Peg Arbitrage Mechanism

Overview

Users can take advantage of price dislocations between the protocol’s minting/redemption mechanism and external market prices to generate arbitrage profits. This peg arbitrage strategy helps maintain price stability and ensures that the synthetic asset trades close to its intended peg.

The primary arbitrage strategy available is:

• Cross-Market Arbitrage: Buying or selling the synthetic asset in external markets when its price deviates from price of the issuer and utilizing the protocol’s minting and redemption contract to profit from the price difference.

Trade Strategies

Key points to consider:

• The synthetic asset is strictly backed by the protocol’s underlying assets.

• Authorized, whitelisted users can mint and redeem the synthetic asset on demand.

• Typically, around 0.50% of backing assets are held in stablecoins within the minting smart contract to facilitate immediate redemptions.

• An additional 4% of backing assets are held in stablecoins across multiple custodians, ensuring consistent liquidity replenishment.

• The protocol’s underlying reserves are generally unaffected by price fluctuations in centralized/decentralized spot markets or automated market maker (AMM) protocols, though short-term price deviations may occur in secondary markets.

Cross-Market Arbitrage

This strategy allows authorized minters and redeemers to profit from price differences between external market values and the protocol’s minting/redemption rate. External markets include both centralized and decentralized exchanges, such as USDe/USDC trading pairs on spot markets or liquidity pools on platforms like Uniswap and Curve.

Example 1: When the synthetic asset is undervalued in an external market

• Suppose USDi is trading at $0.95 on Uniswap.

• A trader buys 1 USDi using USDT at this discounted price.

• The trader then redeems 1 USDi through the protocol’s minting contract at $1.00, receiving USDT.

• Profit: The trader earns $0.05 per USDi redeemed, minus transaction and gas fees.

Example 2: When the synthetic asset is overvalued in an external market

• Suppose USDi is trading at $1.02 on Uniswap.

• A trader mints 1 USDi using USDT through the protocol at $1.00.

• The trader then sells 1 USDi in Uniswap’s liquidity pool for $1.02 worth of USDT.

• Profit: The trader earns $0.02 per USDi minted, minus transaction and gas fees.

This mechanism ensures that whenever price dislocations occur, arbitrageurs will step in to restore price equilibrium, reinforcing peg stability.