|
|
"The upper and lower bounds of the stablecoin LUSD are maintained by two mechanisms:
1. The ability of LUSD for rigid redemption into ETH, meaning 1 LUSD can be exchanged for 1 USD worth of ETH.
2. A 110% minimum collateralization ratio guarantee. Both of these are achieved through user-driven arbitrage mechanisms, and this is referred to as the ""hard peg mechanism.""
Redemption creates a natural price floor. Whenever the trading price of 1 LUSD falls below 1 USD, holders and speculators are incentivized to exchange 1 LUSD for 1 USD worth of ETH and immediately sell the ETH. Since the redeemed LUSD is burned, each redemption reduces the stablecoin's supply, leading to an increase in price. As long as there are arbitrage opportunities, arbitrage bots can automatically trigger the redemption mechanism. If the LUSD:USD exchange rate falls below 1 USD, it will quickly recover, establishing a price floor.
The 110% minimum collateralization ratio creates a natural price ceiling of 1.10 USD. When the LUSD:USD exchange rate exceeds this level, arbitrageurs can profit immediately by borrowing the maximum amount against their collateral and selling LUSD in the market at a price exceeding 1.10 USD. For example, if the trading price of 1 LUSD is 1.11 USD, an arbitrageur can lock up Ether worth 110 USD, borrow 100 LUSD, and sell it at a price of 111 USD. Whether the arbitrageur's loan is liquidated or not, they earn an arbitrage profit of 1 USD.
|
This post contains more resources
You have to Login for download or view attachment(s). No Account? Register
x
|
Post time 23-10-2023 12:00:18
