How Does Nolus Work? Fixed-Rate Spot Margin, Explained Step by Step

Nolus is a spot margin protocol: a financial suite that allows users with different objectives to find a home for their crypto activities. The protocol takes an innovative approach to credit markets with interoperable, self-custodial margin positions that democratize access to ownership and enhance trust and transparency.

Within Nolus, stakeholders can find all their financial needs in one place:

• Users can buy, sell, swap, and ramp in a lightning-fast and cheap way;
• Lenders are the liquidity engine, feeding the protocol with stablecoins used for opening margin positions;
• Borrowers can gain up to 5x exposure, better liquidation rates, and retain ownership by receiving loans in stablecoins;
• Stakers are the users who lock their $NLS tokens to secure the network and be rewarded with protocol-related benefits.

The Nolus protocol is a fully automated money market with no custody over the users funds. The code is open-sourced, and changes can only be applied after the community of stakeholders decides to do so through governance. All transactions are executed solely between Lenders, protocol, Borrowers, meaning that no external parties can operate the funds provided in the system.

Let us dive deeper into how Lenders and Borrowers will interact:

Nolus Protocol Money Market

Spot Margin

Spot margin on Nolus defines a money market between lenders looking to earn yield on stablecoins, and borrowers looking to hold more digital assets than their current equity. To open a position, borrowers provide a down payment and can take exposure of up to 5x, depending on the market.

When a margin position is opened, the down payment and the loan provided by Nolus protocol are locked in a smart contract instance, with both acting as collateral. As a result, the borrower boosts his exposure by up to 5x with a lower margin call risk compared to the average market rate. The interest rate for borrowers depends on the utilization of the funds available in the system: the more liquidity the protocol holds, the lower the rate for new positions and vice versa. However, once a margin position has been opened, its interest rate is fixed and will never change, providing predictability for future cash flows and yield distributions toward lenders. The chain, contract factory, and Interchain Accounts behind that flow are covered in the Nolus Protocol under the hood.

Lenders

Lenders provide liquidity to the protocol in stablecoins. The protocol is designed to work on a cash (not accrual) basis where actual yield rewards lenders. Interest from margin positions is due for collection after certain time periods and, if not paid, automatically gets deducted from active positions (collateral). The accumulated interest is immediately distributed to lenders by the smart contracts. The system also limits the number of new deposits that lenders can provide if the utilization of funds is below optimal, therefore securing controlled returns for lenders who have already committed funds.

Lenders are additionally rewarded in $NLS tokens from the Lenders Incentives Pool containing 12% of all token supply. Rewards distribution from the incentives pool is linked to the protocol’s growth, starting from higher APR % and slowly decaying with the increase of total value locked in the system. Early adopters are exposed to the highest rewards, thus creating organic demand and adoption of the product. The rewards earned in $NLS can additionally be staked on the network and multiplied through the rewards distributed by the Inflation Pool.

Automatic Buybacks

Based on the above mechanics, every margin position pays a fixed interest rate. Part of that rate is streamed to lenders on the spot, and the remaining interest margin stays with the protocol as revenue (stream 1). Combining it with a swap spread (stream 2) and a small TX fee (stream 3), the three streams buy back $NLS tokens from the open market and actively refill the Incentives Pool to create a sustainable model that rewards lenders in the system in the long term.

Conclusion

Nolus is a decentralized strategy to take part in a product from the traditional finance world that is familiar to people who have little to no experience in crypto. Not only that, established crypto users can find an environment where they can easily park their liquidity and earn rewards for doing so. And for believers in this model, thanks to the three revenue streams, they can be certain that there is real yield supporting the value accrual of the native asset itself.

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