Peg stability

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General concepts​

Unlike many stablecoins, USG can’t be redeemed for its collateral nor is backed by RWAs, and thus, does not rely on redemptions to keep its peg to the US dollar. Instead, the system ensure USG’s peg by using a combination of economical incentives (rewards deduction and dynamic interest), and dedicated contracts called Peg Keepers.

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HEC markets​

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For stablecoin collaterals:​

A rewards deduction rate that goes up as USG’s price goes down creates an opportunity cost for leveraged borrowers when USG’s price declines too much. As the rewards deduction rate surges above a certain value, the yield of the position falls below the initial yield of the collateral. Such a behavior acts as a first incentive for borrowers to repay their loans, protecting USG’s peg. If the downward peg deviation continues, charging an interest rate that increases as the price decreases acts as a second incentive for borrowers to repay, as they no longer earn liquid rewards, and they also pay interest on their loans. Furthermore, borrowers who pay a high interest rate over an extended period may eventually face liquidation, as the accumulated interest erodes their loan’s health.

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For volatile collaterals:​

A rewards deduction rate that goes up as USG’s price goes down ensures that the protocol’s revenue from these markets increases when USG’s price decreases. An opportunity cost also appears once the rewards deduction rate is above a certain value, but since these markets are mostly used for leverage trading rather than leverage farming, the incentive to repay because of an opportunity cost is less significant. Then, when an interest rate that increases as the price decreases is applied, it becomes more expensive to maintain a position as USG’s price declines, encouraging borrowers to either decrease their leverage or close their position altogether. Furthermore, borrowers who pay a high interest rate over an extended period may eventually face liquidation, as the accumulated interest erodes their loan’s health.

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LEC markets​

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For stablecoin collaterals:​

An interest rate that goes up as USG’s price goes down also creates an opportunity cost when USG’s price declines below a certain value. As the interest rate surges above the intrinsic yield of the collateral, the yield of the position becomes net negative. It can result in a net loss for leveraged borrowers if USG’s price declines too much over a long enough time frame. Such a behavior acts as an incentive for borrowers to repay their loans, protecting USG’s peg. Furthermore, borrowers who pay a high interest rate over an extended period may eventually face liquidation, as the accumulated interest erodes their loan’s health.

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For volatile collaterals:​

With an interest rate that goes up as USG’s price goes down, it becomes more expensive to maintain a position as USG’s price declines, encouraging borrowers to either decrease their leverage or close their position altogether. Furthermore, borrowers who pay a high interest rate over an extended period may eventually face liquidation, as the accumulated interest erodes their loan’s health.

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Revenues redistribution​

As USG’s price goes down, more rewards are deducted from collaterals, and more interest is charged on active loans. As a result, the more USG deviates below $1, the more revenues the system generates. Since the vast majority of these revenues are directed back towards vote incentives and sUSG, the more USG depegs, the more attractive the yields are on both liquidity pools and the savings account. Hence, new users might be willing to take advantage of it by buying USG to use its savings account, or by providing liquidity to the pools. By doing so, these new users would apply buying pressure on USG and help restore its peg, lowering the rewards deduction and interest rates on Tangent’s markets.