The Stability of xUSD is Guaranteed by Macroeconomic Models — A Deep Dive by xDollar Research

The main hurdle of cryptocurrency adoption has been price volatility. It imposed great challenges for both the store of value and investment. xUSD, as a collateral based stablecoin, was carefully designed with a stable price against fiat, and aims to peg at a rate of 1:1. Unlike other stablecoins, xUSD is based on asset collateral and more importantly finely tuned macro-economic models to ensure both stability and additional economic benefits for the entire community. In this article, we are going to illustrate 3 key parts of the models behind the “magic” stability of xUSD that is naturally built in the system.

The first model is on the minimum collateral ratio, which determines the theoretical ceiling of the xUSD price. xDollar platform imposed a minimum collateral rate (MCR) of 110%. In other words, the borrowers just put additional 10% collateral and mint xUSD. When xUSD price goes up beyond $1.1, there will be an arbitrage opportunity. New borrowers will come to xDollar platform to deposit tokens and mint xUSD at MCR and sells xUSD in the secondary market. As xUSD is with a high price premium, they would make profits. With more borrowers doing that, it will naturally bring the xUSD price back near to $1.1. It effectively determines the maximum ceiling of the price.

The second model is on the redemption mechanism. xDollar platform allows users with xUSD to redeem, at 1:1 rate, the collateral on the platform. Such function guarantees the floor of the xUSD price. When xUSD price falls below $1, the arbitrageurs would buy xUSD at the secondary markets at the cheaper price and use the xUSD to redeem $1 equivalent collateral, make profits. With that, the xUSD price would come back to be equal to or higher than $1.

We have conducted extensive simulations with macroeconomic models built behind and both extreme and reasonable market dynamics. We observe the xUSD price is well within a narrow range over time, shortly after the entire platform ramps up. It holds even with an extreme swing of MATIC price (MATIC is the collateral token in the platform).

Fig 1. Price Dynamices of xUSD and MATIC (Starting from $1)

The third reason for the xUSD stability is from the protocol deeply rooted in macro-economic theory. When a new stablecoin was first launched, the price may shoot high and xUSD also experienced it due to the large demand at the secondary market. It is mainly because of the wide use cases of xUSD, especially its profit earning capability if staking in the stability pool. Our model actually proves that the price of xUSD will eventually come back to a normal range and closely peg to fiat at 1:1 in the longer run. In order to show the logic and model behind it, we also conducted testing using hypothetical scenarios.

The chart below shows the xUSD price over time. You can see the price ramps up to $1.1 for a period of time, again as mentioned earlier, due to the high demand of xUSD.

Fig. 1 Price of xUSD with Strong Demand

With that, the price may break the $1.1 ceiling, but whenever it happens, more and more xUSD will be minted due to the arbitrage opportunity we described above. The chart below shows the supply of xUSD over time and you can see a quick increase.

Fig. 3 Supply of xUSD when Demand is Strong

Due to the attractiveness of xUSD which causes the high price, the newly minted xUSD will go to different places for mining (making a profit). One of the most important venues is the stability pool. However, with the increasing supply of xUSD to the stability pool (or other places), the profitability would decrease as shown in the chart below. The decreasing return would essentially increase the opportunity cost for owning xUSD, thus decreasing the demand. It will eventually lead to the decrease of the price of xUSD shown in Fig. 2.

Fig. 4 Return of Stability Pool

More intuitively, we have

xUSD demand ↑ -> xUSD price ↑ -> xUSD supply ↑ -> Return of stability pool ↓ -> opportunity cost ↑ -> supply of xUSD in secondary market ↑ -> xUSD price ↓


Liquity: Decentralized Borrowing Protocol

Law of Supply and Demand.

About xDollar Research (XDOR)

xDollar Research (XDOR) is a critical arm of xDollar which is initiated to perform quant modeling, economic evaluation, data analytics, and any research tasks deemed to impact the platform’s stability and security risks as well as shape the platform’s key parameter decisions. We believe in “Innovation is key to continue disruption in the industry.” We have researchers joining the team from top financial institutions and research universities.

About xDollar

xDollar is an interest free lending platform that users can borrow decentralized stablecoin, xUSD against MATIC collateral on Polygon with a minimum collateral ratio of only 110%. The platform implements a systematic liquidation mechanism (stability pool) and fair platform revenue fee distribution (stacking pool). xDollar’s vision is to become the first cross-chain decentralized lending platform on multi-chains with DAO governance and a multi-collateral vault system.

Learn more about xDollar and get involved in the community

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First Cross Chain Interest-free Borrowing Platform based on Liquity protocol.