Stability Mechanisms

nUSD < $1

Nectra's primary mechanism for supporting the nUSD price when it falls below $1 is redemptions. Redemptions create a price floor, as market participants can profitably arbitrage the difference by purchasing undervalued nUSD and redeeming it for $1 worth of cBTC from the system, thus increasing the nUSD price back towards its peg.

A period of high demand for redemptions also creates a second-order effect. Borrowers are incentivized to temporarily increase their interest rates to reduce their risk of redemption, and the redemption fees themselves rise with volume. Since the interest and redemption fees are streamed to the Savings Account module, users are further incentivized to acquire discounted nUSD on the market and deposit it into the treasury pool to capture a portion of these earnings. Doing so reduces the circulating supply of nUSD.

nUSD > $1

If the market price of nUSD exceeds $1, Nectra incentivizes cBTC holders to deposit their assets as collateral and mint new nUSD at the prevailing cBTC:USD oracle price.

Newly minted nUSD can then be sold on the open market for a value greater than $1, increasing the circulating supply and exerting downward pressure on the price, thereby diminishing the arbitrage opportunity for further price increases. Once the price stabilizes back down to the $1 peg, arbitrageurs can repurchase the nUSD at its intended price to repay their initial position.