That’s the key point. around 50k, but never 50k, I can gaurantee.
This recent argument, always from Nour, allows me to explain why a model like mine would be fine in a worst case scenario.
I’ll make a very simple example that can also, hopefully, illustrate the mechanics of variable Interest Rates in a cryptocurrency’s Money Market:
He’s argument is, basically:
Inverse can contract the supply of DOLA at will, by raising rates and forcing repayment or liquidations, when it wants, proportionally the demand drop for DOLA.
- User/Market borrows 100$ of DOLA
- Inverse gets 120$ of collateral (for instance, 20% overcollateralization or OCR)
If the demand for DOLA goes to 0, supply gets contracted to 0. How? IR.
If the market asks to close the CDPs say, by redeeming 1$ at a time they will never be able to pay 1$ to have 1.20$ back.
It’s gonna be 1.01$ to have your 1.2$ back. (in your 50K$ analogy, yes ALMOST 50k$)
This because lending is a profitable business, those are IR that need to be paid.
Next $? it’s gonna be 1.02, then 1.03 and so on.
If demand keeps dropping and the peg is endangered, the Money Market keep raising rates, because it wants its stablecoins back, you either pay and give them back to us or we raise ABOVE the 20$, you are liquidated and
As demand for collateral redemption (or CDP closure) goes up, IR go up proportionally, they go hand in hand so it doesn’t matter if you want to get back 1$ at a time or 100$ alltogether.
For these reasons when demand for DOLA goes to 0, and all its circulating supply is removed from the market Inverse will not be left with 0.
It will be left with profits from the IR paid by the market for borrowing.
How much? 20$, no more than that.
Ofc who redeems/closes first pays almost as much as he borrowed ( almost 50k)
But in a complete bank run scenario the last ones who redeem pay A LOT.
So there you have a Money Market who suffers a run and it’s left with profits
If we think about the same scenario for FRAX and we don’t account for locked liquidity (thanks btw, I was not aware of how that worked)
If we have a CR of say… 80%, then we are undercollateralized by 20% (UCR)
Aka. 100$ of emissions and if people will come to redeem them all we’ll have a 20$ debt.
My suggestion is we keep both the undercollateralized AND the overcollateralized designs running at the same time so if the bank run happens we will be left with no profits, but no debt also!
(I actually think that Overcollateralization + Undercollateralization will result in Overcollateralization * Undercollateralization, in the sense that the models are complementary in a way that will allow scalability like never before, besides the fact that they can withstand a bankrun)