Maintaining the $USD Peg
Last updated
Last updated
USDEFI, the stablecoin at the heart of the DCNTRL Protocol, is designed to maintain a stable value pegged to the US dollar. This page provides an in-depth look at how the protocol ensures the stability of USDEFI, despite the inherent volatility of its BNB collateral and the broader cryptocurrency market.
A stablecoin's value is its stability. For USDEFI, maintaining a 1:1 peg with the US dollar is crucial. This peg allows users to treat USDEFI as a digital equivalent of the dollar, providing a stable store of value, medium of exchange, and unit of account within the DCNTRL Protocol and beyond.
The DCNTRL Protocol employs a combination of mechanisms to maintain the USDEFI peg:
Every USDEFI token is backed by BNB collateral. When a user mints USDEFI, they deposit BNB into the protocol, which serves as a guarantee for the value of the minted USDEFI. The protocol requires a minimum collateralization ratio of 110%, ensuring that the value of the collateral always exceeds the value of the minted USDEFI.
While this does mean that for every $1.00 worth of BNB deposited, a maximum of $0.90 in USDEFI can be minted. We reccomend keeping collateral ratio >200% to avoid your funds being liquidated.
The protocol allows any holder of USDEFI to redeem their tokens for the underlying BNB collateral at face value at any time. This direct redemption mechanism removes USDEFI from circulation & ensures that USDEFI can always be exchanged for $1 worth of BNB, reinforcing the peg.
The Stability Pool plays a crucial role in maintaining the peg. In the event of a borrower's collateral falling below the required collateralization ratio, the Stability Pool automatically liquidates the position, using USDEFI from the pool to cover the debt and adding the liquidated BNB collateral to the pool. This mechanism ensures that every USDEFI token in circulation is fully backed by BNB, even in volatile market conditions. To continue learning more about the stability pool read this deep dive:
In addition to the Stability Pool, the protocol also allows users to liquidate bad debt manually. If a borrower's collateralization ratio falls below the minimum requirement, any user can liquidate the position, pay off the debt with their USDEFI, and claim the BNB collateral. This mechanism provides an additional layer of security for the USDEFI peg, ensuring that all outstanding debt is fully collateralized at all times.
The beauty of the DCNTRL Network lies in its on-chain architecture and immutability, which is a result of all collateral and smart contracts being housed on-chain without the need of any audits or attestations that Fiat backed stablecoins have to go through to prove reserves. This ensures USDEFI maintains its 1 USD peg, bolstered by caps and liquidations applied not just to downward movements, but upward fluctuations as well. This dual-sided mechanism fosters a more balanced environment for USDEFI to thrive. Given its overcollateralized design, our system is well-equipped to sustain market stability, even amidst periods of intense market volatility. By understanding these mechanisms, users can confidently use USDEFI, secure in the knowledge that its value is robustly pegged to the US dollar.
