEP will be used to intelligently boost nYUSD growth. It’s important to make sure that much more value is created for the entire system of token holders so that rewards are minimally dilutive compared to overall network value.
In the last few months, we’ve seen many different variations of incentivized rewards in DeFi. These generally involve the emissions of bonus tokens for supplying liquidity to either lending/borrowing pools or trading pools. We’ve observed some incentive programs that have worked relatively well in creating sustained usage, such as Uniswap’s retroactive and ongoing LP rewards and YFI accruing substantial Yearn Vault fees. On the other hand, while Curve has built a product that is highly used, its overly aggressive emission schedule has caused poor CRV performance. The jury is still out on other projects like SushiSwap and Swerve that very quickly aggregated tons of liquidity by being extremely generous with initial emissions but then saw significant pullbacks once rewards schedules tapered. Unfortunately, we’ve also seen many fly-by-night projects, including some outright scams. These poorly designed protocols and rug pulls have hurt the overall DeFi movement in a nontrivial way.
At NEPRIDAO, we very much believe in aligning interests and incentivizing the community to focus on long-term behaviors. Before unveiling our inaugural nYUSD-focused incentive program soon, we wanted to outline some of the principles we are adhering to as we aim to bootstrap nYUSD’s growth.
First and foremost, we want to ensure that we are rewarding activities that create long-term usage of the NEPRIDAO and products (e.g. nYUSD, NEPRIV, VRTB, ETO, RTL, and TFA). We are not interested in flash in the pan rewards programs that result in temporary usage. Instead, we prefer sustained growth since we believe what we’re building with nYUSD, NEPRIV, VRTB, ETO, RTL, and TFA will be many times more valuable a decade from now than they are today.
Secondly, we are taking extra time to ensure that we can create the right balance between releasing NEP from Reserves to fund growth and not flooding the market with too many tokens, and irresponsibly increasing our circulating supply. However, releasing new tokens can actually be very additive if and only if these tokens fund growth that significantly increases the overall value of the NEPRIDAO.
In addition, to mitigate potential supply increases, our upcoming rewards programs will allow NEP holders to stake/lock-up their NEP for more incentives.
We want to structure our upcoming nYUSD-focused incentive program to take advantage of our community. We want many NEP holders to buy, hold, and use nYUSD while keeping their stake in NEP to create the virtuous flywheel between the two tokens. This will enable nYUSD to leverage the full strength of the NEPRIDAO and the community.