A Closer Look at Minting
Today we will have a closer look at the role of minters at Arable.
Minters are essential to Arable Protocol. They create the ‘Life Blood’ of the synthetic ecosystem that makes synthetic farming possible.
Arable Protocol provides yield farmers the unique opportunity to farm synthetic farms using a variety of synthetic assets. Synthetic liquidity is a prerequisite, allowing the whole synthetic ecosystem to function. This creation of liquidity is done by a process called ‘minting.’
Minters create liquidity for the synthetic ecosystem by minting arUSD, a synthetic asset pegged to USD. Minters first provide collateral in the form of AVAX, USDT, or ACRE to borrow arUSD against it by minting. This minting process introduces arUSD liquidity to the Arable synthetic ecosystem. In return for providing collateral, minters also receive ACRE rewards.
Minters can add minted arUSD liquidity to the AVAX/arUSD pool and other pools at Pangolin. LP tokens received from Pangolin can be staked in Arable Pools to earn ACRE rewards.
Farmers buy arUSD and bring it back to Arable to swap for synthetic assets, for example, arETH (a synthetic derivative of Ethereum), at the Arable DEX.
Minters earn from exchange fees when synths are swapped at the Arable DEX. Exchanging synths incur a trading fee of 0.3%. 90% of the fees will go to a minting rewards pool, while 10% will go to the protocol. Minters will be rewarded from the Minting Rewards Pool on a fair share basis while also receiving ACRE token rewards. The calculation for Minter earnings is:
Minter Earnings = (Staking Rewards + Transaction Fees) — (Farmer Rewards).
The Process of Minting
All minting related activities are performed from the M.Factory section of the Arable app:
Let’s look at the items in the information panel in the top right.
Collateral Value shows the USD value of the total deposited collateral by the minter. The combined value for all supported types of collateral like USDT and wrapped AVAX is displayed.
Maximum Debt displays the maximum amount of arUSD that can be minted based on the Collateral Value. Minting of arUSD is over-collateralized. Over-collateralization helps protect the protocol against sudden price movements of the collateral assets.
How much arUSD a minter can mint depends on the amount of collateral provided and the collateralization ratio for each type of collateral:
- USDT: 200%
- AVAX: 300%
- ACRE: 500%
Current Debt shows the amount owed to the protocol by the individual minter.
Current Debt is driven by:
- Minted arUSD
- Farmer Rewards paid out by protocol
- Market price changes of all synth assets in Arable
When arUSD is swapped to other synths by farmers, the value of the Current Debt is affected by the market price changes of the synths. For example, if farmers exchange arUSD for arETH and the price of Ethereum falls, the Current Debt also falls. Conversely, if the underlying assets of synths increase in price, so will the debt of the minter.
The movement of the Current Debt is proportional to their share of total minted arUSD in the system. For example, if a minter minted 10% of the total amount of arUSD minted by all minters, the Current Debt value of that minter would increase by 1%.
Current Debt is also affected by synthetic farming activities. Staking rewards for synthetic farmers are covered by adding to the Current Debt: As staking rewards are paid out to farmers, the Current Debt of each minter increases proportionally to their share of minted arUSD, as described above.
Key Risk: Loan Risk Ratio
The ratio between Current Debt and Maximum Debt is called ‘Risk Ratio’ and is stated in %. By minting arUSD you are essentially loaning arUSD from the protocol, and your collateral backs that loan.
The Risk Ratio expressed as a percentage is calculated like this:
(Current Debt / Maximum Debt) * 100
To stay fully collateralized, a minter has to keep a Risk Ratio at or below 100%. Otherwise, their position is flagged for liquidation or even immediately liquidated:
- If the Risk Ratio goes above 150%, a minter will be flagged for liquidation. If the Risk Ratio stays above 150% for more than three days, the position can be liquidated immediately.
- If the Risk Ratio reaches 200% or more, the minter risks immediate liquidation.
The Risk Ratio of 200% at which a minter is eligible for liquidation is also called the ‘Liquidation Ratio.’
If a minter becomes under-collateralized, their Risk Ratio is over 100%. This under-collateralization occurs when the minter’s position of arUSD is not fully backed by the staked collateral anymore.
There are two options to restore the Risk Ratio and become fully collateralized:
- Add more collateral
- burn previously minted arUSD
Learning To Mint
You can become a minter today by getting hands-on with Arable MVP Testnet at: https://mvp.arable.finance
These topics and more, including practical guides, are also covered in our documentation at: https://about.arable.finance