Reserve-back AMM Mechanism
Last updated
Last updated
The Lumi Finance market-driven protocol owns the liquidity for LUA.
In simpler terms, buying LUA through the central AMM adds liquidity, creating a sell-depth for LUA sales. This liquidity isn't borrowed but held by the central AMM.
The reserve support for LUA is built into the AMM's unique price curve, ensuring a minimum price— the floor price. The AMM allocates liquidity for all LUA tokens at this floor price.
This support gives each LUA token an intrinsic value.
This guarantee creates a floor price effect for LUA, preventing it from trading below this value for long( If a 3rd-party exchange offers LUA below the floor price, arbitrage will quickly correct the price ).
To maintain the intrinsic value of LUA, the protocol burns tokens when buying them back. For instance, if the protocol contains 10 LUA with a treasury value of $1000 and with a floor price of $100, buying back 1 LUA for $100 and burning it would leave 9 LUA and a treasury value of $900, keeping the intrinsic value the same.
The intrinsic value of LUA increases over time, with the floor price only going up, never down.
The floor price is built into the AMM price curve, ensuring enough liquidity to pay back LUA at the floor price. Extra liquidity raises the floor for all tokens.
The floor price rises with net LUA purchases since buying LUA adds extra liquidity to the AMM. When LUA is sold back to the AMM, it returns liquidity, so the floor isn't raised.
