Seamless Transactions on Nirvana’s Distinctive Reserve-backed Floor
With the fast growth of crypto markets, questions are rising on whether these computer code-based projects have a working insurance policy or a backstop of last resort. Also, are these projects able to work on their own, free from external support and how truly decentralized are they?
Borrowing a leaf from the centralized financial institutions, a reserve asset is the asset used to store excess monetary energy across time. With a reserve-backed floor, projects can go beyond the normal offerings of blockchain entities and offer secure real-time payments and settlements system. A seamless payments infrastructure ensures your funds are available immediately to cater for your pending needs such as paying for utility bills.
Nirvana, a twin system of algorithmic wealth and ultra-low-risk stablecoin on the Solana network is taking this approach a notch higher with their reserve-backed rising floor strategy. The protocol produces the $ANA token – an algorithmic metastable token that serves as a store of wealth and the $NIRV token – a decentralized superstable store of value.
How Nirvana’s Reserve-backed Rising Floor Works
The Nirvana protocol owns $ANA’s liquidity such that when $ANA is purchased through the protocol’s central automated market maker (AMM), liquidity gets locked into the AMM. This creates a sell-depth for sales of $ANA tokens back to the AMM ensuring that no liquidity is rented from liquidity providers (LPs).
A unique price curve of this AMM encodes the reserve backing for $ANA ensuring that the token’s minimum price is at the floor. Putting it simply, the AMM allocates liquidity at the floor price for all $ANA tokens. The mechanism is crucial for the growth of the project as the backing for each $ANA token endows 1 $ANA with a certain intrinsic value, thereby, the protocol can always buy and burn 1 $ANA token for that value.
The backstop abides by the notion that the protocol can always be able to buy ANA at a certain value creates a floor price effect for ANA. Therefore, $ANA will not trade below this value or at the very least, it would not trade below it for too long. Take the example where the floor price is $100, and a third -exchange offer $97 for $ANA tokens, creating an arbitrage opportunity that seamlessly caused the $97 price to correct back to $100. An arbitrageur would buy ANA for $97, and sell it to the protocol for $100, netting a profit.
The Nirvana protocol works to maintain the intrinsic value of all $ANA tokens in supply making sure that when it buys $ANA for its intrinsic value, it burns the $ANA tokens. For example, with 10 ANA tokens in supply at a set floor price of $100, the protocol denotes a $1,000 value in the treasury. If the protocol buys back 1 ANA for $100, it will burn the ANA, reducing the supply to 9 ANA to match the new treasury value of $900. The intrinsic value remains the same ($10) after this purchase.
It is good to maintain a token’s intrinsic value since this is the measure of what your digital asset is worth.
Maintaining Intrinsic Value with a Reserve-backed Floor
The past few years have seen cryptocurrencies acquiring a growing social and economic interest. With this growth, it is extremely important to protect a toke’s intrinsic value ensuring that a token’s growth is at par with its adoption and success in its chosen field. Having a token without intrinsic value will see its price supported by speculation alone making it prone to failure in the long-run.
$ANA’s floor price explained
$ANA’s intrinsic value changes over time, and only ever increases as the floor price is designed to ratchet up and not recede. The floor is encoded in Nirvana protocol’s AMM price curve ensuring that the spot market for $ANA allocates its liquidity so that there always is liquidity to pay back $ANA at the floor price. There might be cases where surplus liquidity comes along and the protocol reallocates it to raise the floor for all tokens.
In summation, Nirvana embeds $ANA’s intrinsic value to its business model and to the ecosystem it generates.
Final Thoughts
The innovative AMM within Nirvana contains its rising floor mechanism maintaining a pool of cash liquidity as opposed to the infamous legacy constant product pool. The AMM mints ANA just in time when ANA is purchased, and burns ANA when it is sold back.
A proper token economic model is important for both investors and cryptocurrency founders to think about as it acts as the determining factor on whether a token price will succeed or fail. Nirvana has set the pace for incoming projects to follow, based on using your token to capture the value created by the project.
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