Peg Mechanism

syUSD Peg Mechanics

syUSD maintains a soft peg to the US dollar using minting and repayment mechanisms that incentivize market participants to stabilize its price. The system leverages arbitrage opportunities, collateralized debt positions (CDPs), and market dynamics to ensure stability without requiring centralized intervention.

When syUSD Trades Below $1

Market Arbitrage Stabilizes the Peg

• When syUSD falls below $1 on external markets, arbitrageurs are incentivized to buy it at a discount (e.g., $0.98).

They can use the underpriced syUSD to:

• Repay their debt: Borrowers holding syUSD debt positions can repay loans at a discount, effectively unlocking collateral for less than the market price.

• Hold for future profit: Arbitrageurs may also buy and hold syUSD, anticipating a price return to $1.

Debt Reduction and Supply Contraction

• The use of discounted syUSD for debt repayment reduces the circulating supply of syUSD. As demand for discounted syUSD rises, its price moves back toward $1.

When syUSD Trades Above $1

Minting Incentivizes Supply Growth

• When syUSD trades above $1 on external markets, users are incentivized to mint syUSD within the protocol. Minting is always done at a fixed rate of $1 per syUSD, regardless of its market value.

Market Arbitrage Pushes the Price Down

• Arbitrageurs mint syUSD at $1 and sell it on the open market for a higher price (e.g., $1.05), profiting from the price difference. This increases the circulating supply of syUSD, putting downward pressure on its price and driving it back toward the peg.

Summary

syUSD achieves its peg through a decentralized, market-driven system:

• When Below $1: Arbitrage and debt repayment reduce supply, pushing the price up.

• When Above $1: Minting increases supply, pulling the price down.