Introduction
Armor has devised a four-pronged approach for arNXM price stability and for maintaining liquidity, while offering over 50% total APY.
Recently there have been incidents of the arNXM price being discounted on exchanges. In order to help educate the community, we wanted to share Armor’s planned approach for maintaining arNXM’s liquidity and price stability.
We also thought it would be helpful to give a guided overview on arNXM’s staking options, yields, and future planned updates. Let’s dive in:
Staking
Armor protocol makes it easy to stake into Nexus Mutual while also retaining the ability to sell a position, or earn additional revenue from trading fees and farming rewards. To do this, Armor has provided various arNXM markets and token lock-up mechanisms (incentivized LPs).
Those who stake into Nexus through the arNXM yield vault enjoy a second layer of protection, thanks to an industry-first and exclusive coverage for liquidity providers.
The Armor treasury reserve takes on all losses incurred as debt and repays losses over time to fully replenish the arNXM ratio back to where it was before the loss.
Given that revenues are stable and capable of paying back the loss, staking into the arNXM yield vault is essentially zero risk with considerable upsides. Note that staking directly through Nexus provides no such coverage.
arNXM > wNXM
Due to the returns on the Nexus staking, as explained in detail here in the Gitbook, the value of arNXM will rise relative to the value of wNXM. This price difference should grow consistently, but in case of a payout due to approved claims, that difference might temporarily lower again; this will be replenished by the Treasury Reserve paying off the debt so the long term trajectory should go up only.
Recently, a payout happened soon after the arNXM launch, as the Yearn hack resulted in successful claims. This caused the arNXM/NXM ratio to dip briefly before it was quickly restored by the Treasury Reserve paying the debt thus incurred, and reimbursing the staker’s losses. This demonstrates how the arNXM yield vault is essentially zero loss in the long term.
Bots and miners taking advantage
When a price disparity between wNXM and arNXM arises (due to limited withdrawals liquidity), it becomes profitable for users to arbitrage by purchasing arNXM on the market and then withdrawing wNXM from the arNXM Vault against the guaranteed rate.
While this rebalances the price of arNXM, it comes at the cost of AUM of the reserve. This has led to arb bots, miners and users draining the reserve as soon as it is refilled. This causes stakers of the arNXM vault to be left without any withdrawal liquidity, and they are forced to sell on dexes, causing the price to de-peg — and the cycle continues.
The solution
Both liquidity and price parity are important to maintain and improve user trust and satisfaction with the system.
Armor has devised a four-pronged approach to bring price stability and maintain liquidity:
- Armor will be implementing a choice between a withdrawal delay of 2 days or a withdrawal fee of 2.5%. The delay and fee work to discourage this one-sided arbitrage by either not making it profitable or making immediate profits uncertain (i.e. a bet rather than arbitrage). If the fee is chosen rather than a delay, these 2.5% of funds will be left in the arNXM Vault, increasing the value of everyone else’s arNXM.
- Armor has not been withdrawn for the past 2 weeks. Not withdrawing allowed Armor to build a sizable amount of funds to be withdrawn all at one time so that arbitrage alone will not drain the vault. Having extra reserves in the vault and knowing it will continue to stay around those levels will ensure users are comfortable in the system.
- If needed, treasury funds will be deployed to bring arNXM price back to parity with wNXM before withdrawing. Armor will achieve this through purchase of arNXM on the open market before withdrawals. This should make any attempts at immediate arbitrage of these funds fruitless, and return the surplus to arNXM vault stakers.
- Armor believes Bancor rewards for wNXM play a role in the desire to withdraw wNXM from the vault. So getting arNXM rewards implemented should help significantly. To do this, the structure of minting and burning in the contracts needs to be adjusted. Armor is currently in the process of making changes to the arNXM contract to make it compatible for Bancor rewards.
Implementing these strategies will ensure that the arNXM vault maintains liquidity and trust will be returned, which will result in a positive feedback loop: lowering swap demand -> more NXM available to generate yield -> increasing yields -> more demand for arNXM.
For #1, the smart contracts and code have already been written in the past weeks, and have just been audited. They could be implemented as soon as next week. The other points will serve to further harden and optimise the system.
Future updates
Armor is constantly improving all of its products and already working on the next upgrade to the vault to improve both yields as well as liquidity.
There will be two types of storage- hot in reserve, and cold (not withdrawable, but not staked).
The hot storage (withdrawable reserve) should be enough to satisfy swapping demands and might be tweaked accordingly.
The cold storage is like a war chest: Armor doesn’t want all of the NXM to be constantly staked, as much capacity is unused and NXM should be available for new projects/shield mining campaigns; as well as for popular protocols that are often sold-out on the arCore Smart Cover system.
arNXM yields and benefits
The above four-pronged approach will bring price stability and maintain liquidity.
Meanwhile, the arNXM yield vault already generates yields ~20% on the underlying NXM. If staked into one of several liquidity pools on armor.fi, users can also gain an additional 30% yield on top, giving them a total of ~50% net yield; this is all in addition to maintaining exposure to NXM price appreciation.
Armor is always looking for ways to improve the investor experience and make DeFi safer and easier. We hope you found this guide helpful. Questions on arNXM or vault updates? Join the conversation on our Discord.