Bond Contract

NovaBank primarily sells two types of bonds: liquidity bonds and reserve bonds.

Liquidity Bond Sales

When NovaBank users trade NVB-USDT LP with the NovaBank protocol, this process is called purchasing liquidity bonds. The protocol gains ownership of the LP, and the user loses LP ownership. As compensation, the user purchases more NVB tokens at the transaction price.

To purchase liquidity bonds, users must first add liquidity to the NVB-USDT trading pair to obtain LP tokens, then use these LP tokens to buy liquidity bonds.

The protocol gains LP ownership and calculates the Risk-Free Value (RFV) of the LP, measured in NVB quantity.

$$RFV=（LP/Total LP）*2sqrt(Constant Product)$$

{Constant Product refers to the invariant product of the LP}

The protocol then calculates the Executing Price of the bond, measured in NVB quantity.

$$Executing Price=RFV/Premium$$

{Premium≥1}

Premium is the bond premium determined by the system's total debt and a scaling variable, linking the bond price to the number of outstanding bonds (each bond has a 5-day vesting period).

$$Premium=1+(Debt Ratio*BCV)$$

$$Debt Ratio=Bonds Outstanding/ NVB Supply$$

{BCV is the inflation rate adjustable by the protocol} {Bonds Outstanding：Number of bonds not yet vested}

Liquidity bonds offer users a corresponding discount (ROI). The greater the discount, the higher the return rate, incentivizing users to purchase bonds. Bonds have a 5-day vesting period, after which users receive NVB tokens. This process is irreversible.

$$ROI = (NVB Trading Price * Executing Price/ LP Actual Value - 1)$$

$$= (NVM Trading Price * RVF / LP Actual Value * Premium -1)$$

The number of bonds currently in the vesting period (Bonds Outstanding) determines the bond premium (Premium). Fewer bonds in the vesting period lead to a lower premium, higher Executing Price, higher ROI (greater discount), and stronger incentive for users to purchase bonds.

Benefits of High Liquidity Bond Sales to the Protocol:

• Permanently lock a large amount of liquidity in the NVB-USDT trading pair.

• NVB-USDT liquidity is positively correlated with NVB price.

• Higher liquidity bond premium results in lower bond discount.

• Increase the treasury's balance sheet by evaluating the RFV of LP, which is always greater than $1, meaning NVB has an intrinsic backing price of 1 USDT.

• The 5-day vesting period of liquidity bonds ensures the protocol can distribute profits to NVB stakers.

"Issues" with Liquidity Bond Sales:

When users purchase liquidity bonds using NVB-USDT LP, the LP becomes the treasury's asset. The treasury believes there's a significant difference between the LP's value and its market price. The treasury mints NVB based on the acquired LP while ensuring sufficient funds to back NVB. Therefore, the treasury evaluates LP at its minimum value—the Risk-Free Value (RFV).

Higher premiums increase the gap between market value and RFV. For example, an LP consisting of 10 NVB and 1,000 USDT (market value $2,000) with a 100% LP share has an RFV of 200 NVB (2sqrt(10*1,000)).

The existence of RFV raises the issue of NVB minting quantity. In the above example, the protocol mints one NVB for $5 (treasury receives 1,000 USDT and mints 200 NVB), instead of minting at the backing price of $1. If the protocol needs to lock more liquidity, this NVB minting method is feasible but relatively inefficient and cannot meet the market's demand for rapid supply growth. Therefore, the protocol sells reserve bonds to address this "issue."

Reserve Bond Sales

Users purchase reserve bonds using USDT, which the protocol fully acquires. As compensation, users receive more NVB tokens than if purchased from the market. Reserve bonds offer users a corresponding discount, and have a 5-day vesting period. After the vesting period, users receive NVB tokens. The mechanism is the same as LP bonds.

When users purchase reserve bonds with USDT, the protocol doesn't need to evaluate its RFV. The protocol mints NVB at 100% of the funds received. Referring back to the previous example, $2,000 worth of LP purchasing liquidity bonds mints 200 NVB, whereas $2,000 of USDT purchasing reserve bonds mints 2,000 NVB (with NVB backing price at $1).

The protocol supplements LP bonds with USDT bonds, capturing the full value of USDT bonds to significantly increase NVB minting, meeting market development needs.

Bond Summary:

• Bonds do not rely on market data. The bond market is self-regulating; bond prices are determined by the number of bonds still in the vesting period. When there are few bonds in the vesting period, the bond executing price is high, and the bond unit price is low; conversely, when there are many, the executing price is low, and the bond unit price is high. Market participants choose prices they deem reasonable to buy bonds, causing bond prices to be in constant flux.

• Bonds delay the market impact of new NVB supply. NVB from bonds becomes the user's disposable asset after 5 days, extending the distribution range of new NVB supply. Bond sales create quick arbitrage opportunities (buying at a discount and selling into the pool), which can increase NVB price volatility.

• Bonds require less management. Bond sales are designed with a protocol-controlled discount rate that needs to be attractive enough for buyers. The discount rate is influenced by the premium; thus, the inflation rate (BCV) requires micro-management. However, USDT bond discounts are more market-driven, requiring less intervention.

• Bonds are a more market-driven method to achieve protocol goals. USDT is exchanged into the treasury, and the protocol mints new NVB. Trading volume increases with rising transaction prices.