Num Finance designed the Liquidity-Pool Lock scheme. Under this scheme, Num Finance (alone or together with a partner) creates a liquidity pool between a certain Num-S and a USD-S on a decentralized exchange of the automatic market maker (AMM) type on one or more blockchains on which the Num-S in question circulate. At the time of writing, Num Finance has activated two liquidity pools on PancakeSwap. Users can trade in the nuARS/USDC and nuPEN/USDC pools to acquire these coins.
To determine the amount of Num-S to be contributed per USD-S, Num Finance will use the free exchange rate between the US dollar and the local legal tender currency whose value Num-S seeks to follow as a reference. With the creation of this pool, Num Finance creates a publicly accessible vault in which any user can issue Num-S by exchanging it for USD-S. Conversely, the public can withdraw Num-S from circulation in exchange for USD-S.
In other words, the Num-S in the pool, as they belong to Num Finance, do not constitute circulating currency, but are issued once a user deposits USD-S in the pool to withdraw Num-S. When this happens, the public freely issues Num-S, leaving USD-S as market price support. Conversely, when the public deposits Num-S and withdraws USD-S from the pool, the amount of Num-S in circulation is reduced.
Exchange rate depreciation
In cases of Num-S linked to local legal tender currencies with high levels of nominal depreciation (such as nuARS), it is expected that the Num-S/USD-S exchange rate in the pool will increase constantly. Because of the way AMMs work, this will generate an increase in the amount of Num-S in the pool and a reduction in the amount of USD-S.
This has two consequences. First, there will be fewer Num-S in circulation because a greater amount of them will be absorbed by the liquidity pools. This could generate an increase in the value of Num-S compared to the reference currency in other markets. Second, the pool will suffer capital losses as it will have a greater amount of a Num-S that undergoes greater depreciation.
To avoid these negative effects, Num Finance is committed to increasing the contribution of Num-S to the pool as the reference exchange rate increases. Such contributions are made through direct transfers of Num Stablecoins to the wallet that has set up the liquidity pools.
It is expected that the market will always arbitrate the price of Num-S in the liquidity pools before Num Finance. However, the latter will have a higher portion of its capital protected and will have a balance of Num-S to arbitrate the pool quickly in the event of future imbalances.
The Num-S intended for the Liquidity-Pool Lock program cannot be used for any transfer, loan, or movement other than operating and/or providing liquidity in the pools set up.
Impermanent loss or capital loss
In the event that the USD-S capital contributed to the pool is reduced due to impermanent loss or other factors, Num Finance may reduce a portion of the Num-S contribution made to the pool. Therefore, it may withdraw any excess Num-S or provide additional USD-S.
For simplicity, this article describes a situation in which the only wallet providing liquidity to the pool is Num Finance. However, as it is an open pool, any other wallet can provide liquidity. The Num-S associated with third-party LP-Tokens are freely circulating.