Price Stability Mechanisms
Within the Hatom Protocol, USH is always priced at a fixed rate of 1 U.S. Dollar ($1), irrespective of its market value on different DEXs. Various pegging mechanisms are in place to consistently maintain this $1 valuation for USH.
Arbitrage
When the market price of USH exceeds $1, it creates a profit opportunity for users. They are incentivized to mint new USH and sell it on the market, and then later repay when the price falls enough to ensure a profit.
To break this down:
If the USH price is trading higher than $1 (the peg) in the market, users can mint 1 USH for $1 worth of debt and sell it for more than $1.
The minter can then repay their debt for $1 while pocketing the difference. This action increases the supply of USH and puts downward pressure on its price.
Let's illustrate with an example:
The protocol maintains an internal price for USH, which is pegged at $1.
However, the market price of USH is slightly higher, say $1.05.
A user capitalizes on this difference by minting 1 USH via the Hatom Protocol for $1.
Subsequently, the user sells the newly minted USH on the market for a higher price of $1.05.
This sale increases the overall supply of USH in the market.
As more USH becomes available, the market price should, theoretically, decrease to $1 due to the dynamics of supply and demand.
The user then buys back USH from the market at the lower price of $1.
With the purchased USH, the user repays their $1 debt to the Hatom Protocol.
After completing the process, the user is left with a profit of $0.05 per USH, which represents the difference between the sale and repurchase prices.
This strategy ensures market stability by encouraging actions that bring the price of USH back to its $1 peg.
When the market price of USH falls below $1, it creates an incentive for borrowers to buy USH at this discounted price and use it to repay or liquidate their debt, profiting from the price difference.
To elaborate:
If the market price of USH drops below the peg ($1), borrowers can purchase 1 USH for less than $1, and use it to pay off a debt worth $1. This action decreases the supply of USH, which in turn pushes up its price.
Let's illustrate this with an example:
The protocol's internal price for USH is pegged at $1.
However, the market price of USH has fallen below this, let's say to $0.95.
A borrower can take advantage of this by purchasing USH from the market for $0.95.
The borrower then uses the purchased USH to repay their debt, which is valued at $1 per USH, effectively paying off their debt for less.
This action increases the demand for USH, which reduces its supply in the market and thereby drives up its price.
This mechanism ensures market stability by encouraging actions that guide the market price of USH back to its $1 peg.
Repayments and Liquidations
When initiating the repayment or liquidation, USH is transferred back to the pool by either the borrower or the liquidator and it is burned. A percentage of the minting fees paid by the borrowers ( minters ) is being distributed to the Staking Module to ensure continuous yield for sUSH holders.
In scenarios where the collateral ratio of borrowers (minters) drops below the established minimum threshold, a process of liquidation is started to maintain the integrity and full backing of USH by collateral assets.
This liquidation process involves diminishing the debt of the borrower (minter), with liquidators being compensated through the acquisition of the collateral asset, in return for settling the outstanding debt. Following the completion of the liquidation, the borrower’s (minter’s) adjusted debt is cleared, but it’s important to mention that only 50% of the debt can be liquidated by a borrower at one time.
Being aware of market-induced price volatility is crucial, as shifts in the value of collateral can affect the health factor, potentially triggering liquidations. Should the health factor fall beneath, the collateral could be subject to liquidation. To circumvent such outcomes, one could either augment the collateral provided or settle parts of the borrow positions.
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