Defeating Liquidity Crunch

As the market contracts, borrowing activity decreases. In parallel, existing borrowers start paying off their debt, increasing demand for the synthetic the debt is denominated in. The infamous liquidity crunch occurs when demand for the synthetic outpaces its supply, causing it to depeg to the upside.

How Can It Be Mitigated?

For example, Sandclock’s vault shares are inversely correlated with ETH. When the value of ETH goes down, the number of liquidations increases, causing the vault to generate yield via discounted collateral acquisition. Nero lets you hedge your exposure to certain assets for a better borrowing experience. By allowing our users to mix-and-match collateral, we can reduce the frequency of liquidations and scale faster and safely.

Direct Swaps Module

Direct Swaps are our version of Maker’s PSM. However, instead of USDC and co. Nero will only whitelist stablecoins that fit the aforementioned criteria, such as LUSD and sUSD. This module will help Nero scale.

Is liquidity crunch still possible? Yes. Is it sufficiently mitigated? Probably. Mitigation is the best that can be done without charging negative rates through manipulation of the redemption price.