Linear Finance
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Linear Finance

Discussion: Achieving and Maintaining Stablecoin Peg in Times of Uncertainty

Dear Linear Community,

We have prepared this post in the spirit of transparency. Over the last couple of months, the team has been looking into several options to help stabilize the ℓUSD peg to USD. The ℓUSD peg is something that we are constantly looking to fix, so investors who use Linear Exchange trust that when they exit their trades, they will have a token that is pegged 1:1 to the US Dollar.

After reviewing several possible solutions provided by the community on the Linear DAO Forum, we identified what seemed like a viable option to help stabilize the ℓUSD/BUSD peg. This solution required using the LINA rollover weekly rewards to i) initially bring the peg to, or close to, 1:1 and ii) establish a Peg Protection Fund (PPF) to help maintain the peg at 1:1 by buying or selling (depending on price) in the ℓUSD/BUSD pool on PancakeSwap.

Pros:

  • Increase Linear Finance adoption, specifically on Linear Exchange which benefits all Linear stakers with more weekly fees.
  • Look to increase use cases for ℓUSD on other DeFi protocols on Ethereum and BNB Chain.

Cons:

  • Linear weekly rewards APY will substantially decrease initially and slowly stabilize over time. Note: ~45% of the total weekly rewards are rollover rewards.
  • Consider if this will be a long-term solution or just a small patch for a couple of days/weeks. Given that we’re in a bear market, many users need ℓUSD to increase their P-ratio to start claiming weekly rewards again. Many users may start buying ℓUSD when they see the price back at 1:1 BUSD and push the peg back up, so we need to consider if the funds in the PPF will suffice.

Supporting data

Using Week 99 Rewards (16/11/2022)

Scheduled staking rewards: 9,124,340 LINA

Rollover staking rewards: 8,014,633 LINA

Total staking rewards: 17,138,973 LINA

Fees accumulated: 139 ℓUSD

Rollover fees: 487 ℓUSD

Total fees: 627 ℓUSD

Given that a minimum 450% P-ratio is needed to build, with 8,014,633 LINA from Week 99 rollover staking rewards we will be able to build a maximum of 10,030 ℓUSD with a LINA price of $0.00563137 (at the time of writing).

Additionally, it is possible to consider using the weekly rollover fees in ℓUSD. This ℓUSD would be ready to use, unlike LINA rollover rewards that need to build ℓUSD at a 450% P-ratio.

Currently, if 100% of LINA and ℓUSD (10,030 + 487 = 10,517 ℓUSD) rollover rewards are sent to the PPF it will enable us to bring the price of ℓUSD to $1.07 by selling the ℓUSD in the ℓUSD/BUSD pool. To achieve a 1:1 peg would require us to build and sell 21,480 ℓUSD.

Conclusion

After a lot of internal discussions and work put into this proposal, the team decided that it is best not to move forward and put it up for voting on the Linear Finance Snapshot space.

We believe that under current market conditions, using rollover rewards, although it may help achieve peg, will only be momentary since there are still over 1,300 marked accounts that users can liquidate using the Linear Debt Terminator. Meaning that demand for ℓUSD is still high, whether it is users who want to increase their P-ratio back to 450% to claim weekly rewards again or community members who want to liquidate users’ marked accounts and earn the 10% reward (if the ℓUSD peg is 1:1).

We hope you found this post insightful, and while the core team believes that the implementation of multi-collateral (work in progress) is the most viable solution to achieving peg, the idea behind sharing this post is that we want to keep encouraging the community to be active on the Linear DAO Forum. We know we have some very smart members out there, and if anyone has spotted anything we might have missed or have suggestions on improvements, please start a new topic on the forum so we can all contribute together to continue shaping and building the future of Linear Finance.

Kind regards,

Linear Finance Team

About Linear Finance

Linear Finance is a cross-chain compatible, decentralized delta-one asset protocol that allows users to get synthetic exposure to various assets, including cryptocurrency, commodities, and market indices. Users can utilize our cross-chain swap functionality to instantly swap assets across leading blockchain environments and DeFi protocols with unlimited liquidity and zero slippage.

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