NIL Protocol


Writers deposit collateral to be used as impermanent loss protection, and in return receive continuous funding rate payments from Buyers who have open NIL contracts.
Writer yield is non-correlated with stablecoin borrowing demand, doesn't express a directional view on token prices, and doesn't require them to hold anything besides their collateral asset.

Writer Pool

To earn yield, Writers deposit stablecoins or ETH into a Writer Pool, and receive ERC20 tokens that represent their ownership of the pool’s assets less liabilities.
Each Writer Pool holds all of the collateral deposited by Writers for a specific base token. Writer Pools have a pool-to-peer collateral model and serve as the collateral backing impermanent loss protection for all NIL contracts opened by Buyers for its AMM base token pairs.
Rather than fragmenting collateral liquidity across each individual token pair, the pool-to-peer model significantly opens up IL protection across token pairs for prospective NIL contract buyers.
The gains and losses in the Writer Pool are socialized across all Writers. The value of a Writer’s ownership stake will fluctuate based on the returns (accrued funding payments – ILV incurred) of the Writer Pool since the time they entered the pool.
An individual Writer’s returns can be defined as:
ReturnWriter=FundingPaymentsAccrued– ILVIncurredReturn_{Writer}\:=\: FundingPayments_{Accrued} \:\:– \:\:ILV_{Incurred}

Assets & Liabilities

When Buyers open NIL contracts, they need to (a) pay the mark-to-market ILV for the contract, and (b) fund their margin account for future funding rate payments.
When Buyers pay the mark-to-market ILV for their contracts, that ILV amount is simultaneously recorded as an asset and a liability to the Writer Pool, so they zero out.
Writer Pool Assets
Writer Pool Liabilities
Writer collateral deposits
Mark-to-market ILV across contracts
Accrued funding payments
Buyer contract purchases (mark-to-market ILV)

User Flow

Here’s an example of how a Writer would use NIL to earn yield
  1. 1.
    Bob wants to earn yield on his USDC
  2. 2.
    He goes to the NIL dapp to look at the current funding rate offered for USDC deposits
  3. 3.
    The funding rate looks attractive to him, so he deposits 10,000 USDC into the USDC Writer Pool
  4. 4.
    In return, he receives ERC20 pool tokens that represent his ownership of assets in the USDC Writer Pool, which include deposited collateral and funding rate payments
  5. 5.
    Bob’s 10,000 USDC collateral deposit is used for NIL contracts across a variety of AMM token pairs that have USDC as the base token
  6. 6.
    The assets-less-liabilities of the USDC Writer Pool (and Bob’s ownership stake) fluctuates as mark-to-market ILV goes up and down across all of the USDC denominated NIL contracts, and as funding payments are made
  7. 7.
    When Bob decides to withdraw, his USDC Writer Pool tokens are burned and he receives back his ownership stake of the Writer Pool's assets-less-liabilities in USDC

Writer Risk Profile

By depositing into a Writer Pool, a Writer is effectively going short pair-volatility and selling impermanent loss protection to Buyers.
In exchange for providing impermanent loss protection, Writers earn an attractive return that is non-correlated with stablecoin borrowing demand, does not express a directional view on token prices, and does not require them to hold anything besides their collateral asset.

Withdrawal Limits

In rare instances, 100% of the collateral deposited by Writers in a Writer Pool may be matched to active NIL contracts. If this happens, Writers will not be able to withdraw their ownership stakes from the Writer Pool because all of its capital is actively being used for impermanent loss protection.
In order to withdraw their ownership stakes, Writers will need to wait until either (a) Buyers close their contracts or (b) Writers deposit more capital into the Writer Pool.
The risk of this happening is mitigated by funding rates, because when the utilization rate of a Writer Pool is too high, the funding rate for contracts backed by the pool is increased to incentivize Writers to deposit new collateral or for Buyers to close their active contracts.