Unveiling the USX “Peg Stability Vault” Incentives Campaign on our LSR protocol!
USX and the Liquidity Stability Reserve (LSR)
At the heart of dForce’s ecosystem lies the decerntralized stablecoin USX. Launched in 2021, USX’s pegging mechanism is maintained by the Protocol-Direct-Liquidity-Provision (PDLP) module, the Vault, but most importantly, the Liquidity Stability Reserve (LSR) mechanism, which enables 1:1 swap between USX and a number of supported stablecoins including USDC, USDT, DAI.
In times of high demand or market volatility, the LSR mechanism becomes crucial for unlocking arbitrage opportunities, causing the value of USX to stabilize. If USX has proven to be among the most market resilient decentralized stablecoins, it is mostly because of the LSR efficiency.
The problem: two forms of depegging
With increasing market volatility, arbitrage between major fiat stablecoins and USX has made it challenging for the LSR to maintain its reserve, a factor that has weakened the peg of USX.
It is critical to recognize that there are two forms of depegging.
- One is arbitrage-induced depeg, where the protocol remains fully collateralized - as seen in the case of USX and GHO (Aave stablecoin). The reason for this type of depegging is users borrowing stablecoin (such as USX/GHO) and swapping it for fiat stablecoin (USDC/USDT) to take advantage of higher yield opportunities. Such depegging can be addressed by adjusting interest rate policy or incentives and is typically temporary.
- The second form of depegging is protocol bad debt, indicating that the protocol is under-collateralized. This type of depegging is not easily remedied; the protocol needs to eliminate protocol debt to restore the peg.
The recent price deviation of USX is due to higher demand for fiat stablecoins.
A new mechanism to sustain the peg!
Even though since the launch of the Arbitrum STIP campaign USX’s price has almost returned to $1, we propose introducing additional mechanisms to further strengthen the peg.
- First, with the approval of the DIP062 proposal, a fee of 0.1% will be applied to USX-to-stablecoin swaps via LSR. This is intended to discourage arbitrage that leads to supply/demand imbalances.
- The second measure is the implementation of the Peg Stability Vault. This vault is designed to enforce directional incentives on USX minting, incentivizing USX minting with stablecoin via LSR while disincentivizing recursive USX borrowing.
Think of it as Peg Stability Insurance, where the protocol pays incentives for liquidity providers to insure against USX depeg risk by providing only USDC/USDT/DAI liquidity (incentivized directional liquidity provision).
Campaign details
Starting February 8th at 12:00pm UTC, users can access the Peg Stability Vault from the Farm section of the dForce dApp on the Arbitrum chain. Once there, users can use USDC, USDT and DAI to mint USX and Stake it in the vault to receive rewards in ARB in one single click!
Please note that PSV is directional, meaning that if you want to convert USX back to fiat stablecoins, you would have to go through DEXes with USX liquidity or LSR. There’s no guarantee of enough liquidity for 1:1 conversion to fiat stablecoins as liquidity and price are all market driven.
For the first week (8–15th February), dForce has confirmed 20,000 ARB to be assigned to this campaign, distributed as follows.
The number of ARB tokens assigned to this campaign can vary on a weekly basis. Check our forum and social media channels to stay updated with the next allocations and everhything you need to know about dForce!
