I’m looking for a deep dive into the mechanics or actions in the system that push the price below $1 and then the corresponding actions that are taken to push the price back to or as close as possible to $1.
@light Has just done a fantastic write-up on deposits/withdrawals regarding RBTC. I think it’s important to explain exactly how $DLLR maintains its peg in the same fashion beyond the broad answers I’ve received when asked previously and read in the wiki.
Edit: What led me to ask this question is that if a user opened an LoC today for $10,000 and then swapped their DLLR/ZUSD to XUSD to actually do something with their funds beyond AMM/stability pool, they would lose ~$460 in the swap.
It is the old problem. Scarcity of centralized Stablecoins in the protocol leading to lack of liquidity for XUSD. Not enough people bring USDC or USDT in. Plus the need for 2 AMM swaps
DLLR to RBTC to XUSD with associated costs (fees, slippage).
There’s not much to this, it is simple supply/demand imbalance. If there is more supply than demand for DLLR then the price will fall below 1 USD, and vice versa, if there is more demand than supply then the price will go above 1 USD.
DLLR inherits the stability mechanisms of its underlying stablecoins, which are currently DOC and ZUSD.
With regards to the price floor: 1 DOC is redeemable for 1 USD of BTC as long as the amount-to-redeem is less than the value of nDOC₀ (a parameter in the Money On Chain protocol). And 1 ZUSD is redeemable for 1 USD of BTC minus a redemption fee (currently the redemption fee floor is 2.5%); so if the ZUSD redemption fee 2.5% this means 1 ZUSD (and, by proxy, 1 DLLR) has an effective floor price of 1 USD - 0.025 = 0.975 USD, beyond which it becomes profitable to redeem ZUSD for BTC and arb the price back up to the floor.
With regards to the price ceiling: 1 DOC can be minted by depositing 1 USD worth of BTC. So if the DOC (and, by proxy, the DLLR) price goes above 1 USD then it becomes profitable to mint 1 DOC, sell 1 USD worth, then keep the difference as profit. For the ZUSD ceiling, I’ll link my comment here which discusses this in detail.
The Sovryn AMM is not a stableswap AMM so it is going to have higher slippage on stablecoin pairs than if using an stableswap pool like Curve or Balancer. If/when BabelFish implements its basket balancing incentive algorithm we might see better pricing on stable pairs – TBD!