Arbitrage opportunities on the Ocean O dollar and maintenance of the peg
The Ocean O is a 12 month yield dollar launched by OPEN DAO and built on the UMA protocol.
It allows Ocean holders to lock their Ocean tokens and mint Ocean O synths which trace the price of USD.
From time to time the Ocean O will trade either above or below the peg.
However it always locks $1 worth of Ocean in collateral, which means its inherent value is $1.
Market forces should then account for this and bring the price of Ocean O back to $1.
This leads to some interesting arbitrage opportunities.
Suppose the O dollar trades at 80c. This was seen very early in the launch, where Ocean holders minted Ocean O and sold them off for USDC.
This skewed the demand and pushed the price of Ocean O down.
This gives an arbitrageur the opportunity to buy them at below inherent value and hold them to expiry when they have a contractual claim for $1.
It is in effect a 20% guaranteed profit.
A caveat needs to be added that this is contingent upon Ocean tokens still being worth a non zero amount and the collateral buffers which are sitting at a healthy 3x atm.
On the flip side if Ocean O is trading above $1, then you can lock more Ocean and mint more Ocean O and sell them for USDC. At expiry you can buy them at a lower price and unlock your collateral to tidy a neat profit.
The reality is you will most likely not need to hold till maturity as the peg is likely to achieved faster.
Given the strong UMA rewards offered to LP, you can buy Ocean O on market (if it is below peg) and supply LP to earn strong rewards.
If it is above peg then the rewards in effect pay you to be a borrower!
Being a LP is a no brainer as well. Given Ocean O is designed as a stable coin, a LP would have no impermanent loss, enjoy UMA rewards and transaction fees. Soon they will also be eligible for BAL rewards. The return currently sits well above 3 digits APR.
If you know of a better return on stable coins with no impermanent loss please write to me.
These market forces and contractual design combined with UMA rewards would always push the Ocean O closer to $1 and progressively increase liquidity making for a smooth experience for Ocean token holders to borrow against them and go long on Ocean.
Ocean O is just the start of OPEN DAO stable coin suite and we will be launching many more in the coming days.