Liquidity and Peg Stability
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Liquidity and Peg Stability
Maintaining the stability of USDs and ensuring deep liquidity are critical to the success of TheStandard protocol. We employ two key mechanisms to achieve these goals: the Global Borrowing Limit and strategically managed DEX Liquidity Pools.
Global Borrowing Limit
The Global Borrowing Limit is a crucial mechanism designed to maintain the stability of USDs and safeguard the protocol during its growth phases. This limit acts as a guardrail, specifically set up to help bootstrap the project towards "escape velocity" - a point where the protocol has sufficient liquidity and market adoption to function without such constraints.
Key aspects of the Global Borrowing Limit:
Cap on Total Borrowing: It limits the total amount of USDs that can be borrowed across all Smart Vaults. This cap is set to be less than the available liquidity on decentralized exchanges (DEXs).
Weekly Adjustments: The limit is reviewed and potentially adjusted on a weekly basis, allowing for controlled growth of the USDs supply in line with increasing liquidity and demand.
Prevents Over-issuance: By restricting the total supply of USDs, we mitigate the risk of over-issuance that could lead to a de-peg event.
Supports Peg Stability: Ensures that there's always sufficient liquidity in DEX pools relative to the circulating supply of USDs, supporting the stability of the USDs-USD peg.
Temporary Measure: The Global Borrowing Limit is not a permanent feature. As the protocol matures and liquidity deepens, we plan to gradually increase and eventually remove this limit.
The Global Borrowing Limit plays a vital role in TheStandard's controlled growth strategy, balancing the expansion of USDs supply with the protocol's ability to maintain its peg and provide sufficient liquidity.
DEX Liquidity Pools
TheStandard leverages concentrated liquidity pools on decentralized exchanges to ensure deep liquidity for USDs. This approach offers several advantages over traditional liquidity provision methods:
Concentrated Liquidity: We utilize Uniswap V3 concentrated liquidity pools, which allow liquidity providers to focus their capital within specific price ranges. This results in deeper liquidity at the most relevant price points, particularly around the $1 peg for USDs.
Dual Pool Strategy: We implement two types of liquidity pools to balance stability and yield opportunities:
a) Correlated Stable Pools (e.g., USDs/USDC):
Offer consistent, lower-risk yield
Minimal impermanent loss risk
Provide deep liquidity to support the USDs peg
b) Volatile Asset Pools (e.g., ETH/USDs, WBTC/USDs):
Offer potentially higher yields
Come with increased impermanent loss risk
Allow users to maintain exposure to volatile assets while providing liquidity
Flexible Collateral Allocation: Borrowers can choose how to allocate their collateral between these pool types, allowing them to balance their risk and reward profiles according to their individual strategies and market outlook.
Automated Liquidity Management: We use Gamma strategies for trustless liquidity management, optimizing returns without users surrendering control of their assets.
Incentivized Liquidity: TST stakers receive a share of the trading fees generated in these liquidity pools, creating an additional incentive for users to provide and maintain liquidity.
Peg Support: The deep liquidity in these pools, especially in the correlated stable pools, helps maintain the USDs peg by allowing for efficient arbitrage when the price deviates from $1.
By leveraging these concentrated liquidity pools, TheStandard ensures that there's always sufficient liquidity for users to trade USDs, borrow against their collateral, or exit their positions when needed. This deep liquidity is crucial for maintaining the stability of USDs and the overall health of the protocol.
The combination of the Global Borrowing Limit and our strategic use of DEX liquidity pools creates a robust framework for maintaining USDs peg stability and ensuring ample liquidity. This approach allows TheStandard to offer its innovative 0% interest borrowing while still ensuring the long-term sustainability and stability of the protocol.
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