How to make money keeping Teddy stable
Iron Finance’s stablecoin recently lost its dollar peg. TVL plummeted and the Titan token, used partially as collateral, crashed with it. And they’re not the only stablecoin protocol to have failed either. Fei and SafeDollar, to name a few, have all faced bad news in the DeFi space.
Keeping TSD stable (and profitable)
The Teddy Cash protocol mints TSD. A USD-pegged stablecoin. It’s minted on creation of Troves.
To ensure TSD maintains it’s peg, we’ve built in safety mechanisms to prevent us from a catastrophe. Let’s break down the ways we maintain our peg even during volatile market moves.
There are two distinct mechanisms that ensure that TSD will follow the price of USD closely. They are divided into “hard peg mechanisms”, that are based on giving the user a direct arbitrage opportunity and “soft peg mechanisms” who are a less direct process.
The Stability Pool
Our first line of defence in achieving and protecting system solvency, besides being a fully backed stable coin, is the stability pool.
The stability pool promises both TEDDY and AVAX rewards on our dashboard and helps to maintain the TSD’s price.
Anyone can deposit TSD in the Stability Pool. These funds are then used to cover the debt of liquidated troves. Liquidated Troves burn TSD and earn a percentage of the underlying collateral.
Troves can be liquidated once their collateral’s value falls below 110%. Liquidations often reward net positive returns. The only exception to this would be if TSD were trading well above its dollar peg.
Keeping Price Up (with Redemption Arbitrage)
Let’s say TSD falls below it’s $1 peg. What then? Well, …
We have a redemption mechanism. Which allows anyone to redeem their TSD for AVAX. At a pegged price of $1 (i.e. 1 TSD for $1 worth of AVAX).
Redemptions will mostly be performed by bots and arbitrageurs. So, there is a variable fee of a minimum of 0.5%. The fee adjusts to redemption volume and amount of AVAX withdrawn.
Redemptions can result in instant arbitrage profits. Withdrawing $100 worth of AVAX in exchange for 100 TSD, if bought below the $1 peg.
Redeemed TSD is burned, causing circulating supply to shrink.
If TSD falls below peg, redemptions will increase. And so does the borrowing fee. These fees go to TEDDY token holders.
You can find further details regarding the mechanism and how the fee adjusting works in our documents.
Keeping Price Down (with Trove Arbitrage)
What about a scenario where TSD is overpriced, how does the protocol handle this?
As we noticed, due to having a minimum collateral ratio of 110% there is a natural price ceiling of $1.1.
But, let’s say that TSD trades above $1.1. You can profit by depositing AVAX into a Trove. Borrow as much TSD as you can, then, sell your TSD for a different stable coin. You could make profit even if you’re liquidated as a consequence.
Make sure to calculate your trade before trying to arbitrage, because you must take the borrowing fee into account.
Graphic based on: liquity.org
Soft peg mechanisms don’t offer arbitrage opportunities. Instead, Teddy Cash treats TSD as equal to USD.
Borrower debt is accounted for in TSD. Though, the value of AVAX held as collateral, is expressed in USD. Our protocol-wide collateral ratio is defined by the value of collateral in USD divided by debt in TSD.
Taking this formula in account, parity between TSD and USD is established.
“Hard peg mechanisms”, and clear branding of TSD as a USD stablecoin, will ensure TSD always returns to $1.
Recovery mode
Let’s say: A lot of users take out loans at a low collateral ratio. The Total Collateral Ratio (TCR) will fall.
Once the TCR drops below 150%, Recovery Mode is automatically activated.
Recovery mode does two important things:
- It sets the liquidation ratio to 150%
- The system blocks transactions that would further decrease TCR. Only actions made by borrowers and owners of active troves that improve TCR will be permitted. For example: opening new troves with a collateral ratio of >= 150%, or adjusting troves to improve collateral ratio.
While in Recovery Mode, borrowing fees are set to 0%. Encouraging users to take loans and depositing into the stability pool while also offering better arbitrage opportunities.
How does Teddy Cash handle liquidations if there isn’t enough TSD?
There is a secondary liquidation mechanism. Activated if the Stability Pool is empty.
The system redistributes debt and collateral from liquidations to existing troves, in proportion to the recipient Trove’s collateral.
Shown below is an example based on the original in the Liquity whitepaper:
About Teddy Cash
Borrow up to 90.99% on your AVAX, interest free, with Teddy Cash, a decentralized borrowing protocol with interest-free loans and high capital efficiency.
