# How These Mechanisms Create an Economic Flywheel

This is an idealized prototype of the economic flywheel mechanism, intended for educational purposes rather than precise details. It intuitively illustrates how the protocol self-regulates and adjusts the incentives of the three main parties—market/bonding, stakers, and the NovaBank policy team. The model shows how the implementation generalizes the economic forces of supply and demand to match or offset runaway reflexivity in the market.

*<mark style="color:yellow;">The reward rate combined with the volume of bond sales determines the rate of supply inflation.</mark>*

* **Supply increases → Price decreases**&#x20;
* **Lower premium → Price increases** (as the price returns to the standard multiple of RFV)
* **Price increases → More bonding/selling**
* **Higher APY → More demand/staking** (3, 3)
* **Price decreases → Lower premium**
* **More bonding/selling → Higher APY**
* **More demand/staking → Price increases**

#### &#x20;*<mark style="color:orange;">Why is this economic flywheel a virtuous cycle?</mark>*

The fundamental issue in decentralized finance (DeFi) economics is: Where does value creation in DeFi come from? What constitutes economic productivity in DeFi? What economic benefits does DeFi generate?

*<mark style="color:orange;">**The essential questions are:**</mark>*

* How to break the cycle of capital flow in DeFi?
* How to connect DeFi to the broader financial system?
* How to elucidate the source of economic value in DeFi?

Only by answering these questions can DeFi elevate from merely a degenerative art form tothe legitimate status of economically productive activity. The treasury reserve asset model or "Protocol-Owned Liquidity" model (DeFi 2.0) initiated by NovaBank provides initial answers to these questions through concepts like Risk-Free Value or intrinsic value familiar in traditional finance, albeit in a different form in DeFi.

The fundamental value basis for creating the flywheel is internal coordination, which can be generalized as:

* **Because internal coordination (staking) yields significant returns;**
* **Then price coordination (bonding) will yield substantial returns;**
* **Therefore, treasury assets (income) will grow significantly;**
* **This ensures that internal coordination will yield significant returns.**

This virtuous cycle relies on internal coordination as the basis of economic productivity in aspecific digital economy. The third element beyond supply and demand—internal coordination (generalization of demand)—allows NovaBank to exercise policy levers and control treasury composition to offset irrational, runaway reflexivity in market forces. This gives investors confidence that staking NVB will continue to be a profitable financial strategy. It is this third element that paradoxically breaks the vicious cycle and lays the foundation for a virtuous cycle and substantial, rational reflexivity that benefits the market. Through internal coordination, NovaBank has the ability to self-regulate and self-govern market conditions for itself and the entire ecosystem of interdependent, interoperable protocols.

To have a comprehensive theory of economic productivity in the digital economy, we must have a clear description and explanation of what internal coordination (3, 3) is—as economic productivity. And we must explain why it is more important than price coordination (1, 1).

The NovaBank protocol is created through internal coordination or entrepreneurship. It is an innovation of the algorithmic non-stablecoin model. Essentially, the algorithmic non-stablecoin model holds an over-collateralized basket of reserve assets, ensuring that the stablecoin maintains its peg to the US dollar by constantly correcting the market when the value is above or below its price peg.NovaBank's innovation in this model lies in creating not a stable currency but a floating-price reserve asset backed by the risk-free value of treasury assets, rather than being pegged to the US dollar. Therefore, the price of NVB can be higher than the risk-free value of its treasury-backed assets. This premium over the risk-free value can be considered a way to measure economic productivity in the digital economy.


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