Everybody has heard of ‘stable assets’ – aka stablecoins.
But not everyone knows the fundamental mechanisms that give them price stability.
Read on to learn how the Liquid Loans protocol regulates its price and supply of USDL.
It is fully-backed by vaults created by individual users who collateralize their $PLS and mint USDL.
Through various mechanisms, USDL is pegged to $1 USD.
Just like any other cryptocurrency or fiat currency, USDL is subject to price fluctuations.
Any asset, in a free crypto market, has a price that is discovered via comparison of value in order books and liquidity pools.
In the case of USDL, it is subject to price movements due to people buying and selling it in liquidity pools on decentralized and centralized exchanges.
When people sell it, the price moves down. When people buy it, the price moves up.
So the question is, how does USDL return to $1 when the price dips, and how does it return to $1 when the price rises?
USDL maintains its peg to $1 using both hard and soft peg mechanisms:
Fundamentally, the total supply of USDL can be calculated by finding the total collateral ratio (TCR) and solving for USDL amount.
TCR = (Price of $PLS x Total PLS locked) / (Price of $USDL x Total USDL owed)
Total USDL Supply = (Price of $PLS x Total PLS locked) / (Price of $USDL x TCR)
Consequently, there are several factors that can influence the supply of USDL:
The Liquid Loans system-state has a genius design to keep the price of $USDL pegged at 1 USD.
Due to a balance between the supply and price as well as strong economic incentives, USDL represents the industry standard for stablecoins.
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Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.