Stability Mechanisms

Maintaining the value of xUSD at $1.00 is a critical priority for CompX. A stable needs to hug its optimal value as closely as possible, because users rely on that value to take predictable actions in defi. There are two cases of losing the peg that will be discussed.

Case 1 - There is not enough xUSD in the market place causes the value of the token to rise so that xUSD>$1.00.

Case 2 - There is an excess of xUSD on the market such that xUSD<$1.00.

When there is a shortage of xUSD on the marketplace, there isn't a detriment to anyone. In this case, holders have more buying power than they expect to have which gives them a nice bonus and incentive to buy something, or to borrow more tokens in order to buy other assets at a discount. Every person holding xUSD can participate in this arbitrage to re-balance the market.

In the case that there's an excess of xUSD, and the value drops below $1.00 it's more difficult to restore the peg. Now users that hold other crypto need to be enticed to buy xUSD out of the market to re-balance it. One option would be to simply let users arbitrage the depeg on their own. If you buy xUSD at $0.98, you are making a 2% profit instantly when the token returns to the peg. You're buying xUSD on sale! With enough users performing this service, for their own profit, you could technically bring the peg back to $1.00 without any other mechanisms. However, this hasn't been found to be an effective method of maintaining the peg, because conveying that information to the relevant users is a non-trivial problem. As a result, two mechanisms have been introduced at the protocol level to convey this information to the broader market. This is done both on the supply side (variable vault interest rates) and the demand side (xUSD injected liquidity staking).