yUSD Price Stability and Rigid Redemptions

Peg Mechanisms in yUSD Stability: Hard vs. Soft Pegs

In the realm of decentralized finance (DeFi), stability and reliability are paramount, especially when it comes to stablecoins like yUSD. To maintain stability and parity with the US dollar (USD), yUSD employs a combination of peg mechanisms, including hard pegs and soft pegs.

Hard Peg Mechanisms:

Hard peg mechanisms are explicit operations designed to establish a rigid relationship between yUSD and USD. Two key hard peg mechanisms employed by yUSD are:

• Price Floor: yUSD maintains a price floor through its redeemability for collateral at face value. This means that 1 yUSD can be exchanged for $1 worth of a collateral asset of choice. This redemption feature creates a strong anchor, preventing yUSD from falling below its pegged value.

• Price Ceiling: Additionally, the mandated minimum collateral ratio of 120% acts as a price ceiling. This requirement ensures that Vaults maintain sufficient collateral to support the value of yUSD. If the collateral ratio exceeds this threshold, arbitrage opportunities arise, allowing users to exchange yUSD for collateral assets, thereby preventing yUSD from surpassing its pegged value.

Soft Peg Mechanisms:

In contrast to hard pegs, soft peg mechanisms operate indirectly to maintain parity between yUSD and USD. One such mechanism utilized by yUSD is Parity as a Schelling Point: EpsiLoan treats yUSD as equivalent to USD, establishing parity between the two as an inherent equilibrium state of the system. This perception of equivalence reinforces market confidence in yUSD's stability and fosters trust among users, further solidifying its peg to USD.

By combining hard peg mechanisms with soft peg mechanisms, yUSD strives to ensure robust stability and maintain parity with USD within the dynamic and evolving landscape of decentralized finance. These complementary peg mechanisms work in tandem to safeguard the integrity and reliability of yUSD, providing users with a dependable and resilient stablecoin solution.