Autonity Refresher

As a reminder, Autonity is a Ethereum-compatible Proof-of-Stake (PoS) L1 designed as a framework for the decentralized clearing of smart derivatives contracts.

More specifically, Autonity is built as a framework for balancing risk speculation by offering the accessibility to various tradable smart derivative products, with the goal of creating a decentralized ecosystem (whether for speculation or hedging) that facilitates trade execution and price discovery for all market participants in a balanced manner.

Sadly, the accessibility of tradeable risk in TradFi markets is remarkably underserved with DeFi derivatives services being largely restricted to underlying crypto assets (e.g., commodities, intangible assets, artwork, and real estate). This structural model results in fragmented liquidity throughout various pools of open interest within the same product offerings, preventing ecosystems from increasing market liquidity to meet potential demand.

Autonity solves these challenges via the provisioning of multiple trading protocols and execution configurations that allow for the submission of trade executions for clearing within the same pool of open interest. The end result is a fully decentralized ecosystem of price discovery and trade execution via an interconnected market of off-settable positions within smart derivatives products.

To learn more about the main vision and ethos behind the creation of Autonity as well as the founding of the project and why it's important, have a look at our introductory blog post in the series.

Understanding Autonity Tokenomics

Critical to achieving the above goals and others, is the equitability and functionality of Autonity’s tokenomic and economic systems. In general, the Autonity blockchain and its underlying ecosystem leverages the utility of three distinct tokenized assets. including:

Auton
Newton
Liquid Newton

Let’s have a look at each one in more detail:

Auton

The auton ecosystem token (ATN) is the native unit of account (essentially ATN is a specialized stablecoin) on Autonity and is used to pay on-chain transaction fees (gas fees) atop the network. ATN employs the Auton Stabilization Mechanism (ASM) to maintain a stable price similarly to the model used by various algorithmic stablecoin types, with one main caveat: the price of auton is not pegged to a specific asset, but to a weighted currency basket of seven separate fiat currencies (more on this below).

Newton

The newton token (NTN) helps fulfill numerous purposes atop Autonity, including as the medium in which validator staking rewards are allocated (which are distributed in ATN at the culmination of each consensus round) and leveraged to secure underlying network consensus. Additionally, NTN also acts as collateral via specialized smart contracts for the borrowing of auton (ATN) through collateralized debt positions (CDPs).

Depending on its utility at a specific instance, NTN employs three separate states:

Unbonded (unlocked): when in its default and unbonded state, NTN is fully transferable between user accounts
Bonded (locked in): when bonded, NTN cannot be transferred between user accounts; however, after the unbonding process is complete, the token becomes unbonded (unlocked)
Unbonding (unlocking): as the intermediate state between bonded and unbonded, the unbonding state means that at that current juncture, NTN is still considered locked and is non-transferable until the unbonding process is complete, which at that time, the token reverts back to its unbonded state

Liquid Newton

As the liquid staking version of the NTN governance token, liquid newton (LNTN) serves as a liquid staking receipt token (or LST) representing deposited (staked) NTN tokens within Autonity liquidity pools. The LNTN token is minted (created) and burned (destroyed) during the delegator staking and unbonding process. Liquid newton is validator specific, meaning that within an individualized validator, it has its own market price and isn’t fungible across multiple validators.

In general, LNTN comes in two states:

Unlocked: when in its default and unlocked state, LNTN is fully transferable between user accounts
Locked: when locked, LNTN cannot be transferred between user accounts

Now that you're familiar with Autonity’s three main tokenized units of value, we’d be happy if you’d explore our third blog post in this series that goes over the basics of the Autonity ecosystem while comparing the auton (ATN) stablecoin to MakerDAO’s dai (DAI) and others.

The Auton Stabilization Mechanism and CDPs

The Autonity protocol employs the use of the Auton Stabilization Mechanism (ASM) to stabilize the value of the auton (ATN) asset. To enable this functionality, ATN makes use of a CDP-based stabilization mechanism, whereby auton is borrowed in return for depositing tokenized collateral (i.e, NTN or LNTN).

In order to accomplish this, the ASM utilizes various functions to compute the target value of auton to drive its actual market price towards the target value via the supply of auton (ATN) and newton (NTN).

To ensure the stability of auton’s peg, auton tokens are minted (created) and burned (destroyed) as a result of newly opened and closed CDPs. The Stabilization Contract manages collateralized debt positions throughout its lifecycle, including for initial borrowing, repayment, and potential liquidation. In general, the Auton Stabilization Mechanism employs the use of three main stabilization roles, including:

Borrower (CDP owner) - a user that takes out a CDP to borrow auton by depositing collateral. Of significance, there is no limit to the number of open CDPs a borrower can deploy at one time
Liquidator (Keeper) a user that liquidates an undercollateralized CDP and repays the CDP’s outstanding debt to then receive the remaining collateral in return
Stabilizer (the ASM Protocol) the protocol account address used to conduct auton mint and burn operations via the Stabilization Contract

To initiate a CDP, users are required to deposit newton (NTN) (or liquid newton (LNTN) in certain instances) to burrow auton at interest. Conversely, autons are burned when a CDP is repaid through the deposit of ATN into the ASM smart contract, with the result being the removal of the NTN (or LNTN in some cases) as collateral, which is then returned to circulation.

By using this model, CDPs are created with defined collateralization and liquidation ratios to limit the possibility that risk cannot be sufficiently covered through the sale of the collateral.

In the event collateral requirements cannot be maintained, and the value of the collateral is at risk of dropping below the value of the borrowed tokens because of a decline in NTN price, the owner of the CDP is able to either increase the deposited collateral amount, or close the CDP by returning the auton token to the smart contract. If neither of these steps is taken, the forced liquidation of the CDP occurs and the user loses their initially deposited funds.

The Auton Stabilization Mechanism and the Auton Currency Unit

To help ensure the stability of the auton token, the Auton Stabilization Mechanism is linked to a base-invariant volatility minimized index called the Auton Currency Unit (ACU). To realize its functionality, the Auton Currency Unit employs a currency basket of seven free-floating fiat currencies, including the:

USD - US Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
AUD - Australian Dollar
CAD - Canadian Dollar
SEK - Swedish Krona

Supply and demand changes for auton are absorbed by dynamically modifying CDP incentives to increase and decrease auton borrowing costs when the asset prices move above or below its ACU stabilization target. In essence, the stablecoin peg slightly adjusts with these changes as more CDPs are opened and closed, yet remains as close to its peg as possible at all times.

The proportion of the currencies in the basket stabilizing ATN is determined based on the volatility of each currency to limit overall volatility of the entire unit. At the same instance, the real-time value of the basket is provided via an Autonity oracle.

This model works in a similar way to algorithmic stablecoins such as DAI. That said, with DAI, the stablecoin is backed by several Ethereum ERC-20 assets (including ETH, USDC, and others) and numerous real-world assets (RWAs) such as US treasury bills through the Multi-Collateral DAI (MCD) framework.

Regardless, it is absolutely critical that the Autonity Stabilization Mechanism (ASM) works correctly or the derivatives markets operating on Autonity would be unable to function, rendering the platform inherently unusable.

Autonity Use Cases

The Autonity platform exhibits numerous potential applications in a host of areas. Nearly all of these are in one way or another related to the three main tokenized units of value (ATN, NTN, and LNTN) that contribute to the widespread serviceability of the network.

For NTN and LNTN specifically these include those related to decentralized finance (DeFi) such as the lending and borrowing (through CDPs) of stablecoins (in particular ATN) and different asset types and the trading of various derivatives assets and as a platform that allows users to participate in liquid staking.

In general, the Autonity platform is meant to address the challenges that those focused on the development of transparent and decentralized blockchain marketplaces face. These users encompass the creators of quantitative trading strategies, data scientists, mechanism design professionals, and services providers for derivatives trading and investment platforms, and others.

As we noted initially in the first Autonity blog post, the platform compliments its decentralized derivatives markets and marketplace creation infrastructure via specialized Decentralized Clearing Contracts (DCCs). DCCs are unique smart contracts that enable the clearing and settlement of trading and exchange user data in a permissionless and censorship-resistant manner through various blockchain systems.

Autonity is also focused on the development of derivative market infrastructure for real world asset (RWA) predictions such as inflation, Gross Domestic Product (GDP), and other macro- and micro-related data-sets. This could allow for the ability for traders to bet on the future prices of many real-world instances coming to fruition, surely representing an underserved market at this current juncture.

Relatedly, the Autonity platform is being primed as a derivatives platform that offers two distinct exchange offerings, the Decentralized Auton Exchange (DAX) and the Centralized Auton Exchange (CAX). This structure offers users the best of both worlds for derivatives trading and investing via a centralized and decentralized approach.

This dual exchange approach will allow for the leveraged speculation (longing and shorting) of a wide range of assets both inside and outside crypto (i.e., RWAs that represent a Tesla stock, the future price of a piece of real-estate, or even the expected score of a Premier League football match).

In the bigger picture, Autonity is meant to function as a decentralized derivatives framework for borderless markets by serving participants in multiple currency areas. Autonity is built to address the risk of unwanted foreign exchange (forex) in these markets by merging innovation in unit-of-account and stabilization mechanism design, allowing for the development of new marketplaces without the limitations of fiat-pegged stablecoins.

Although it's difficult to pinpoint the protocol’s exact uses as it evolves, these potential derivatives marketplace applications could even include the speculation of various asset types for a multitude of purposes such as those related to token and asset issuance, NFTs, music, credentials, certifications, licenses, and other representations of intellectual property (IP).