@Gauthier had a great explanation in the Solving wNXM discount while maintaining reasonable MCR% forum post.
Essentially, we want to provide concentrated liquidity above book value up to the bonding curve price to create deep liquidity within that range. This would create somewhat of a price floor above book value.
I think it’s important to note that burning existing WNXM does nothing to stop current NXM holders from wrapping NXM to WNXM and selling on the market. Providing liquidity long-term would enable the mutual to earn trading fees over time. IL could be a concern in the short-term, and I’m sure we will incur IL. However, we’d be earning 1% of every trade and at least benefit from wNXM trading.
In addition, it’s important to note that our Community Fund (treasury) is primarily NXM. The NXM in the Community Fund is also subject to the same restrictions as every other member, so it cannot be redeemed through the bonding curve. This means a lower WNXM price results in selling WNXM to fund grants, pay operational costs for Hubs, etc.
Low liquidity for wNXM has been an issue for some time, and there is a benefit to offering deep liquidity. The Capital Pool is earning ~4 stETH/day. Projected yearly earnings are 1,460 stETH, if not more. Investment earnings plus cover premiums earned would offset any IL incurred by LPing. In the short-term, we will likely see IL from LPing but the long-term value is more important here.
It provides members deeper liquidity to enable both larger buys and sells through an AMM. It earns the mutual 1% of every trade. For those members who want to sell WNXM, it gives them a chance to exit at a reduced discount.
And if we’re buying WNXM below book value and LPing with it in Uniswap V3, then we can enter a position with 100% WNXM above the current trading range and diversify into ETH as the price moves upward, while buying WNXM as the price moves back toward the bottom of the range.
We’re essentially buying low, selling higher, and creating deep liquidity within a range to establish a price floor on the open market.