Capital Protection

Nara's Three-Tiered Approach to Capital Protection

Nara employs a structured, three-tiered loss waterfall to safeguard its ecosystem and maintain the stability of the NaraUSD stablecoin. This sequential mechanism is designed to absorb losses in a predefined order, ensuring that each layer of capital provides a buffer before the next is impacted. The waterfall prioritizes the protection of the core stablecoin, NaraUSD, by distributing risk across different components of the ecosystem.

Here is the order in which losses are absorbed:

1. First Layer of Defense: The Insurance Fund

The first tier to absorb any financial losses is the Insurance Fund. This fund is a dedicated pool of capital accumulated from various protocol-generated revenue streams. Its primary purpose is to act as the initial buffer against unforeseen events or negative yield, thereby protecting the yield-bearing assets.

The Insurance Fund is capitalized through several sources:

• Performance Fees: A percentage of the yield generated by the protocol's strategies is allocated to the Insurance Fund.

• Protocol Fees: Revenue from minting and redemption fees for NaraUSD contributes directly to the fund.

• Arbitrage Revenue: Profits generated from arbitrage activities, which occur when the protocol capitalizes on price discrepancies of NaraUSD to bring it back to its $1 peg, are channeled into the fund.

By using protocol revenue as the first line of defense, Nara ensures that day-to-day operational risks are covered without immediately impacting its users' principal.

2. Second Layer of Defense: NaraUSD+

If losses exceed the capacity of the Insurance Fund, the second tier of the waterfall is activated: NaraUSD+.

Users who stake their NaraUSD are entitled to receive all the yield generated from the protocol's underlying stablecoin strategies. In exchange for capturing this yield, NaraUSD+ holders agree to bear the next level of risk. This aligns the interests of yield-seekers with the overall health of the protocol. If a significant loss event occurs, the value of naraUSD+ positions would be used to cover the shortfall.

In the future, staked NARA tokens will also participate in this tier, sharing both the yield and the risk of loss equally with NaraUSD+.

3. Third Layer of Defense: NaraUSD

The final layer in the loss absorption hierarchy is the NaraUSD stablecoin itself. This tier is only affected in the event of a catastrophic loss that completely depletes both the Insurance Fund and the value of all staked assets.

The primary design goal of NaraUSD is to maintain a stable value of US$1. The preceding two layers of the waterfall are specifically designed to protect this peg. Only under severe and exceptional market conditions, where the losses are substantial enough to overwhelm the first two buffers, would the value of NaraUSD be impacted. This makes NaraUSD the most protected asset within the Nara ecosystem.