DSM Scenario Analysis

How Does the DSM Operate Across Different Market States?

Scenario Analysis

Dual Stability Mechanism Tree

The Dual Stability Mechanism (DSM) operates based on a straightforward logic that revolves around two key questions:

1. What is the market price of USC?

   • This determines whether USC is trading above, at, or below its $1 peg in the market.

2. What is the state of the protocol’s reserves with respect to the USC market cap?

   • This assesses whether the reserves are in excess, balanced (equilibrium), or in deficit relative to the total supply of USC.

By answering these questions, the DSM dynamically adjusts the supply of USC and manages the protocol's reserves to maintain stability, solvency, and the $1 peg across different market conditions.

According to the combination of the market price of USC and the state of the protocol’s reserves, arbitrage opportunities are defined and executed internally by the protocol. Below is a detailed description of each scenario within the Dual Stability Mechanism (DSM):

Above $1

Excess Reserves

State of Excess Reserves and Above $1

Arbitrage Contract Steps

1. Mint deltaUSC:

   • The protocol mints the amount of USC needed to bring the market price back to $1, known as deltaUSC.

2. Swap deltaUSC for ETH:

   • The minted deltaUSC is swapped for ETH on the open market. Since USC is trading above $1, the amount of ETH received (ethAmountReceived) is greater than the equivalent value of deltaUSC in USD terms (deltaInUSD).

3. Swap deltaInETH for CHI:

   • The delta in ETH (deltaInETH) is then swapped for CHI tokens.

4. Burn chiAmountReceived:

   • The CHI tokens received from the swap are burned, reducing the total supply of CHI and increasing its scarcity.

5. Reward ethAmountReceived - deltaInETH to Arbitrage Contract:

   • The difference between the ETH received from the initial USC swap and the deltaInETH is rewarded to the arbitrage contract as a profit.

Effect:

1. USC Spot Price retains the targetPrice of $1:

   • This adjustment helps align the market price of USC with its intended $1 peg, ensuring stability within the protocol.

2. uscTotalSupplyValue rises towards reserveValue:

   • The total supply value of USC increases, bringing it closer to the reserve value.

Equilibrium Reserves

Deficit Reserves

At $1

Excess Reserves

tate of Excess Reserves and At $1

Arbitrage Contract Step:

• Mint reserveDiff in USC and Deposit in the Arbitrage Contract:

  • The protocol mints USC equal to the reserveDiff (the difference between the reserve value and the USC supply) and deposits it into the arbitrage contract.

Effect:

• uscTotalSupplyValue rises towards reserveValue:

  • The total supply value of USC increases, aligning it to the reserve value, which enhances the stability and balance of the protocol.

Deficit Reserves (1)

Deficit Reserves (2)

Below $1

Excess Reserves

State of Excess Reserves and Below $1

Arbitrage Contract Steps:

1. Redeem deltaETH from Reserves:

   • The protocol redeems the required amount of ETH, referred to as deltaETH, from the reserves.

2. Swap deltaETH for USC:

   • The redeemed deltaETH is swapped for USC. Since USC is trading below $1, the amount of USC received (uscAmountReceived) is greater than the equivalent value of deltaETH in USD terms (deltaUsd).

3. Set uscAmountToFreeze = deltaUsd:

   • The protocol sets the amount of USC to freeze (uscAmountToFreeze) equal to the value of deltaUsd, ensuring a calculated reduction in circulating supply.

4. Maintain uscAmountToFreeze as Reward:

   • The uscAmountToFreeze is maintained as a reward mechanism, helping generation of revenues within the system.

5. Reward uscAmountReceived - uscAmountToFreeze to Arbitrage Contract:

   • The difference between the uscAmountReceived and uscAmountToFreeze is rewarded to the arbitrage contract, providing an incentive for participating in the stabilisation process.

Effect:

• reserveValue decreases towards uscTotalSupplyValue:

  • The value of the protocol’s reserves decreases, bringing it closer to the total supply value of USC. This adjustment helps restore balance between the reserves and the circulating USC supply, ensuring the stability of the system.

Equilibrium Reserves

Deficit Reserves