USDFI Stability Mechanisms
Last updated
Last updated
The USDFI price can be in three different states: at the peg, in a state of downward or upward instability. While at the peg, the revenues of the treasury are used to deepen the liquidity of the ecosystem at and around the peg of the USDFI. The protocol’s revenues are allocated to the yield operations. More revenues are generated and compounded into the AMM operations, which in return create more liquidity, lending and revenues, resulting in a cyclical reinforcement of the stability of the stablecoin.
In a state of downward price instability (USDFI/USD exchange rate drops below USD $1), the treasury automatically engages as a buyer of last resort and redirects its revenues to buying back unlimited USDFI at a higher price, in perpetuity, until price stability at the peg is reinstated. This mechanism helps to restore confidence, attract new users, and reduce extended periods of downward price pressure.
Further, the vote escrow governance contract of the dual-ve design always gives users USD $1 worth of voting weight for USDFI 1; or put differently, USD $1 always equals veUSDFI 1. At all times, every user gets the economic equivalent of USD $1 irrespective of the USD/USDFI exchange rate.
For example: a) STABLE trades at USD $10 and USDFI trades at the peg. For each USD $1 spent, users get the same amount of voting weight: 1 veSTABLE = 10 veUSDFI.
b) STABLE trades at USD $10 and USDFI trades under peg at USD $0.95. Since 1 veSTABLE = 10 veUSDFI, arbitrageurs have an instant arbitrage opportunity via the ve-governance contract to get 1 veSTABLE or 10 veUSDFI or USD $10 worth of voting weight while only paying USD $9.50 for it.
For speculators, it can be profitable to buy USDFI at a discount and "front run" the repegging process secured by the treasury and the ve-governance contract. By buying USDFI at a lower price and holding it until it is repurchased by the treasury at a higher price, speculators can earn a profit.
In parallel, "vote escrow arbitrageurs" can earn all rewards (LP fees and bribes) at a discount (equaling the under peg % - or greater when locking longer for extra "boost") forever or until eventually selling USDFI at the peg for an extra profit.
This combination creates an incentive for market participants to participate in the repegging process, thus contributing to the stability of the stablecoin in a cooperative non-zero sum game not achievable in single-ve/ve(3,3) models (learn more about USDFI's Dual-ve model).
In a state of upward price instability (USDFI/USD exchange rate exceeds USD $1), the protocol’s own AMM allows to mint USD $1 worth of STABLE for 1 USDFI. This creates an instant arbitrage opportunity for market participants. Users will sell USDFI in the market for a profit until the arbitrage opportunity is exhausted and the exchange rate at the peg is restored.
In a state of downward price instability, the USDFI protocol has implemented an additional buffer mechanism to support the price stability of the stablecoin. This mechanism allows for the automatic transition between user incentive distribution and the use of token supply as a buffer boost. When the price of USDFI deviates from the peg, the token's deterministic token supply is dynamically allocated to accelerate the buyback of USDFI by the protocol's stability mechanisms.
