Bamk.fi, the first stablecoin protocol to interpret the Rune ecosystem, builds the Bitcoin ecosystem with Ethena

Author: Frank, PANews

After the failure of UST, algorithmic stablecoins were once abandoned by the market. It wasn’t until Ethena adopted the hedging mechanism of perpetual futures to design USDe and launched high-yield rewards that algorithmic stablecoins became a hot spot in the market again. In the Rune race of the Bitcoin ecosystem, the demand for stablecoins seems to be higher, because the current mainstream Rune pricing method uses the smallest unit of Bitcoin, “Satoshi” (sats), which, although it looks more intuitive, is still different from the fiat currency units that people are familiar with.

Recently, a new NUSD Bitcoin stablecoin protocol has attracted attention in the runic market, with the price of its runic token BAMK increasing 50 times in 2 months, reaching a market capitalization of 360 million dollars, entering the top three in the runic market. On June 13, UTXO, the asset management department of BTC Inc, which owns many well-known Bitcoin ecological brands such as Bitcoin Magazine and Bitcoin Conference, announced a $1 million investment in the protocol.

The ENA of the Bitcoin ecosystem?

NUSD, short for Nakamoto Dollar, is issued using the BRC20-5byte protocol. Similar to Ethena’s issuance mechanism, NUSD also uses the hedging mechanism of perpetual futures to achieve price stability.

According to the official introduction of Bamk.fi, this mechanism is a triangular arbitrage hedging mechanism. Specifically, the minting process of NUSD is that users deposit BTC into Bamk.fi, and Bamk.fi opens a 1x perpetual futures short order on a decentralized exchange, which is usually called a hedging order in futures trading. The characteristic of such an order is that the total position value remains unchanged regardless of whether the price goes up or down. When the user redeems BTC, Bamk.fi will close the corresponding position to return the corresponding BTC.

Compared to other algorithmic stablecoins, NUSD and BTC assets are value-anchored, avoiding the death spiral phenomenon like UST due to the collapse of LUNA coin price. In contrast to Ethena, NUSD’s perpetual contract orders are executed directly through DEX, as introduced by Bamk.fi, in order to avoid the security risks caused by centralized exchange custody.

According to the official introduction, the issuance of NUSD is divided into two stages. In the first stage, it is still issued in a way anchored to USDe, and NUSD is pegged to USDe of Ethena at a 1:1 ratio in this stage. The second stage then enters the triangular arbitrage hedging stage, and begins to be issued in the form of perpetual futures short orders.

In addition to NUSD, Bamk.fi has also launched another runic BAMK•OF•NAKAMOTO•DOLLAR, codenamed BAMK, which is currently in the first incentive phase. The incentive is to distribute 1,311,625,000 (6.25%) of BAMK’s supply as rewards to all NUSD holders. The distribution will take place over 41,962 blocks between block heights 844,492 and 886,454. Each block will distribute 31,250 BAMK tokens, proportionally based on the amount of NUSD held at that block height divided by the total NUSD TVL at that block height. According to the official calculator on June 13th, depositing 2000 NUSD currently yields approximately $43 per day, with an APY of 798.7%.

The risks behind high returns should not be ignored

Behind the seemingly high returns, multiple factors need to be considered. Firstly, the returns from BAMK mining are not stable, and mainly depend on the TVL of NUSD. As the TVL increases, the rewards for BAMK tokens will correspondingly decrease. Additionally, the BAMK rewards for the first quarter will be received approximately 9 months later, and the actual amount received by users may vary significantly. On the other hand, BAMK also exhibits high fluctuations in the secondary market, with daily fluctuations of 20-30% not uncommon. Furthermore, the significant network fees for Bitcoin transactions cannot be ignored. On June 13th, the fee level was such that a single transaction would cost approximately $47 in network fees.

In addition, there is the stability of the project itself. The risks in this part may come from two aspects. One is the security of the team, and the other is the vulnerability of the mechanism design.

According to Bamk.fi official, their team is from “1,177 degens and counting”, which is understood to be a gray humor and informal statement in the encryption field, mainly referring to users who are keen to participate in early-stage projects and highly speculative transactions. They reject any venture capital. The official introduction says that longest of the core team members are already active on X or Telegram, so they have made their identities public. According to a PANews survey from the X platform, Jack Liu @liujackc has spoken on behalf of Bamk.fi long times and should be a core member of the Bamk.fi, Jack Liu previously served as the general manager of Circle in Asia and the former chief strategy officer of OKCoin. The rest of the team has not yet been able to make a clear announcement.

From the perspective of the NUSD mechanism, the stability essentially depends on the team. Risks such as fund management and order execution will exist. In response to the question of ‘how does the team prevent the withdrawal of collateral or the issuance of unsupported NUSD,’ Bamk.fi stated, 'There is no technical way. But our own incentive measures prevent this. Tether, Circle, or a large amount of funds held by a Centralized Exchange may also withdraw deposits. However, due to legal reasons and profit incentives, they did not do so. The Bamk.fi protocol has already started generating income. If we do the right thing, we can continue to make money instead of taking a large sum of money and forever evading enforcement. Tether recorded a net profit of 45.2 billion US dollars this quarter.

While the official documentation reveals in another place: “The first phase of the protocol has started generating revenue, about $600 per day, with an annual income of approximately $219,176”, it seems difficult for the current income to counterbalance the temptations it faces.

Another vulnerability in the mechanism comes from the funding rate. The funding rate of perpetual futures contracts is constantly changing. When the market is bullish and there is more long funding, higher rates need to be paid to the shorts. In this case, for holders of short positions like NUSD, there will be positive rates, which means there will be rate income. On the contrary, when the market is bearish, short positions will need to pay additional rates. This situation may cause a loss in overall value. The official method is as follows: ‘During the period of negative interest rates in perpetual futures contracts, minting will be suspended until the interest rate becomes positive again, redemption is open, and BAMK rewards are provided according to the redemption ratio of each block.’ From this perspective, once encountering a longer downward phase, the minting of NUSD may face a long stagnation period, making it difficult for NUSD to detach from market conditions.

Overall, the launch of NUSD has indeed provided a typical case for application-type runes in the Bitcoin ecosystem, and its high-yield attractiveness and the continuously rising BAMK token will attract more players in the short term. However, for Bamk.fi, the greater challenge still comes from the performance after the formal introduction of the algorithm in the second phase. A truly stable and more reasonable governance mechanism may further advance Satoshi Nakamoto’s vision of Bitcoin becoming a banking system.