Peg Arbitrage
Handling trenUSD Above Its Peg
When trenUSD exceeds its target peg, our protocol takes proactive measures to restore its value to $1 USD. The steps involved are as follows:
Minting TrenUSD: Additional trenUSD is minted to increase the supply.
Selling for Stablecoins: A portion of the newly minted trenUSD is sold in exchange for stablecoins.
Enhancing Liquidity: The acquired stablecoins, along with the remaining newly minted trenUSD, are used to bolster the liquidity pools. This dual approach helps drive the trenUSD price back down to its peg and simultaneously strengthens our liquidity reserves.
Handling trenUSD Below Its Peg
Conversely, when trenUSD trades below $1, the following redemption mechanism is implemented to correct its market price
The redemption function allows any user to engage in arbitrage by redeeming trenUSD for a few tokens, at a rate nearly equivalent to 1:1. This process is facilitated through our interest-free modules accessible directly via our platform's frontend.
Redemption Process:
Initiation: A user goes to the redemption interface, and enters the amount of trenUSD they wish to redeem.
Collateral Calculation: The amount of collateral returned is determined by the current market redemption rate, which generally reflects our system-wide loan-to-value (LTV) ratio. This rate may adjust slightly depending on the redemption fee, which escalates with the amount of trenUSD being redeemed to deter large, destabilizing redemptions.
Position Selection: The protocol identifies which collateral positions to access, prioritizing those with the lowest health factor to optimize system stability. Modules with redemption protection are not considered
Transfer: For each dollar of trenUSD redeemed, the equivalent dollar value of collateral is transferred to the redeemer’s wallet.
Circulation Reduction: Redeemed trenUSD is permanently removed from circulation, effectively reducing supply and aiding in the stabilization of its value.
Strategic Rationale and System Design
The design of our protocol incorporates game theory to ensure that it is beneficial for users to continue redeeming trenUSD until the peg is restored. Additionally, our system supports two distinct modules for managing the same high-value asset:
0% interest Module: Offers users an interest-free credit line with potential exposure to redemption risks. This module is suited for users willing to accept some level of risk in exchange for lower costs.
Interest Bearing Module: Charges interest but shields users from redemption risks, appealing to those who prefer a more secure and predictable borrowing environment.
These mechanisms provide users with the flexibility to choose between risk and cost, enhancing their ability to manage their investments according to their individual risk tolerance and financial objectives.
Soft Peg
Users who have borrowed trenUSD may observe that it is trading at a discount to 1 USD in some markets. In response, they might purchase trenUSD at this discounted rate to reduce their debt. This influx of buying activity can drive up the price of trenUSD relative to the trading volume.
Users who possess valid collateral may notice that trenUSD is trading above 1 USD in certain markets. They might choose to initiate positions and sell the borrowed trenUSD to allocate funds elsewhere. This action can contribute to a decrease in the price of trenUSD relative to the trading volume.
Individuals holding various cryptocurrencies, whether stablecoins or not, might observe disparities in trenUSD's trading prices across the aforementioned markets. They could opt to buy trenUSD in a market where the price is below 1 USD and sell it in another market where the price is at or above 1 USD. The reverse scenario can also occur.
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