Nolus Reserve Contracts serve as a crucial insurance fund for the protocol, ensuring lender protection against financial instability caused by in-protocol debt, whether triggered by external or internal factors. Here’s a closer look at how they work:
Addressing Inefficiencies
The reserves are designed to tackle inefficiencies such as delayed liquidations caused by faulty price movements, derivatives price de-pegging, or technical failures. They are automatically funded by margin positions liquidation spreads and swap fees. This self-sustaining mechanism ensures that the protocol can handle inefficiencies smoothly and efficiently
Maintaining System Health
In times of need, these reserve contracts autonomously address system inefficiencies, ensuring the protocol remains healthy at all times. This autonomous action prevents the buildup of risks and maintains the stability of the overall system
Example Scenario
Consider a scenario where an asset value in a margin position drops by over 70% within a single block time. In such cases, the Nolus protocol triggers liquidation. If the proceeds from this liquidation do not cover the outstanding debt, the reserves step in to cover the missing debt. This mechanism protects lenders from financial losses, acting as a shield against significant market fluctuations and unforeseen events