Re-collateralisation

馃彞 Each mStable asset is stronger than the sum of its parts. Re-collateralisation protects the basket in the event of a bAsset failure.

This feature will be launched in Phase 2 of the protocol

Introduction

mStable creates assets that are stronger than the sum of their parts. A core reason for this is mStable's re-collateralisation mechanism. MTA is used to effectively over-collateralise mAssets.

If a bAsset loses its peg beyond a certain amount, mStable can purge that asset and recover lost value by selling MTA for the outstanding mAsset. The purchased mAsset is subsequently burned. This continues until there is an equal amount of outstanding mAssets to the amount of collateral in the basket.

For example, if TUSD breaks its peg to 60 cents, it will be isolated and may then be auctioned for mUSD. The loss is made up by selling MTA for mUSD until which time the system returns to full collateralisation.

Process

Peg detection and ARE (TLDR)

MTA is the ultimate backstop to mStable. When a bAsset deviates from its peg beyond a predetermined threshold, an Auto-Redistribution Event (ARE) is triggered:

  • Reacting to price information supplied by the oracles, the mAsset鈥檚 basket is redefined to immediately exclude the affected asset from the basket

    • Exclusion happens on either the minting or redemption side depending on whether the affected asset went over or under peg.

  • A proposal is automatically submitted to the governance system which asks whether a re-collateralisation is required. Three options are generated:

  1. Start the re-collateralisation process;

  2. Negate the lock, i.e. reverse the ARE; or

  3. Delay decision.

Auctions

If the proposal to start the re-collateralisation process is approved, the affected bAsset is auctioned for its mAsset through an OpenIPO format of a Dutch auction. The collected mAsset will be burned, reducing its supply.

As it is unlikely that sufficient mAsset will be burned through this process, there is a secondary auction. In this stage, the same OpenIPO auction process is used to raise the remaining mAssets in return for MTA. Once sufficient mAssets have been committed, the auction is finished and traders may collect their bAsset/MTA. Upon successful completion of this second stage, the MTA required for payout to traders is sourced through the following channels:

  • A portion of staked MTA will be liquidated and used;

  • Should this not meet demand, and only if required, will newly minted MTA be minted and added to the payout.

MTA dilution is unlikely to lead to a negative spiral as:

  • MTA will continue to derive value from:

    • its role as the medium of payment for forge fees in the affected asset;

    • other, uncompromised mAssets.

  • The system imposes an upper limit (through a reserve price) on the number of MTA that can be minted for the auction, using price data validated by Governors.

In the event that the auction does not raise the required amount of mAsset to fully re-collateralise, the auction is deemed as failed, no MTA is minted, and auction participants can reclaim their commitment.

The affected mAsset is now marked as failed, and minting permanently disabled. It now suffers from under collateralisation and is redeemable to this proportionate amount.

Example

Assume the USD-pegged mAsset mUSD has a basket with a composition of 20% Stablecoin A, 25% Stablecoin B, 25% Stablecoin C, and 30% Stablecoin D. Assume that there are 1.5 million mUSD in circulation, and that the current composition of underlying stablecoins perfectly matches the defined basket composition (i.e. 0.2路1.5M = 300k of A, 0.25路1.5M = 375k of B, 0.25路1.5M = 375k of C, 0.3路1.5M = 450k of D).

Assume market prices are as follows:

  • MTA $5

  • mUSD $0.97 (the exact weighted average basket price, i.e. no arbitrage possible)

  • Stablecoin A $0.85

  • Stablecoin B $1.00

  • Stablecoin C $1.00

  • Stablecoin D $1.00

Assume that $0.86 is the threshold set through voting, where an automatic basket redistribution is triggered. A is immediately removed from the basket, with the new basket being a proportional redistribution of A鈥檚 weight to the other stablecoins in the basket, specifically: (0.25/0.8)% = 31.25% B, (0.25/0.8)% = 31.25% C, and (0.3/0.8)% = 37.5% D.

The governance system can decide to trigger a re-collateralisation event. If this happens, A is auctioned off over a fixed period in exchange for mUSD. Let鈥檚 assume that all units of A can be auctioned off at an average best price of 0.82 mUSD per A, meaning all units of A can be exchanged for 300k 路 0.82 = 246k mUSD. This 246k mUSD is then burned, reducing the supply of mUSD to 1.254 million and thus pushing the price back upwards; specifically, the 1.254 million mUSD is now collateralised with 375k of B + 375k of C + 450k of D = 1.2 million stablecoin units in the basket, with a new weighted average basket price of 1.2M 路 $1.00 / 1.254M = $0.957.

The de-pegged asset has now been removed from the basket, but it remains under collateralised.

A portion of staked MTA will then be liquidated and sold. Assume that there are 54,000 MTA staked and 10% are liquidated for re-collateralisation. 5,400 MTA is then liquidated and sold for $5, raising $27,000 of mUSD, which is then burned.

Only if this process fails to cover the full re-collateralisation value, MTA will be diluted and sold for mUSD to restore full collateralisation and the $1 price.

In this example, a total of $54,000 mUSD is needed to be raised to cover the peg loss. Staked MTA covered 50% of this loss. The remaining 50% will be raised through printing and auctioning MTA until the full 54k mUSD is raised.

If the price of MTA in the auction is $5, 5,400 additional MTA enters circulation. If this auction is successful, the $27,000 mUSD raised through this auction will be burned. This is mean that the outstanding units of mUSD now match the value of the underlying basket of $1.2M, and the system is again fully backed at $1 per mUSD.