USDX Stability Mechanics

What makes USDX stable around 1 USD?

Scott Stuart
5 min readDec 15, 2020

TLDR; USDX usage and growth should tend to increase as USDX stability around 1 USD increases — this makes USDX stability a great objective for Kava Governance. Stability of USDX around 1 USD is not guaranteed. Kava Governance has tools to affect USDX market flows which may affect price, but ultimately USDX price is decided by the market.

There are a number of market factors which impact USDX stability.

What is USDX?

USDX is a digital asset which denominates the borrow balances drawn from the Kava lending platform. A user can supply BTC or other cryptocurrencies to Kava, borrow USDX, and exchange that USDX for other assets, goods, or services. Once the USDX is repaid to Kava, the user regains full access to their supplied BTC.

Assets like USDX and DAI are often labeled as ‘stablecoins’ and are said to be ‘pegged’ to the US Dollar.

What about the USDX design guarantees its will trade in a stable range around 1 USD?

Nothing. There is nothing inherent to the USDX digital asset design which itself guarantees it trade in markets around 1 USD, or even that it will trade in a stable range.

Market price and volatility is a function of an asset’s rate of supply and demand flows in that market. USDX asset design has features which can be tuned to potentially impact the rate of supply / demand of the asset and thereby the price in markets, but only indirectly.

Is USDX broken if it doesn’t trade in a stable range around 1 USD?

No. USDX stability in markets is not a strictly necessary condition for a moderate level of success in terms of market engagement. Indeed, there are assets on the market today with supposed stability mechanisms whose price action is anything but stable, yet still drive high levels of engagement.

AMPL/USDT 4-month price action.

Endeavoring for a specific USDX price and volatility level are not themselves a goal, they are a means. Using the OKR framework for project goal setting, an objective of the USDX asset may be to be the most used “stable asset” in the crypto industry. To achieve that level of usage and growth, minimizing USDX price volatility and deviation from $1 are arguably the most important key results to measure. It’s a subtle but useful point, that while USDX stability around 1 USD is likely an important part of its success, but it is not strictly necessary.

How does USDX price and stability impact my ability to repay borrowed USDX in Kava?

USDX price and stability does not impact your ability to repay borrowed principle in Kava because your principal is denominated in USDX and not any other asset. For instance, if you borrow 100 USDX from supplied BTC and there is no Borrow APY assessed, then you may repay your 100 USDX and regain full access to your supplied BTC equally if USDX trades at $0.50 or $1.50.

USDX price may impact you when you have extra USDX to source from assessed Borrow APY, when you sell your borrowed USDX (and are now effectively short the asset), or when you purchase USDX with another asset (and are now effectively long the asset).

What makes USDX price stability an important key result for USDX growth?

Usage. In almost every facet of USDX usage, it because more desirable when USDX is more predictably stable about a certain price. Users who borrow USDX have increased propensity to sell their USDX for whatever they need, for a longer period of time, with less risk when they are confident that when it comes time to buy back that USDX to repay it will be approximately the same unit price as when they sold it.

Similarly, sourcing USDX as inventory for some profit generating strategy (purchasing liquidate assets at auction, DeFi yield staking, etc) becomes more appealing as the user’s belief in the long term stability of USDX price increases.

What factors contribute to USDX price around 1 USD?

If USDX should be stable to increase its growth and usage, why not be stable around $0.50 or $1.50, why $1.00?

Kava Lending Auction Arbitrage

Kava lending’s internal system assumes USDX is worth $1.00 insofar as its ability to purchase liquidated assets at auction at a rate of 1 USDX equals $1.00 of liquidated assets. Example, if $100.00 of BTC is up for auction, determined by Chainlink Price Oracle reference feeds, then you can purchase the entire $100.00 BTC lot for 100 USDX, whether you purchased that USDX at market for $0.50 or $1.50.

This feature presents a price arbitrage opportunity for any USDX valued at less than $1.00.

What factors contribute to USDX price stability?

There are a number of factors which contribute to asset flows in a market. For the USDX digital asset here are a few categories:

Endogenous Variables

Borrow APY: Borrow APY is the annualized rate at which a user must pay on their borrowed USDX and can be adjusted per asset. We might expect that as Borrow APY for a given asset increases, all else being equal, marginal propensity to borrow USDX from that asset will decrease, thereby increasing demand to source USDX.

USDX Savings Rate: USDX savings rate is the annualized rate at which USDX holders are compensated for sourcing and holding USDX. We might expect that as USDX Savings Rate increases, all else being equal, marginal propensity to source USDX should increase.

KAVA Incentives: KAVA incentives are the amount of KAVA assets compensated to users who borrow USDX with a given asset. We might expect that as KAVA Incentives increase for a given asset, all else being equal, the marginal propensity to borrow USDX will increase, thereby increasing supply onto a given market.

Exogenous Variables

USDX Downstream Demand: USDX downstream demand is any demand sources which compensate USDX holders for taking a specific action. For instance, the HARD money market directly compensates USDX holders for supplying HARD into the money market. We might expect that as USDX downstream demand increases, all else being equal, the marginal propensity to source USDX should increase.

USDX Speculative Demand: USDX speculative demand is the set of decisions made by USDX market participants to place bets on a specific USDX prices, potentially at a specific times. For a given USDX price and time, we might expect that as USDX speculative demand increases, all else being equal, the volatility about that price decreases.

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Disclaimer: This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making investment decisions.