Stability and Peg Mechanisms in Aqua Protocol

Aqua Protocol employs a multifaceted approach to ensure the stability of AquaUSD and maintain its peg to the US Dollar. This system includes over-collateralization, a hard peg mechanism, market arbitrage, incentive mechanisms, and risk management strategies.

Over-Collateralization:

Each 1 AquaUSD is backed at least $1.5 worth of LST as a collateral. Over-collateralization ensures stability in Aqua Protocol by making certain that the value of collateral supporting AquaUSD issuance exceeds the value of AquaUSD itself. This additional collateral provides a safety net, reducing the risk of default and offering security to those holding AquaUSD.

• Minimum CR: 200% for issuing AquaUSD.

• Redemption Range: CR of 150% and above, targeting the account with the lowest CR position.

• Liquidation Thresholds: Partial liquidations at 150% CR, and full liquidations at 125% CR.

The Aqua Protocol features liquidation mechanisms designed to safeguard against undercollateralized positions. When a user's collateral rate dips below the safe threshold, any participant can opt to act as a Liquidator. This involves purchasing the portion of collateralized LST subject to liquidation and compensating with an equivalent amount of AquaUSD, adjusted for the Liquidation Reward Rate. This approach not only exerts upward pressure on AquaUSD's value but also contributes significantly to maintaining the protocol's stability.

Hard Peg Mechanism:

• Fixed $1 Price Exchange: Users can exchange AquaUSD for Toncoins within the protocol at a fixed rate of $1, irrespective of market conditions.

• Robustness: This hard peg mechanism is central to AquaUSD’s stability, ensuring its value remains consistent.

Market Arbitrage:

• Price Stability: Market arbitrage plays a role in correcting any significant deviations from the peg, contributing to price stability.

AquaUSD Price Above 1 USD:

• Minting and Selling: When AquaUSD's price exceeds 1 USD, users can mint new AquaUSD by depositing collateral (like Toncoins) and then sell the minted AquaUSD on a decentralized exchange (DEX).

• Market Impact: Selling additional AquaUSD increases its market supply, which can help push its price back down towards 1 USD.

• Profit Realization: Users can repurchase AquaUSD at a lower price or use it to repay loans, capitalizing on the price discrepancy for profit.

AquaUSD Price Below 1 USD:

• Buying Discounted AquaUSD: If AquaUSD's price drops below 1 USD, users can buy it at a lower market rate.

• Redemption Process: After purchasing discounted AquaUSD, users can redeem it within Aqua Protocol for 1 USD worth of collateral assets, such as Toncoins.

• Market Correction: As users acquire undervalued AquaUSD, demand increases, which can drive the price back up to 1 USD.

• Profit Opportunities: Post-redemption, users can either hold onto the redeemed collateral or sell it, benefiting from the price gap.

Incentive Mechanisms:

• Interest Fee: An interest fee is applied to incentivize timely repayment and collateral withdrawal.

• Liquidation Penalty: A minimum penalty of 12% on liquidations encourages users to maintain a healthy CR.

Risk Management:

• Debt Ceiling: Sets a limit on AquaUSD minting to avoid excessive issuance that could destabilize the market.

• Reserve Fund: A fund designed to facilitate liquidations without needing to sell assets on the market, thus protecting the protocol’s stability.

• Oracle System: Utilizes aggregated mid-prices from top exchanges to determine accurate market prices, ensuring that temporary price drops on a single exchange don’t trigger undue liquidations.

User Protection and Incentives:

• Partial Liquidation: Designed to protect users’ investments and the market, by only liquidating enough collateral to restore CR to safe levels.

• Retention of AquaUSD: Even in full liquidation scenarios, users retain their AquaUSD, preserving their ability to engage in the protocol.

In summary, Aqua Protocol's intricate array of stability and peg mechanisms — from over-collateralization to the strategic use of a reserve fund — collectively ensure the consistent value of AquaUSD. These features not only maintain the peg to the US Dollar but also provide a secure and stable environment for users to engage in various DeFi activities within the protocol.