10. uCR NFT
We recognize that the uAD protocol cannot rely on the same set of economic incentives to restore the $1 peg of uAD in its initial volatile period and maintain the $1 peg once the price of uAD attains stability.
For example — as the price of uAD attains substantial stability around the $1 peg, the possible arbitrage return on buying uCR NFT at a low premium decreases. This may make buying uCR NFT in periods of high stability unenticing, which may harm the stability of uAD.
Here, we outline the roadmap of how the uAD protocol shall continue to apply the right amount of upward price pressure during debt cycles.
uCR NFT coupons are ERC-1155 tokens managed by the protocol's ERC-1155 Receiver debt redemption contract. These are redeemable for uAD when the price of uAD is above $1.00. The purpose of uCR NFT coupons is to apply upward price pressure whenever the time-weighted average price (TWAP) of uAD falls below the intended $1.00 peg by incentivizing users to burn their uAD, lowering its supply.
In debt cycles (i.e., when the TWAP is below $1.00) created by an excess supply of uAD in the market, uAD holders may burn uAD tokens in exchange for uCR NFT coupons issued at a premium rate. The premium is calculated as follows:
where R stands for the debt ratio debt/supply.
Particularly, the debt ratio is - (total supply of uCR NFT) / (total supply of uAD).
For instance, if the premium is calculated as 15%, 100 uAD may be burned in exchange for 115 uCR NFT coupons.
uCR NFT coupons can be redeemed for uAD tokens at a 1:1 rate in an inflation cycle (i.e., when TWAP is greater than $1.00) before they expire. uCR NFT coupons are redeemed by depositing them in the protocol's debt redemption contract.
As of protocol launch, uCR NFT coupons expire at 180 days of issuance.
Natively tokenizing uCR NFT allows for the creation of secondary uCR NFT markets where speculators can sell their uCR NFT tokens if they require liquidity before the price returns to above $1.00.
For launch, we will leverage OpenSea's NFT marketplace. We will create a wrapped debt (uCR NFT) token in order to allow speculators to sell batches of uCR NFT of matching expiry on OpenSea.
After launch, we will create a dedicated uCR NFT marketplace. This would include a UI to assist with automating pricing and transactions. The tokenization of uCR NFT allows for permissionless extension of the protocol. It is not part of our roadmap to create uCR NFT protocol extensions. This will be left to the community.
❔ What purpose does the uCR NFT token serve?Unlike uCR, uCR NFT is issued at a premium, determined by the formula:
Here, R is the debt ratio, i.e., (total debt in the system) / (total uAD supply). That means the more uCR NFT already bought by participants, the greater the premium at which the next participant is issued uCR NFT.
That is the use case of uCR NFT - it provides an incentive for participants to burn uAD even as the price of uAD continues to decrease - fulfilling goal (2) above.
It’s an acceleration mechanism for contracting uAD supply. The more uAD already burned in the debt cycle, the greater the incentive for participants to burn even more.
❔ Why burn uAD for uCR NFT when I can burn uAD for uCR?As explained above, x amount of uAD can be burned for at most y amount of uAR in return, where y < x is always true.
In the case of uCR NFT, it is guaranteed that burning x amount of uAD will yield at least x amount of uCR NFT. Usually, the uCR NFT will be issued at a premium, so x uAD will usually yield x + c uCR NFT.
For users capable of writing bots or, in some other way, competing for the redemption of uCR NFT tokens in an upcoming inflation cycle, burning uAD for uCR NFT instead of burning uAD for uCR is much more profitable.