The USD Soft Peg

Maintaining a soft peg

A soft peg refers to a set interval that a currency is allowed to deviate from its peg. OINDAO intends to maintain a soft peg to the USD, allowing a small short-term deviation from the Dollar, with a long-term intention to maintain a 1:1 peg.

Soft peg mechanisms

OINDAO uses the following mechanisms to maintain the soft peg for stablecoins issued on the platform:

1. Market-driven price parity

Because OINDAO views its stablecoins as being equal to the value of the USD, it is expected that its users will also share the perception of value to OINDAO's stablecoins. Should short-term price deviations occur, this embedded price parity will trigger a self-fulfilling effect, creating profit-generating arbitrage opportunities in the market that will eventually drive the short-term prices back to its long-term equilibrium.

To illustrate this example, if the stablecoin price drops below $1, it makes it attractive for borrowers to burn and repay their debt. When there are more people repaying the debt than people borrowing in the market, it reduces the total stablecoin supply in the market, and gradually returns the stablecoin peg back to parity. Conversely, if the stablecoin price rises above $1, it becomes more attractive to borrow money as people believe that it will be cheaper to repay in the future when the price returns to equilibrium. As there are more borrowers than repayers in the market, the total stablecoin supply will increase, depreciating the stablecoin price back to its parity.

Overall, this soft-peg mechanism is built on people's belief in the 1:1 peg. Short-term price deviations will create opportunities for them to take advantage of through borrowing and repayment, returning the underlying stablecoin price back to its long-term price equilibrium.

The arbitrage effect above is strengthened by the value that is represented by the stablecoin - the collateral. Since the stablecoins are over-collateralized, each $1 of stablecoin represents a minimum of $1.80 worth of collateral, with the liquidation mechanism ensuring that the overall system C-ratio stays above this value. In essence, if the value of collateral is threatening to fall below the value of the stablecoin, the system liquidates the risky troves to push its value back up. This provides a decentralized mechanism that provides a floor for the value of the stablecoin, and thus gives confidence to the arbitrageurs wanting to capitalize on undervalued opportunities.

2. Stability-Pool-driven price parity

A proportion of the stablecoins minted will be deposited into the Stability Pool, lowering the total amount of stablecoins in market circulation. While the main purpose of the Stability Pool is to support liquidation and enhance they system's stability via a liquidity reserve, it also helps with maintaining the Dollar price peg for the stablecoins.

In a scenario where the price of the stablecoin rises above $1, the further it deviates, the more likely that Stability Providers will incur a loss when a Liquidation Event is triggered. As a result, some Stability Providers may decide to withdraw their deposits from the Stability Pool, increasing the amount of stablecoins circulating in the market and depreciating the stablecoin price back to parity.

While this process may result in a thin or an empty Stability Pool, the OINDAO system also has a Redistribution mechanism - a second liquidation defence line that is designed to kick in when the funds in the Stability Pool become insufficient.

3. Stability fee driven price parity

Just like how central banks implement different monetary policies to control the money supply in the market, OINDAO also utilizes different stability rates to influence the amount of stablecoins circulating in the market. When there is too much funding being borrowed causing the stablecoins trading below $1, the DAO community may choose to increase the stability rate, incentivizing borrowers to repay the loans; when the stablecoins are trading above $1, the DAO community can choose to decrease the stability rate, making it more attractive for users to borrow money.