Guide: How To Mint USM
Guide: How To Use DEX
© Digital Native Foundation Inc
Previously, we introduced what is MTR, the Self-sovereign, Non-reserve, Web 3.0 Stablecoin, and how it solves the problem.
Introducing USM - Self-sovereign, Non-reserve, Web 3.0 Stablecoin
Stablecoin is an essential matter in the full-of-volatility Crypto space. Minute by minute, cryptocurrencies fluctuate in their prices and stablecoin is what allows them to trade by a solid reference. There are many other friends and predecessors in the space that have come up with creative and intelligent solutions to deliver this important thing.
Now, let’s go further on its benefits, mechanism, how to manage vault (CDP or Collateral Debt Position), and arbitrage from liquidation.
1. What are the gains for using USM?
1. Use NFT to buy purchase CDP
Sellers remove risks of liquidation via selling. Buyers get more collateral than the market price due to overcollaterization
2. Our stablecoin hedges to collateral
Liquidation goes to dex for buying them in cheaper than market price with stablecoin
2. What is the mechanism?
Intrinsically, each unit of Meter will have at least USD 1 equivalent of collateralized assets such that its economic value will be higher than USD 1, and hence could be similarly used as a settlement currency that valued at USD 1 for each token.
The challenge is to stay close to the peg, which two sides of forces will need to be considered,
Either when USM is positively or negatively off-peg, rebase mechanics will kick in to govern how much new MeterUSD could be minted in the upcoming cycle. The algorithm will be based on issuance ratio and the market situation to adjust, and even suspend new minting of stablecoin until the entire market is stabilized (e.g. during a free-falling bearish situation). All these will be handled by our stablecoin contract automatically, which you may also refer to our whitepaper for more details.
Price Restoring Factors
USM is a stablecoin with a rebasable desired supply which is a mathematically determined optimal total supply to best keep USM at $1.
This rebasable desired supply factor is on/off able
Vault Manager mints USM and vaults and Vault Manager are in control of the rebasable desired supply factor as well.
Vault Manager constantly gets updated with USM’s market price.
Based on the market price, it sets the desired supply of USM for every rebases by the following equation:
Essentially equivalent to
There are other factors that work with the desired supply to restore USM’s peg. These factors will be introduced in specific cases below.
Case A: USM’s price is above $1 (Positively off-pegged)
When MeterUSD is positively off-pegged, e.g. at $1.05@, borrowing through our vault will net user of Meter that valued more than USD 1, this incentivizes more to mint new Meter, resulting in more circulation in the market, and hence stabilizing the tokens value back to $1.00.
- Assume collateral price stays the same, total supply is 1,000,000, the market price is $1.05, desired supply is therefore 1,050,000.
- Remember that USM is always minted at $1. So, by minting USM, the user immediately gains a $0.05 arbitrage profit.
- Users seeking to take arbitrage opportunities from the Collateral-USM AMMs will be minting USM. Buying USM is inefficient because USM’s price is >$1. Users can mint USM using low min. collateral ratio assets. For example, USDC
- These actions work to increase the supply of USM and selling pressure and bring the USM price down closer to the peg. The desired supply factor acts as a guard in an attempt to prevent USM prices from dropping lower below the peg.
Case B: USM’s price is below $1 (Negatively off-pegged)
When MeterUSD is negatively off-pegged, e.g. at $0.95@, the market will be incentivized to buy MeterUSD from DEXs and use the now-cheaper MeterUSD to redeem their collaterals, which comparatively have a higher value. Users gain profit from the arbitrary, while at the same reducing the circulation of MeterUSM in the market, hence uplifting the token value back to the $1.00 range.
- Assume collateral price stays the same, total supply is 1,000,000, the market price is $0.95, desired supply is therefore 950,000. Also, assume the user had used borrowed USM to purchase other assets.
- No new USM can be minted because total supply > desired supply.
- Remember that USM is always paid back at $1. So, a user gains by buying USM and paying back.
- Stability Fee on borrowed USM is accruing, therefore users must buy USM and do payback.
- Users seeking to take arbitrage opportunities from the Collateral-USM AMMs will be buying USM.
- These actions work to decrease the supply of USM and increase buying pressure and bring the USM price up closer to the peg.
Of course in the real market, collateral prices are changing and there are other factors to take into account. However, the simple model works like it’s described above.
3. Collateralized Debt Position (CDP)
Every time users borrow MeterUSD, they need to over-collateralize their assets. In Standard Protocol, we do not own any collateral as a reserve, but rather, our vault contract will create a Collateralized Debt Position NFT in your wallet and lock your assets as collateral before minting the MeterUSD to you. This approach introduces two interesting mechanics that are unique to Standard Protocol.
- Your assets are still with you rather than locking up into our treasury as a reserve like some other stablecoin protocol. This means that if anything bad happened to the protocol, you remain to own your assets. It’s a truly decentralized way of handling collaterals.
- Your CDP is an NFT, you keep it, you own it. Compare to other protocols, Standard CDP is recorded under protocol with assets stored in the contract, but Standard Protocol not only let you keep the ownership in a decentralized format, but subsequently unlocking the potential of some other usage, including trading, and staking, enabling richer Defi options which we will explore more later.
To redeem your assets, all you need to do is to visit our vault contract, explained below, burn the sufficient amount of MeterUSD plus a few percent of stability fee (paid in MeterUSD as well), then your CDP will unlock your assets and now you can spend them again.
To maintain the stability of the entire protocol, there’s one more feature will be required to ensure that all CDP have sufficient collaterals to back the intrinsic value of all the circulating MeterUSD. That’s Liquidation.
To mint USM, the user deposits collateral. Borrowed # of USM = Market value of collateral (using oracle price feed) / collateral ratio. The borrowed amount is the quantity of USM, not based on the market value of USM.
Meaning, USM is always minted at $1. USM is always paid back at $1 as well.
Ex) If the collateral value is $200 and the collateral ratio is 200%, 100 USM are minted.
- Note that the market price of USM may not exactly be $1.
The user can interact with the vault in the following ways:
- Deposit Collateral
- To avoid potential or imminent liquidation
- Withdraw Collateral
- Up to an amount that leaves a min-collateral amount in the vault
- Payback borrowed USM + accrued fees (in USM)
- To avoid potential or imminent liquidation, or take advantage when USM’s market price is lower than $1
- Mint more USM
- To take advantage when USM’s market price is above $1.
4. Arbritrage from Liquidation
The challenge of every stablecoin is when the collaterals can no longer support the token to stay close to its $1 peg during a bearish market. Standard Protocol takes a different approach on liquidation: instead of auctioning the undervalued collateral to specific, privileged users, the CDP will be liquidated (partially or completely) directly to our DEX and available to the market to trade. This is not only a much more capital-efficient way to handle liquidation but also allows users to explore arbitrary, i.e. slightly discounted, tokens on our DEX even during an unpleasant market sentiment.
Collateral Liquidation on AMM
When a liquidation happens, liquidated collaterals are sent to the AMM pair of Collateral-Meter. This creates an arbitrage opportunity where anyone can gain from the trading Meter to the collateral through the AMM. In the bear run, collaterals are liquidated to the free market asap, and the market self-adjusts. One can simply trade Meter and gain instead of having to participate in an auction or governance token backstop.
- Stablecoin (USM)
- 1. What are the gains for using USM?
- 2. What is the mechanism?
- Price Restoring Factors
- Case A: USM’s price is above $1 (Positively off-pegged)
- Case B: USM’s price is below $1 (Negatively off-pegged)
- 3. Collateralized Debt Position (CDP)
- Manage Vault
- 4. Arbritrage from Liquidation
- Collateral Liquidation on AMM