The solution to VAI off-peg problem: Stability Fee

This post was originally published on Venus Protocol

Venus Protocol

Dear Venus community,

After discussing with the risk team and the Venus development team, and consulting external experts, we have determined a solution to VAI’s off-peg problem.

We believe that the program needs to meet three conditions:

1. The program has been implemented in other projects, and its effectiveness and safety have been verified.

2. The development workload of the program should not be too large to ensure that the development and audit are completed as soon as possible.

3. The scheme is adapted to the existing mechanism of Venus.

biswap

Therefore, after discussing and comparing a large number of stablecoin mechanisms, we chose the Stability Fee and made some improvements on the basis of the mechanism to improve efficiency. The mechanism of Stability Fee has been used for a long time in MakerDAO, which has been proven to be effective for the stability of DAI. DAI is currently the largest decentralized stablecoin issued.

VAI’s off-peg is caused by the oversupply of VAI in the market. To ensure that the price of VAI is stable at $1, it must be in a state of balance between supply and demand. The Stability Fee is used to adjust the supply and demand status of VAI.

Considering that the supply of VAI is currently in a state of severe oversupply, it is necessary to stop VAI’s Minting, which was already proposed in VIP 41.

Users need to pay interest for the VAI that they have minted. The interest is called Stability Fee.The stability fee is similar to the money market interest rate in traditional finance. When the demand for VAI is insufficient and the supply is in excess, the interest rate is raised and the Stability Fee is increased to recover VAI; when the demand for VAI is strong and the supply is insufficient, the Stability Fee needs to be reduced to encourage VAI’s minting

When the price of VAI is lower than $1, it means that its actual demand is less than the market supply, and the Stability Fee needs to be increased to recover liquidity; when the price of VAI is higher than $1, it means that its actual demand is greater than the supply, and the Stability Fee needs to be reduced. The more VAI deviates from 1 USD, the higher the Stability Fee adjustment should be until VAI returns to around 1 USD

The Venus risk team will formulate the Stability Fee adjustment rules, which will be issued through VIP. Then the risk team will adjust VAI’s Stability Fee regularly in accordance with the rules

The interest income of the Stability Fee will be attributed to the Venus Treasury as a new source of income. For example, the current price of VAI is 0.833 US dollars, and the supply of VAI is far greater than the demand. Therefore, the Stability Fee should be increased, such as increasing the annualized interest rate of VAI’s Stability Fee to 40%. After this mechanism is activated, users who have already loaned out VAI need to return VAI as soon as possible, or they have to bear the high interest costs, and the interest income will continue to be allocated to the treasury.

Repeging VAI is only the first step of the plan. For any stablecoin to develop, it must solve two problems:

1. How to make it stable continuously?

2. How to expand the use scenarios of stablecoin and increase holders, payers and receivers?

After VAI returns to stability, we will start the next step of the work.

We believe that VAI will become another growth engine of Venus and become the critical cornerstone of Binance Smart Chain as well. Let us look forward to it.

Venus Team

2021.9.13

Leave a Comment