Simply Peg Simplicity

Hello all.
One of the issues we had with the unclaimed rewards discussion was that we, in my opinion, over complicated things. Really we should just simply vote on whether we think we should use, or not use unclaimed rewards. All the discussion around what we should do with these funds is pointless if we vote no to this.
One of the use cases for the use of these funds was to be around Peg, that of achieving peg and then of maintaining it.
In the spirit of keeping things simple lets talk all things peg, as I feel this is one of the biggest concerns and most widely accepted issues of our protocol.

Currently we are at 0.96 Busd per Lusd, the liquidity in that pool on PCS is only around $14k out, so we would need to adjust each asset by around $7k .

If a more mathematically minded community member doesn’t mind just checking all the maths here please?
But I propose we use DAO treasury funds to make this correction as soon as possible, no unclaimed rewards for now :wink:

Then, moving forward, and maybe this is another conversation, but we should look to maintain peg somehow. Perhaps we could agree to initiate a peg protection pot which comes into use if peg slips or rises by more than 1.5c
We could use unclaimed rewards or just DAO funds for this. We could also look at ways of increasing liquidity to this pool, not necessarily with unclaimed rewards. Lets get our creative hats on!

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Blockquote Currently we are at 0.96 Busd per Lusd, the liquidity in that pool on PCS is only around $14k out, so we would need to adjust each asset by around $7k .

would be nice to have a bot manage this

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I fully agree that there should be a vote on this. However it is pointless to do a snapshot vote if council members already indicate to veto. So in my opinion the first step is with the council to get the house in order, so to speak and decide if such a vote for changing the reward structure would not be blocked by the council.

Reward structure is one thing but I’m talking about getting peg in line via DAO funds initially.
I’d consider reward structure afterwards as its a very sensitive topic and needs more deliberation, I’m of the view that we are better not to change the reward structure for the moment but start to deal with other pressing issues such as peg.

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Okay but you are suggesting to peg by using unclaimed rewards. If you don’t want to touch the rewards how do you propose to peg lusd?

By using the DAO treasury fund.

However the purpose of this chat is also to work through the different connotations of using funds to achieve peg.
In particular:
How much is need to add to the LP to secure peg?
How much LINA would we sell and what would the impact on price be? (Assuming we would sell DAO treasury funds in order to buy LUSD on the open market to secure peg this way)
Are there better ways of doing this?

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for the record, i’m in favor of determining a solution for maintaining peg, so long as it doesn’t affect the weekly rewards for our users

would be interesting to investigate our current fees structure and see if there’s any juice in there

Okay that looks like progress :slight_smile:

What do we need to bring that to a vote?

Hello,
A bot would be the best solution here, because the the liquidity in the pool is very tight at the moment. Decent buys or sells drives the price relatively strong off peg.

There are two and maybe more possible implementations for such a bot:

  1. A simple Bot / program running somewhere connected to a wallet buying from the overbalanced side of the pool. This approach is very easy to implement but it has some downsides. The funds stored in this wallet are at risk because a entity holds the key to the wallet is a single point of failure. The program could potentially attacked because it’s not decentralised accordingly.

  2. A smart contract based approach. This should be a little less easy to implement. The contract has methods to balance the liquidity pool and is triggered via an external program. The funds could be locked in the smart contract couldn’t be abused if it’s done correct. The approach ensures the desired decentralisation.

We could vote to balance the pool manually before we implement such a bot. But it will soon go off peg afterwards because of the relatively low liquidity in the pool. Maybe we should also vote for increasing the liquidity of the pool by dao funds after the balancing.

Best regards!

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Thanks Pho, good input there. I’m in favour of the smart contract approach and will speak with our core team to see how viable.

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Why you don’t peg the LUSD with a basket of multiple stablecoin BUSD, USDT, FRAX… if you can’t handle the peg ?

This is how a LINA backed Peg Protection Pot could look like:

                                  Peg Protection Pot (PPP)

                        BUSD > lUSD                    BUSD < lUSD
                     ┌──────────────── Pancake Pool ───────────────┐
                     │                                             │
        PPP lUSD > 0 ▼ PPP lUSD = 0                                ▼
        ┌─────────────────────────┐                      Sell LINA to buy lUSD
        │                         │                      until it's balanced
        ▼                         ▼                                │
Sell lUSD to buy LINA     Mint lUSD by staking LINA                ▼
until it's balanced       and sell it to buy more LINA   Payback the potential
                          until the pool is balanced     dept created by Staking
                                                         while BUSD > lUSD

Would like to hear any opinions!

Best regards

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Hi

It looks like that you are proposing to stake the Lina bought. Does that mean that there will also be a reward distribution towards that amount?
I guess that the Lina staked balance could take up a significant of total staked balance and if staked would receive a significant reward share that could pull down everyone’s total rewards.

Do I understand that correctly?

Also given the recent news with luna, it would be great if you couldexplain the protective mechanism in place to ensure that when LUSD is attacked and goes off peg the sell of Lina does not result in a price dump.

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Hi @Crumbi,

nice to see that you are interested in this topic. This is more important than ever especially because of the things happend with UST and LUNA these days.

First of all I want to point out, that Linear has a completly different approach to collateralize its stable coin. The problem with LUNA UST was that LUNA actually has no maxiumum supply and because of a very high demand for algorithmic stable coins in the past an huge bubble was inflated. There were some people warning for a scenario like this and when the peg began to struggle there was an huge bankrun which could not be handled fast enough by the algos and the spiral of death began.

LINA on the other hand has a max supply of 10B coins, so there is no chance to mint the value of LINA to nirvana like currently in the Terra LUNA system. Another very important point is that every lUSD is collatarallized by a multiple of the LINA to USD value with a 5x target and it’s protected by the liquidation mechanism which enforces a minium of double LINA equivalent in USD. This alone makes it much harder to drain the liquidity of the lina dept pool.

But on the other hand it’s much harder to peg such a stable coin. Currently the demand of LINA is actually created by the huge staking rewards distributed weakly. On the long run this should be replaced by trading fees on the platform, but therefore there need to be participants who come to the platform and trade against the deptpool. There are two ways to onboard in the linear system:

  1. Buy Lina, stake it and trade with 1/5 of the dollar equivalent in lUSD and maintain the dept you created. (Sounds not so great without huge rewards, so we need alot participants on the long run!)

  2. Buy lUSD on Pancake Swap and trade without creating dept in the dept pool and try to make profits. (No KYC, defi, multichain, equities, stocks and so on. Could work out well!)

The second approach is where the peg comes into play, because everybody expects that it’s 1:1. In the past this was hard to realize because the peg is maintained by a simple pancake pool which is not for maintaining peg at all. In a world where LINA is a multi billion valued asset some people would say that the peg should be maintained by supply and demand. But with the current liquidity in the pool this is simply not realistic because there are no entities which do arbitrage on the assumption that lUSD and BUSD would peg either way in the future.

This is where the system described above comes into play. It uses a “huge” stack of lina to create artificial supply and demand on the pancake pool if there is a disbalance of the two assets in it.

In case there is more lUSD than BUSD in the pool which means that the value of lUSD is below one BUSD it simply sells as much LINA for lUSD as it needs to balance the pool. Than the peg is restored. (LINA supply is increased) → It means liquidity leaves the lina eco system so that the price of LINA have to decrease.

In case there is more BUSD than lUSD in the pancake pool, which means that the value of lUSD is above of one BUSD, the algorithm looks if there is currenly lUSD in “Peg Protection Pot” and simply sells it for LINA tokens. This pushes the demand of previously bought lUSD back on LINA. Liquidity enters the Linear eco system and LINA price increases. Peg is established.

If there is currently no lUSD to sell in the “Peg Protection Pot” for LINA, the algorithm simply creates as much dept it would need to raise the pancake pool to the desired balance. This dept is than sold for LINA to push the demand on the LINA price. Peg is established. The dept could be controlled by staking or unstaking LINA tokens. Another point is, that the staking will generate rewards which can be used to increase the “Peg Protection Pot” in a healthy way. As soon as there is a inbalance in the other direction the dept could be decreased (payed back) by that amount.

It is important that the inflow and outflow of the “Peg Protection Pool” is carefully determined by the in- or deflation of the LINA value, this should result a healthy burn like way to fight heavy inflation.

This is the theory behind the approach, I hope it has become clear what I mean. If you have questions or further concerns please feel free to comment on this, much appreciated!

Kind regards!

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Good thread @pho

I have another proposal, I think it’s worthing for the long run rather than selling or buying Lina/lusd but it implies also dev and funds from linear foundation or incitivising users for single staking.

For me It’s better if on the Linear website to have a swap features to swap lusd with other stablecoin (usdt,usdc,busd).

In that way when user swap 1lusd for another stablecoin the swap will give exactly the same amount of lusd to the other stablecoin (busd,usdc…)
and vice versa.
Wich means 1lusd will always be 1 usdc/busd/usdt 1:1

For the beginning Linear foundation should have those others stablecoin (maybe the community can vote wich one they prefer)
but we can also incitivising them for single staking stablecoin (usdt,busd,usdc) and give them some rewards from trading fees or just a little bit more lina from unclaimed rewards or other proposal (doing it like the vaults mechanism by locking or not the user single staking funds)

And for the decentralized way in future doing some partnership to integrate our swap api for lusd<>busd|usdt|usdc (thinking on Binance, kucoin, debrige, multichain, synapse protocol…)

Just some thoughts but in that way we control exactly the peg.

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Hi @legacy,

nice you joined the discussion. There is one aspect about your proposition, I’m missing a little bit. How is the pressure of supply and demand of lUSD put onto the demand and supply of LINA? I think this is a very essential part of the idea of such an Peg Protection Pool. Because if liquidity enters or leaves the eco system this should lever on the price of lina so that the minting / burning of lUSD by the dept pool is triggered, which will self regulate the overall supply of lUSD.

Would like to hear more opinions about this topic. Please everybody should join this discussion!

Kind regards!

Hey Pho,

Great ideas! This is on the table to be further analyzed and discussed. Thank you for your excellent input and feedback :+1:. It’s much appreciated!

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I like both ideas and think it is possible to find and meet in the middle.

What is needed to move this to the next stage?

Great thread pho, very interesting reading those peg insights, even more considering current market.

Same as Crumbi, what should be done next? Motivated to help if needed

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