Dual Stability Mechanism (DSM)

Mechanics

Introduction to the DSM

The Dual Stability Mechanism (DSM) is the cornerstone of Chi Protocol, making USC the first capital-efficient stablecoin in DeFi that minimises counterparty risks without relying on centralised exchanges (CEXes) or exposing itself to censorable collateral. The DSM ensures USC's solvency and stability while generating protocol-level rewards for all stakeholders. This innovative mechanism allows USC to operate securely and efficiently, aligning with the decentralised ethos of DeFi.

Dual Stability Mechanism Scenarios

What is the DSM?

The Dual Stability Mechanism (DSM) is the integrated system that enables USC to maintain its $1 peg on external markets while preserving a 1:1 collateralisation ratio with USD against the protocol’s reserves. The DSM considers two main factors:

1. USC Price

Subject to the market demand for USC and fluctuations in the price of ETH, the market price of USC can trade in the following ways:

State of USC Above $1

2. Reserve State

Similarly, depending on ETH price fluctuations, the reserves of the protocol can be in the following states:

State of Excess Reserves

Based on the combination of market price of USC and the state of the protocol's reserves, the protocol defines and executes internal arbitrage opportunities. These scenarios create a total of nine possible arbitrage opportunities:

Above $1:
  • Above $1 and Excess Reserves

  • Above $1 and Equilibrium Reserves

  • Above $1 and Deficit Reserves

At $1:
  • At $1 and Excess Reserves

  • At $1 and Deficit Reserves ( USC In Arbitrage Contract ≥ Reserves Difference )

  • At $1 and Deficit Reserves (USC In Arbitrage Contract < Reserve Difference)

Below $1:
  • Below $1 and Excess Reserves

  • Below $1 and Equilibrium Reserves

  • Below $1 and Deficit Reserves

Following the execution of the arbitrage, USC retains the peg and full collateralisation in LSTs, LRTs, and ETH in USD denomination.

Note: The delta represents the amount of USC that needs to be sold or bought back from the USC/ETH pool on Uniswap to adjust the price precisely to $1. For a deeper understanding of the mathematical logic behind delta calculation, visit our HackMD technical article: Quadratic AMM

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