Author: Frank, PANews
After the failure of UST, algorithmic stablecoins were abandoned by the market. It was not until Ethena designed USDe using the hedging mechanism of perpetual contracts and launched high-yield rewards that algorithmic stablecoins became a hot spot in the market again. In the rune track of the Bitcoin ecosystem, the demand for stablecoins seems to be even higher, because the current mainstream rune pricing method uses the smallest unit of Bitcoin, "sats". Although this pricing method looks more intuitive, it is still different from the legal currency units that people are familiar with.
Recently, a new Bitcoin stablecoin protocol NUSD has attracted attention in the Rune market. The price of its Rune token BAMK has increased 50 times in 2 months, with a market value of 360 million US dollars, ranking among the top three in Rune. On June 13, UTXO, the asset management department of BTC Inc, which owns many well-known Bitcoin ecological brands such as Bitcoin Magazine and Bitcoin Conference, announced that it would invest 1 million US dollars in the protocol.
ENA in the Bitcoin ecosystem?
NUSD stands for Nakamoto Dollar and is issued using the BRC20-5byte protocol. Similar to Ethena’s issuance mechanism, NUSD also uses the hedging mechanism of perpetual contracts to achieve price stability.
According to Bamk.fi's official introduction, this mechanism is a triangular arbitrage hedging mechanism. Specifically, the minting process of NUSD is that users deposit BTC into Bamk.fi, and Bamk.fi will open a 1x perpetual contract short order on a decentralized exchange, which is usually called a "hedging order" in contract trading. The characteristic of such an order is that the total position value remains unchanged regardless of whether the price rises or falls. When the user redeems BTC, Bamk.fi will close the position of the corresponding value to return the corresponding BTC.
Compared with other algorithmic stablecoins, NUSD and BTC assets are value-anchored, and there will be no death spiral phenomenon like UST due to the collapse of LUNA coin prices. Unlike Ethena, NUSD's perpetual contract orders are directly executed through DEX. According to Bamk.fi, this is to avoid security risks caused by centralized exchange custody.
According to the official introduction, the issuance of NUSD is divided into two stages. The first stage is still issued in the form of anchoring with USDe. In this stage, NUSD is bound to Ethena's USDe at a ratio of 1:1. The second stage begins to enter the triangular arbitrage hedging stage and begins to be issued in the form of perpetual contract short orders.
In addition to NUSD, Bamk.fi has launched another rune BAMK•OF•NAKAMOTO•DOLLAR, codenamed BAMK, which is currently in the first incentive stage. The incentive method is to distribute 1,311,625,000 (6.25%) of the supply of BAMK as rewards to all NUSD holders. The distribution method is 41,962 blocks between blocks 844,492 and 886,454. 31,250 BAMK tokens per block are distributed proportionally according to the number of NUSD held at that block height, divided by the total NUSD TVL at that block height. According to the official calculator on June 13, the current daily income of depositing 2000NUSD is about US$43, and the APY is 798.7%.
The risks behind high returns cannot be ignored
There are still many factors to consider behind the seemingly high returns. First of all, the income from BAMK mining is not stable, and it mainly depends on the TVL of NUSD. As the TVL increases, the rewards of BAMK tokens will also decrease accordingly. And the BAMK rewards for the first season will not be received until about 9 months later, and the actual amount received by users may be very different. On the other hand, the price of BAMK in the secondary market is also highly volatile, and a single-day increase or decrease of 20-30% is not uncommon. In addition, the Bitcoin network fee cannot be ignored during transactions. The handling fee level on June 13 basically requires a network fee of about US$47 for one transaction.
In addition, there is the stability of the project itself. The risks in this area may come from two aspects: one is the security of the team, and the other is the loopholes in the mechanism design.
According to Bamk.fi’s official introduction, their team comes from “1,177 degens and counting”. It is understood that this is a gray humor and informal saying in the crypto field, mainly referring to users who are keen to participate in early projects and highly speculative transactions. They refuse any venture capital. The official introduction states that most members of the core team have been active on X or Telegram, so their identities have been made public. According to PANews’ investigation on the X platform, Jack Liu @liujackc has spoken on behalf of Bamk.fi many times and should be a core member of Bamk.fi. Jack Liu previously served as the general manager of Circle in Asia and the former chief strategy officer of OKCoin. The other team members cannot be clearly announced yet.
From the perspective of the mechanism of NUSD, stability is essentially determined by the team. Risks such as fund management and order opening operations will exist. Bamk.fi said in response to "how the team prevents the taking of collateral or the issuance of unsupported NUSD": "Technically there is no way. But our own incentives prevent this. Tether, Circle, or a large amount of funds held in centralized exchanges may also take away deposits. But they did not do so due to legal reasons and profit incentives. The Bamk.fi protocol has begun to generate revenue. If we do the right thing, we can continue to make money instead of taking a large sum of money and evading law enforcement forever. Tether recorded a net profit of US$4.52 billion this quarter."
The official revealed in another part of the document: "The Phase 1 agreement has begun to generate income, approximately US$600 per day, and annual income of approximately US$219,176", and it seems that the incentive brought by this income is currently difficult to compete with the temptation.
Another mechanism vulnerability risk comes from the funding rate. The funding rate of perpetual contracts is constantly changing during the market changes. When the market is bullish, there are generally more funds for long positions, and higher rates need to be paid to short positions. At this time, for holders of short positions such as NUSD, the rate is positive, which means there will be a rate benefit. On the contrary, when the market is going down, short positions need to pay additional rates. In this case, there may be a loss of overall value. The official method is as follows: "During the negative interest rate period of the perpetual contract, until the interest rate becomes positive again, the casting will be suspended, redemption is open, and BAMK rewards are provided according to the redemption ratio of each block." From this perspective, once a long period of downward phase is encountered, the casting of NUSD may face a long period of stagnation, which makes it difficult for the application scenario of NUSD to be separated from the market.
In general, the launch of NUSD has indeed made the application of runes a model case in the Bitcoin ecosystem. Its high-yield appeal and the rising BAMK tokens will also attract more players in the short term. But for Bamk.fi, the greater challenge still comes from the performance after the formal introduction of the algorithm in the second phase. The real stability and more reasonable governance mechanism may enable Satoshi Nakamoto to take a step further in his vision of Bitcoin becoming a banking system.
