DSM Scenario Analysis
How Does the DSM Operate Across Different Market States?
Scenario Analysis

The Dual Stability Mechanism (DSM) operates based on a straightforward logic that revolves around two key questions:
What is the market price of USC?
This determines whether USC is trading above, at, or below its $1 peg in the market.
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

Arbitrage Contract Steps
Mint
deltaUSC
:The protocol mints the amount of USC needed to bring the market price back to $1, known as
deltaUSC
.
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 ofdeltaUSC
in USD terms (deltaInUSD
).
Swap
deltaInETH
for CHI:The delta in ETH (
deltaInETH
) is then swapped for CHI tokens.
Burn
chiAmountReceived
:The CHI tokens received from the swap are burned, reducing the total supply of CHI and increasing its scarcity.
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.
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.
Below $1

Arbitrage Contract Steps:
Redeem
deltaETH
from Reserves:The protocol redeems the required amount of ETH, referred to as
deltaETH
, from the reserves.
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 ofdeltaETH
in USD terms (deltaUsd
).
Set
uscAmountToFreeze = deltaUsd
:The protocol sets the amount of USC to freeze (
uscAmountToFreeze
) equal to the value ofdeltaUsd
, ensuring a calculated reduction in circulating supply.
Maintain
uscAmountToFreeze
as Reward:The
uscAmountToFreeze
is maintained as a reward mechanism, helping generation of revenues within the system.
Reward
uscAmountReceived - uscAmountToFreeze
to Arbitrage Contract:The difference between the
uscAmountReceived
anduscAmountToFreeze
is rewarded to the arbitrage contract, providing an incentive for participating in the stabilisation process.
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