Peg Stablility Module (PSM)
This section of the document describes the PSM and how it contributes to the stability of ZAI
The Peg Stability Module (PSM) is a crucial mechanism for minting ZAI, designed to maintain its peg to the USD. Inspired by MakerDAO's PSM for DAI, the ZAI PSM allows users to mint and redeem ZAI at a 1:1 ratio with supported stablecoins like USDC and DAI.
The modules gives the advantage to ZAI holders that the protocol is stable at the $1 peg; but it also brings in the disadvantage in that ZAI becomes nothing more than a wrapper for other stablecoins. However this is offsetted with the introduction of the Direct Deposit Module, which allows ZAI to be backed by over-collateralized crypto loans.
Market Arbitrage keeps the peg at $1
To understand how the fixed exchange rate provided by the PSM encourages arbitrage and maintains the peg at $1 we explore the following two scenarios.
If ZAI trades above $1, arbitrageurs can exchange USDC for ZAI through the PSM and sell ZAI on the open market, increasing the supply of ZAI and pushing its price back toward $1.
If ZAI trades below $1, arbitrageurs can buy ZAI cheaply on the open market, exchange it for USDC through the PSM, and sell USDC at a profit, reducing the supply of ZAI and pushing its price back up toward $1.
Fees to prevent misuse of allocation
Optionally to prevent a possible misuse of allocation, supply and redemption fees can be applied to the PSM. These fees can be used to either encourage/discourage the use of the PSM module.
However they also have direct impact on the stability of ZAI. If a 2% redemption fee is applied to redemptions, then arbitrageurs will not participate in maintaining the peg at $1 unless the price goes below $0.98.
Any fees charged by the PSM go directly back to the protocol (See Revenue Share).
Source Code and Technical Documentation
The source code for the PSM can be found on the GitHub link below.
The technical documentation can be found on the GitHub wiki pages, and the unit tests for the PSM can be found on the PegStabilityModuleTest.sol file.
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