On the recent COL-5 launch party @dokwon dropped some Alpha in regards to a potential Ozone feature where part of the Ozone Luna allocation is not burned for UST but rather is exchanged for non UST stablecoins, and as incentive users can purchase discounted but locked/vested Luna.
These non-ust stable coins will be used to backstop UST in the event of a depegging where Ozone acts as a type of buyer of last resort.
So with this in mind, i want to suggest and discuss a potential additional feature that Ozone could adopt which would significantly stabilize the UST peg. After all depeggings are usually cascading during crypto flash crashes. Deep liquidity could go a long way in stabilizing the UST peg and potentially prevent a depegging.
So the idea is inspired by MakerDAO, most people dont realize that in addition to being overcolaterized DAI has a very creative and innovative PEG stability mechanism . This mechanism basically allows protocol users to create 50x leveraged DAI/Stablecoin LP positions at low to 0 interest.
So for example a user with 10k, could use that 10k as collateral to create collateralized debt position (CDP) where a 490k DAI loan is backed by 500k in DAI/USDC Uniswap liquidity.
I suspect about 50 million DAI is backed by 50x leveraged CDPS, this creates 50 million dollars in DAI/USDC liquidity backed by only 500k. DAI seems to use a fixed oracle for determining the price of DAI/USDC, and so the CDP position only grows in value as it accrues uniswap swap fees.
A quick run down of how this works
In a single transaction the end user does the following:
Receives 500k DAI flashloan from AAVE
Uses 250k DAI to purchase 250k USDC
Deposits 250k DAI and 250k USDC in to Uniswap LP
Deposits the uniswap LP in to the respective MakerDAO vault , the MakerDAO vault requires 102% collateral so the user is able to withdraw about 490k DAI from the MakerDAO vault
The user uses the withdrawn DAI and 10k of their own collateral to pay off the flash loan.
The user now owns a makerDAO CDP 490k of DAI debt backed by 500k of Uniswap DAI/USDC LP
The user is incentivized to hold this position because they earn fees on 500k of LP
To withdraw the initial collateral and fees the user can flash loan out of the position .
Users are incentivized to open CDPS when DAI is above or below peg, when above peg the initial flash loan is in DAI, when below peg the initial flashloan is in another stable . Users are incentivized to close CDPS when DAI is below peg.
How Ozone could adopt a similer stability mechanism
Ok so here’s how i think this could work for Ozone. Since Ozone is going to be a bit heavy on UST, and potentially other stable coins , a way to allocate some of those funds could be to issue leveraged UST/other stable CDP positions , backed by low interest UST loans provided by Ozone . I would suggest 110% max LTV, and 8/9x being the “safe” threshold, 10x being the max/liquidation threshold . In this model Ozone would also collect fees and potentially interest from it’s CDPS.
This would basically subsidize, incentivize, and magnify UST/otherstable liquidity without requiring LP rewards or other incentives. This would help provide stability to the UST peg in the form of leveraged liquidity subsidized through low interest loans.
When above peg users are incentivized to open CDPS , and when below peg Users are incentivized to close CDPS. If flash loans in other stables are possible then below peg events could also encourage users to open CDP positions. Since these are leveraged positions they provide magnified buying and selling pressure in the event of a depegging.
Where does the other stable coin liquidity come from , i think it’s best it comes from external markets rather than Ozone it’s self , but initially other stable liquidity on the terra blockchain will take a bit to grow.
Ozone would obviously need to limit max leverage , available leverage but the factors on which that is decided would need to be modeled.
What type of UST exposure would users have in the event of a depegging? Should these CDP positions be liquidatable? Because the LP only has 50% UST exposure in the event of a depegging the CDP should still be liquid. Is higher leverage possible/safe?
I would also like to add i think a similar leveraged LP model would be possible with defi money markets but without farming or external rewards i dont think this can be sustainable.
Let me know what you think!