Applying Internal Coordination Theory to the NovaBank Protocol

The idea that internal coordination is as important as price coordination is implemented in the NovaBank protocol. The set of rules in the NovaBank protocol essentially has three aspects:

• Staking (Internal Coordination)

• Bonding (Price Coordination)

• Treasury (Reserves)

This rule set is controlled by three main levers:

• Reward Rate and APY (Internal Metric of Internal Coordination)

• Bond Control Variable (Internal Metric of Price Coordination)

• Premium Over RFV (Price Metric of Internal Coordination)

(RFV: Risk-Free Value; detailed explanation in Part Three of the white paper: Protocol Contracts Introduction)

Policy levers are the primary means by which NovaBank counters irrational, runaway reflexivity in self-regulating market conditions. These policy levers act as focal points, either offsetting or cooperating with external market forces to maintain internal productivity.

Staking (Internal Coordination)

The (3, 3) scenario is a win-win situation where both players stake their NVB tokens. As a reward for removing them from circulation, stakers receive compounded rewards based on the yield rate, which is controlled by the NovaBank policy team. The (3, 3) focal point essentially states that internal coordination—universal agreement, positive-sum, cooperative behavior—is more economically productive than price coordination—zero-sum, competitive behavior. Internal coordination forms a demand synchronization that absorbs economic value proportional to network effects. Price coordination is also a win-win equilibrium but to a lesser degree than the internal coordination equilibrium. Internal coordination is a generalization of economic demand, while price coordination is a generalization of economic supply.

Bonding (Price Coordination)

The (1, 1) scenario is also a win-win situation but to a lesser extent. Bonding refers to buyers purchasing NVB tokens from the protocol at a price below market value. Buyers provide another asset (stablecoins, LP tokens, etc.) to the protocol treasury in exchange for NVB tokens. The discount is determined by market forces and the bond control variable managed by the policy team. The bond control variable sets a certain bond capacity or target limit for the amount of a given asset the treasury wants to receive within a specified time. As bond sales approach the capacity limit, the bond discount decreases to ensure the treasury accumulates the appropriate amount. The price coordination equilibrium is a generalization of economic supply.

Treasury (Reserve Support)

Funds from bond sales enter the treasury reserves. These are reserve assets that back the value of each NVB token. The Risk-Free Value (RFV) is an amount of stablecoins that supports each NVB token minted and sold through bonding or reward distribution. For each NVB token minted into circulation, the treasury must contain this RFV amount of stablecoins. The metric of "Market Value per Token Backed" is composed of treasury reserves from assets other than stablecoins, so it may have greater volatility.

Policy Levers

• Staking Reward Rate: This metric determines the number of new NVB minted for stakers. The percentage of staked NVB then determines the Annual Percentage Yield (APY). The rate of bond sales combined with the reward rate determines the supply growth rate. Every NVB token minted must be backed by one unit of Risk-Free Value. The reward rate combined with the percentage of total NVB supply staked yields the APY. The APY is the primary internal metric of internal coordination. It is inversely proportional to NovaBank's health. When NovaBank is performing well, the APY will be lower because the reward rate will be lower (indicating the protocol has existed longer), and there will be a high staking percentage (indicating long-term internal confidence).

• Bond Control Variable: This measure is partially controlled by the policy team to incentivize the precise treasury composition that NovaBank desires. NovaBank needs to consider what types of reserve assets it wants to back the value of NVB, such as liquidity provider assets versus stablecoin assets. Each asset has different reserve backing attributes, and these attributes must be collectively weighted to achieve healthy growth and adequately stable reserve backing. The bond control variable is an internal metric of external price coordination because it sets the discount rate for purchasing directly from the protocol rather than from third-party market makers.

• Premium Over RFV: This is not a policy lever but a market measure. The trading value of each NVB token is above the stablecoin value backing each token. This is a multiple comparable to the price-to-earnings ratio familiar to value investors. The premium is an external/price measure of internal coordination; NVB trades at a price higher than the RFV because the external market perceives effective internal coordination among NovaBank contributors. This external perception reflects investor confidence that the NVB staking ratio will remain high, contributors will continue to work for NovaBank, the protocol will expand its network to form new partnerships, and demand for NVB will remain high. Therefore, the premium over RFV is a metric of NovaBank's economic productivity and its expected future cash flows. This metric is set by the market, not directly by the NovaBank policy team, but it can be influenced by policy levers.