Sperax USD Manages Risk While Paying 11% Auto-Yield
EDIT: $USDs is now 100% collateralized. The stability of $USDs is an utmost priority as $USDs endeavors to service the market need for decentralized stablecoins.
Since algorithmic stablecoins have taken the spotlight this week, Sperax wants to ensure that all users understand the $USDs strategy for maintaining a one dollar peg, and for distributing a sustainable 11% target Auto-Yield.
It is important to adapt, grow, and plan for worst-case scenarios as Sperax builds a leading stablecoin. Simulating risks will help Sperax minimize these very risks to deliver a sustainably growing product for our global community.
Can $USDs weather an attack on the peg?
Actually, the community saw the $USDs peg wobble last week. After a breach on a Saddle finance pool, some $USDs holders offloaded their holdings. The $USDs peg saw a 1.5% dip, which was rapidly corrected through the profitable arbitrage strategy inherent to the Sperax USD mechanism.
In bank run scenarios, initial selling causes panic, then more selling creates more panic and a stablecoin can lose its peg without proper risk management.
In the case of Terra Luna, a bank run caused the stablecoin to lose its peg for two reasons:
- Opaque collateralization
- Insufficient liquidity
Prof. DiMaggio explained these risks in his recent thread.
So how does USDs solve these risks?
$USDs is defined as a hybrid, crypto-collateralized algorithmic stablecoin.
On-chain collateral reserves: For now, the protocol holds exogenous crypto-collateral in the form of stablecoins $USDT and $USDC. This on-chain collateral maintains transparency so that all users can be sure of $USDs collateralization. By utilizing backed stablecoins to collateralize $USDs, the protocol can prevent a bank run scenario.
Currently, the protocol maintains a 90% collateralization ratio, meaning that in the worst case scenario, even if $SPA goes to 0, $USDs holders can rely on a price floor that tracks the collateralization ratio.
100% of this collateral is redeemable by $USDs holders. The purpose of the collateral is to stabilize $USDs price at $1 and generate organic yield.
Dynamic Swap Fees: If $USDs loses its peg above one dollar, the dynamic swap fees and arbitrage strategy will protect $USDs collateral and return the peg (with profit for arbitrageurs). However, as we saw last week the $USDs peg can be maintained in bearish scenarios as well with dynamic minting fees helping to temporarily deflate $USDs supply and increase collateral reserves (also at a profit for arbitrageurs). See the calculations here.
Deep liquidity: Since the inception of $USDs, the Sperax suite of yield farms has rewarded LPs who provide liquidity for $USDs and $SPA, to ensure that arbitrageurs have the market to incentivize profitable arbitrage by maintaining the $USDs peg.
While $USDs TVL may not grow as rapidly as some investors may hope for, the slow and steady rise is inherent to both stability and sustainability for the protocol and investors.
How does collateral work in the Sperax protocol?
Collateralizing $USDs is integral to the Auto-Yield feature of $USDs, since the protocol relies on healthy collateral in order to facilitate DeFi yield earning. Collateral is reployed in DeFi yield aggregators to create value for $USDs holders in the form of Auto-Yield, and for veSPA holders through the revenue split.
By creating organic yield, $USDs is a more robust token, and is not prone to inflation the way Anchor protocol created risk for the Terra Luna ecosystem. Healthy collateral not only facilitates Auto-Yield, but offers peg downside, as described above.
Will collateral change over time?
The Sperax team is interested in adding further decentralized stablecoins to the collateral pool, but for now centralized stablecoins offer the lowest risk profiles for the protocol.
The Sperax DAO may bring proposals to include new forms of collateral in blue chip cryptocurrencies, with respect for the risk of collateralizing with volatile assets.
From the incident this week, Sperax feels safer knowing that:
- Generated yield is organic, and earned through exogenous capital
- Auto-Yield brings value to $USDs users by purchasing on the open market, not minting new tokens
- Sperax has a 90% collateralization ratio, ensuring a price floor in the worst case scenario
Since yield generation has no effect on circulating supply, the growth of $USDs might seem a bit slower than other protocols, but giants that grow steady grow stronger!
Sperax is dedicated to benefiting all financial lives with blockchain technology.
With the Sperax token ($SPA) at its core, Sperax has built the first auto-yield stablecoin, $USDs, and a suite of DeFi apps.
As always, please join our communities!