First off, we should specify the specific variety of stablecoins we are discussing here
Basically, there are two major types of stablecoins. The first variety are centralized stablecoins (e.g. Tether), the second decentralized ones (e.g. DAI). The centralized stablecoins are (allegedly) backed up by real assets and currencies, e.g. the American dollar, and as long as you can successfully redeem them for the underlying asset (in most cases the dollar), their peg should be maintained without any issue
The decentralized stablecoins are more tricky in this regard since their peg is maintained by market means, not direct exchange. If we take the DAI stablecoin as an example, its peg to the US dollar is maintained via the required amount of Ethereum which serves as a collateral. So, when the price of Ethereum goes down, more of that currency is required to maintain the peg to the dollar. And that is how it is done with decentralized stablecoins in general
Topic: How do "stablecoins" really maintain their peg? (Read 114 times)
The whole idea of stablecoin that are pegged against fiat is still a case of study to me. I have not fully digested a simplified explanation of this. The only one that really came clear to me was the one pegged against the Gold and the totally supply that will ever be minted will have a corresponding reserve of gold in the vault which is been audited by a trusted third party auditing firm, and these stable coins could be redeemed in gold at an agreed value as pegged.
Pegging essentially works by two mechanisms :-
Buying and selling of a currency concerned with foreign trades
Trading , maintaining the import - export balance
Pegging means a currency maintains it's stable state against a stable currency for example many people prefer doing it against the USD .
If the value of the currency increases , they buy more of that particular currency which inturns creates massive inflation .
This is a good strategy if done in moderation.
Buying and selling of a currency concerned with foreign trades
Trading , maintaining the import - export balance
Pegging means a currency maintains it's stable state against a stable currency for example many people prefer doing it against the USD .
If the value of the currency increases , they buy more of that particular currency which inturns creates massive inflation .
This is a good strategy if done in moderation.
Depends on how well it is really received by the public. Just to give an example there was a try in our nation for a gold pegged stablecoin for example, it was something like 1 gram of gold equal 1 of that coin or something if I am not wrong, however nobody really cared and sold all the ones they got for free. However looking at the good big ones, USDT for example was one of them, don't know if it is still that loved, you will stay pegged. When its gold and physical its harder, however if you give people the chance to get 1 dollar for 1 usdt or get 1 usdt for 1 dollar, people won't sell it too much under since they could just get it 1to1 ratio from you anyway so why would they sell it to 0.8 cent somewhere else? Sure there are small varience like %5 at most but thats about it.
Let's say you mint 10 sUSD using Synthetix and on an external exchange 1 sUSD = 0.5 USD. You could buy 10 sUSD for 5$ on that exchange, use it to repay your debt. You are now debt free and have 10 sUSD (but you are down 5$). However you need to sell the sUSD to cash out your profit and unfortunately, the best price right now is 1 sUSD = 0.5 USD. So when you sell your 10 sUSD, you only get 5$.
In total, you spent 5$ and earned 5$, for a total of 0$ profit. Which means, there wasn't really an arbitrage opportunity.
In total, you spent 5$ and earned 5$, for a total of 0$ profit. Which means, there wasn't really an arbitrage opportunity.
If the price is at the pegged price, then there is no opportunity. When the price deviates, then an opportunity exists and taking advantage of the opportunity moves the price back to the peg. Anyway, that's how arbitrage works in general. I don't the specifics for the coin. Typically, there is a trader or lender of last resort who trades/lends at the pegged price.
EDIT:
I skimmed the paper. Maintaining the peg via arbitrage is straightforward (in a perfect world). If the price is higher than the peg, stakeholders mint more synth and sell it, causing the price to fall toward the peg. If the price is lower, stakeholders buy synth and burn it to reduce their debts. The increased buying causes the price to rise to toward the peg.
I guess the arbitraging is used mainly to keep the price of the stablecoin thesame across exchanges. The arbitraging feature is probably included just incase the stablecoin price becomes too different across exchanges? I guess they use different algorithm to maintain the stablecoin at $1. If for example USD increases/decreases in price, the algorithm tracks & changes accordingly while arbitraging only helps keep the stablecoin at almost thesame price across exchanges. The whole activity of a stablecoin should be very transparent and decentralized otherwise not worth trusting too much.
I know what arbitrage between exchanges is and it is not what I was asking about. I actually listed it in the list of assumptions I was making (there exists arbitrage between exchanges causing them to all have the same price for sUSD) specifically because I was worried the conversation might derail in that direction.
Synthetix claims that there is an economic incentive for people to buy up undervalued sUSD on exchanges but I fail to see what this incentive is. This is what my question is about. If you know the specific mechanisms/incentives in place, please do share.
I guess the arbitraging is used mainly to keep the price of the stablecoin thesame across exchanges. The arbitraging feature is probably included just incase the stablecoin price becomes too different across exchanges? I guess they use different algorithm to maintain the stablecoin at $1. If for example USD increases/decreases in price, the algorithm tracks & changes accordingly while arbitraging only helps keep the stablecoin at almost thesame price across exchanges. The whole activity of a stablecoin should be very transparent and decentralized otherwise not worth trusting too much.
I was reading the Synthetix litepaper (https://www.synthetix.io/uploads/synthetix_litepaper.pdf) where it is claimed that there is a pegging mechanism to maintain 1 sUSD = USD but I couldn't quite grasp how it is supposed to work.
In the litepaper, there's only one vague bullet point about the pegging mechanism for sUSD. The bullet point claims that arbitrage will maintain the peg from falling below 1$. I guess I just don't see where there is an actual arbitrage opportunity.
I'm working with the following assumptions:
- The only way to repay a X sUSD debt on Synthetix is by sending it X sUSD
- There is perfect arbitrage across exchanges so that the price on any exchange reflects the global market price
Let's say you mint 10 sUSD using Synthetix and on an external exchange 1 sUSD = 0.5 USD. You could buy 10 sUSD for 5$ on that exchange, use it to repay your debt. You are now debt free and have 10 sUSD (but you are down 5$). However you need to sell the sUSD to cash out your profit and unfortunately, the best price right now is 1 sUSD = 0.5 USD. So when you sell your 10 sUSD, you only get 5$.
In total, you spent 5$ and earned 5$, for a total of 0$ profit. Which means, there wasn't really an arbitrage opportunity.
I believe MakerDAO uses a similar reasoning in their "pegging mechanism".
Am I missing something?
In the litepaper, there's only one vague bullet point about the pegging mechanism for sUSD. The bullet point claims that arbitrage will maintain the peg from falling below 1$. I guess I just don't see where there is an actual arbitrage opportunity.
I'm working with the following assumptions:
- The only way to repay a X sUSD debt on Synthetix is by sending it X sUSD
- There is perfect arbitrage across exchanges so that the price on any exchange reflects the global market price
Let's say you mint 10 sUSD using Synthetix and on an external exchange 1 sUSD = 0.5 USD. You could buy 10 sUSD for 5$ on that exchange, use it to repay your debt. You are now debt free and have 10 sUSD (but you are down 5$). However you need to sell the sUSD to cash out your profit and unfortunately, the best price right now is 1 sUSD = 0.5 USD. So when you sell your 10 sUSD, you only get 5$.
In total, you spent 5$ and earned 5$, for a total of 0$ profit. Which means, there wasn't really an arbitrage opportunity.
I believe MakerDAO uses a similar reasoning in their "pegging mechanism".
Am I missing something?
Jump to: