How can mUSD stability be ensured?

mUSD stability is maintained through a combination of overcollateralization, liquidation mechanisms, and arbitrage opportunities. These factors work together to ensure that the value of mUSD remains close to its 1 USD peg.

1. Overcollateralization

Each 1 mUSD is backed by at least $1.5 worth of GLP assets as collateral. Overcollateralization helps maintain stability by ensuring that the value of the underlying collateral is greater than the value of the mUSD issued. This buffer reduces the risk of insolvency and provides a level of security for mUSD holders.

2. Liquidation Mechanisms

The Meta Protocol incorporates liquidation mechanisms to protect the system from undercollateralized positions. If a user's collateral rate falls below the safe Collateral Rate, any user can volunteer to be a Liquidator and buy the liquidated portion of collateralized GLP, paying in corresponding mUSD (100% - Liquidation Reward Rate). This mechanism ensures all time sufficient collateral to back mUSD and helps maintain trust & confidence in the stablecoin.

3. Arbitrage Opportunities

Arbitrage opportunities arise when the mUSD price deviates from its 1 USD peg. Users can take advantage of these price discrepancies to make a profit and help restore the mUSD price to its intended value.

  • mUSD price above 1 USD: If the mUSD price exceeds 1 USD, users can mint new mUSD by depositing GLP as collateral and then sell the newly minted mUSD on DEX. As more mUSD is sold, the market supply increases, pushing the price back down to 1 USD. Users can then buy back mUSD at a lower price or use it to repay their loans, realizing a profit from the price difference.

  • mUSD price below 1 USD: If the mUSD price falls below 1 USD, users can purchase mUSD at a discounted rate on the market and then redeem it within the Meta Protocol for $1 worth of GLP. As users buy up the undervalued mUSD, demand increases, driving the price back up to 1 USD. Users can either hold the redeemed GLP or sell it, profiting from the price difference.

In both scenarios, users engaging in arbitrage help to maintain the stability of mUSD by correcting price imbalances and restoring the mUSD price to its 1 USD peg.

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