Nerite Protocol Lite-Paper

Overview

Nerite Protocol is a Multi-Collateralized Debt Position Protocol built on the Arbitrum network that issues a Streamable, Redeemable, Governance Minimized fully Over-collateralized stablecoin called $USDN which is pegged to $1.00 and backed by ETH denominated assets like ETH, stETH, and rETH.

Collateralized Debt Position (CDP)

Nerite Protocol is a “friendly” fork of the CDP protocol Liquity V2, which takes inspiration from Maker, Open Dollar, and other CDP protocols that have come before. 

Nerite CDPs accepts multiple collateral types, but due to governance minimization, new ones can not be added by governance in the future, like Maker. So there is no risk of the protocol ever accepting centralized collateral like USDC, and introducing additional security risk if those centralized assets are ever seized by governments or locked into banks which have collapsed. 

Each CDP is called a "trove". This is similar to a vault or safe, in Open Dollar or Maker respectfully. Each trove has a particular interest rate that USDN is minted and borrowed at from the trove, an owner, and other unique features. Troves are stored as transferable NFTs using a standard ERC-721 token.

Streaming

The USDN stablecoin is a Streamable “Super-token” with all streaming features built using the Superfluid Protocol.

Being Streamable means that USDN is ideal for use cases around vesting, grants that payout linearly or quadratically over time, and all kinds of subscriptions.

Redemptions

1 USDN is always redeemable for $1.00 of underlying collateral at any time by any stablecoin holder. Whichever CDP has the lowest interest rate on the protocol can be redeemed against. So if the market price of USDN is ever less than $1.00, participants can always exit their stablecoin positions into the underlying collateral.

Example:

User A opens a CDP by depositing $3,000 worth of ETH, borrowing 1,000 USDN stablecoins, and chooses an interest rate of 0%. It is the lowest interest rate chosen for any open CDPs.

User B is holding 100 USDN stablecoins.

The market price of USDN fluctuates to $0.9965

User B calls the redeem() function on the Nerite Protocol in order to redeem their 100 USDN for $100.00 of ETH from User A’s CDP.

User C sees the market price for USDN is below $1.00 so they buy 200 USDN for ~$199.30 at an average price of $0.9965. The act of buying from the market raises the price of USDN to $1.00.

User C calls the redeem() function on the Nerite Protocol in order to redeem their 200 USDN for $200.00 of ETH from User A’s CDP. 

User C has arbitraged the price of USDN back up to $1.00 while capturing $0.70 of value for doing so.

User A’s CDP remains open with $2,700 of ETH deposited, and 1,000 USDN of debt.

The protocol always remains over-collateralized by ETH Denominated Assets meanwhile the stablecoin always has incentives available for buyers to bring its price up to $1.00.

Governance Minimization

In the past, CDP protocols like Maker have allowed governance to update the collaterals which users can deposit to open new positions. This has led to increasingly risky collateral types being added over time and more centralized assets which have higher risk of becoming a larger share of total backing of stablecoins in the market over time. Liquity V1, by contrast, could only accept ETH and as a result has been rated as the safest stablecoin ever made by Bluechip, a stablecoin rating agency.

Governance minimization is a core principle of Nerite's design, serving as a safeguard against any long-term centralization of protocol control. New collateral types can never be added, governance can not mint new stablecoins, or take any other actions to control users’ CDPs. This approach aims to establish robust security guarantees for protocol users and prevent undue influence over the system's operation.