USX is designed to maintain a 1:1 soft peg with the U.S. dollar. Its pegging mechanism is mainly dictated by the hybrid interest rate policy which shall algorithmically adjust to keep market supply and demand in equilibrium.
There are mainly two ways for DF holders to set the interest rates for USX:
- 1.collectively vote to decide the interest rate for Vaults, which is a fixed interest rate adjustable through governance.
- 2.guide USX’s interest rate on secondary market through a dynamic supply mechanism powered by PDLP module.
For example, in the event of a high demand for USX when the price is pushed above $1, we could either lower interest rates for the Vaults, making it less expensive to mint USX, or increase USX supply on lending protocols via PDLP. Both can help the price of USX return to $1 by increasing USX’s supply in the open market.
In contrast, when market demands shrink and the trading price of USX falls below $1, we could either increase interest rates for the Vaults, making it more expensive to mint USX and encouraging earlier repayment, or remove USX liquidity from lending protocol via PDLP. Both can help to reduce USX supply and push its price back to $1.
In July 2022, dForce launched the LSR (Liquid Stability Reserve) module as an additional mechanism in keeping USX pegged 1:1 with the US dollar. The idea is simple: make USX tradable 1:1 with other supported stablecoins directly.
Instead of borrowing USX from lending protocols with a fee or incurring price slippage on every trade, the LSR module allows arbitragers to depositing USX to dForce to withdraw supported stablecoins slippage-free, or vice versa, depositing supported stablecoins to dForce to mint USX at zero cost, depending on whether USX is below or above peg.