USDm Price Stability
Last updated
Last updated
The design mechanism of the Mars Ecosystem and the market behavior of users combined to ensure the price stability of the USDm.
When USDm market price > $1:
Arbitrageurs can use $1 worth of the Mars Treasury whitelisted assets (such as BTC) to mint 1 USDm in the Mars Treasury, They can then sell the newly minted USDm in the market to make a profit. This arbitrage action will quickly bring the market price of USDm back to $1.
When USDm market price < $1:
Arbitrageurs can buy 1 USDm in the market for less than $1 and then redeem it in the Mars Treasury to obtain $1 worth of XMS. The redeemed XMS can be sold in the market to make a profit. As long as XMS has sufficient liquidity in the market, this arbitrage action will quickly bring the market price of USDm back to $1.
The sufficient market liquidity of XMS is guaranteed by the following mechanisms:
✔️ Mintage control mechanism. The mintage control mechanism ensures that the market cap of XMS is at least 2.5 times the amount of USDm minted, which means that even if all USDm is redeemed as XMS at the same time, the exchanged XMS market value will only account for 40% (1/2.5) of the total market value of XMS. In the future, the XMS Support Ratio will gradually increase, and the above-mentioned 40% ratio will be further reduced.
✔️ Mars Treasury uses its assets to provide liquidity. The main purpose ofassets held within Mars Treasury is to provide liquidity for USDm. Since Mars Treasury will also provide liquidity for XMS, XMS will receive corresponding liquidity support.
The anti-bank run mechanism guaranteed by the asymmetry of minting and redeeming assets
A stablecoin protocol must not only be able to return the stablecoin Within normal market fluctuations, the protocol also needs to be able to deal with the so-called death spiral event. The death spiral generally refers to the large-scale sell-off of stablecoins in a short period of time, causing the price of stablecoins to drop significantly below $1 and continue to fall until they reach zero. The root of the death spiral is fact the stablecoin protocol cannot give users the confidence or evidence that the stablecoin market price will return to $1.
Mars Ecosystem guarantees that there will be no death spiral through the following mechanisms:
1️ Mintage Control mechanism
2️ The anti-bank run mechanism guaranteed by the asymmetry of minting and redeeming assets
The asymmetry of minting and redeeming assets means that users place the Mars Treasury whitelisted assets into the Mars Treasury when minting USDm, and receive XMS when redeeming USDm. Having the mint and redeem asset being different in this asymmetric manner prevents the typical bank run as seen on other protocols.
The symmetric design of Frax and other stablecoin protocols can cause bank runs. Using a game theory perspective on the issue, redeeming stablecoins as early as possible is the optimal strategy for all users.
The mintage control mechanism ensures that the market cap of XMS is 2.5 times the amount of USDm minted. This means that even if the price of XMS drops by 50%, the market value of XMS can guarantee the full payment of USDm at its $1 value. If at any point a death spiral begins to appear and XMS price starts to fall, users can remain confident in USDm's stability due to the significant support than having 2.5x the value held in the market cap of XMS.
The asymmetric design of Mars Ecosystem makes redeeming stablecoins as early as possible no longer an optimal strategy for all users. Users who redeem USDm early can have better liquidity when selling XMS than users who redeem USDm later. However, those users who are eager to sell XMS must bear the slippage loss when trading on Mars Swap since Mars Treasury is the main provider of XMS liquidity. These slippage losses are captured by Mars Treasury, and the ratio of the value of Mars Treasury’s reserve assets back the value of the USDm owned by the users will rise; users who redeem later or never redeem can exchange their USDm for greater value later on the open market. This anti-bank run mechanism prevents the protocol from collapsing even in the most extreme cases.
