Price Stability Mechanisms

1:1 Peg to US Dollar

The aUSD is designed to peg to US Dollar at 1:1 ratio that the ACALA Network aims to maintain the value of one aUSD token approximate to one US Dollar at all times. Our unique strong peg to US Dollar is achieved through an automatic risk management algorithm within the Honzon Protocol together with community governance. More details on them in the following sections.

1. Risk Management

ACA token holders have governance rights and responsibilities for managing risks of the ACALA Network, including authorizing manual or automatic (algorithmic) adjustments of risk parameters.

Since multiple types of crypto assets with different risk profiles are accepted as collaterals of CDPs, all risk parameters of CDPs and liquidation auction parameters are set up separately across collateral types and are to be adjusted by the Honzon Protocol automatically or by voting of ACA token holders.

Adjusting Risk Parameters of CDPs

  • Stability Fee Adjusting stability fee or interest rate is one way to influence the supply and demand for aUSD loans consequently stability of its price. To close any active CDP, some ACA tokens are required to be paid as the Stability Fee, charged in the percentage of the outstanding debt of the CDP, presenting interest payable of the debt position. An equivalent amount of aUSDs at the current market price is also accepted by the official portal and will be exchanged to ACA automatically. When ACA tokens are received, they are burnt and removed from the supply permanently.

  • Liquidation Ratio The price fluctuation of underlying collateral assets affects the risk profile of the borrowed aUSD, hence adjusting the liquidation ratio to a degree creates a stability shell of the stablecoin. The collateral-to-debt ratio of all active CDPs is monitored constantly by the system, by dividing the current market value (in aUSD) of the collateral locked in the CDP by the outstanding debt balance. Once the current collateral-to-debt ratio of an active CDP becomes lower enough that it reaches a certain threshold, the Liquidation Ratio, the system will automatically trigger a liquidation of the CDP. A more risky collateral asset type is usually associated with a higher Liquidation Ratio, and vice versa.

  • Liquidation Penalty The liquidation penalty is a disincentive for users to leave a position in danger, hence provides additional safeguard and stability of the stablecoin. All active CDPs are constantly monitored by the system, once the value of the CDP collateral has fallen below the liquidation ratio, the CDP is regarded to be risky and is automatically liquidated by the system that a liquidation penalty in aUSD will be charged to the CDP holder and sourced from the collateral sale auction. The liquidation penalty will be automatically used to purchase ACA tokens in external exchange by the system, which will be burnt and permanently removed from the ACA supply.

  • Debt Ceiling For each type of asset that can be used as collateral for CDPs, a maximum amount of total outstanding debts in aUSD, the Debt Ceiling, is preset to cap the total collateral of such assets in the ACALA network, which ensure both diversification and risk management of the collateral portfolio. Once the Debt Ceiling for an asset is reached, no new CDP can be generated until some existing CDPs are closed.

2. Adjusting Liquidation Auction Parameters

The auction process is an essential mechanism to balance profit and debt accumulated in the system - it’s the pedestal that upholds the stability of the entire system. The global debt (issuing and burning aUSD) is managed by CDP Treasury. The stability fee is calculated in each block and is accounted for as system profit. For risky CDPs, the system will take over the debt as system debt, it will then auction off part or all of its collateral to repay outstanding positions. Periodically, the system will balance its books, that if system profit exceeds a certain limit, it will be used to purchase (via exchange or auction) ACA tokens from the market, which will be burnt immediately. If system debt exceeds a certain limit, system will issue more ACA tokens, and sell them off (via exchange or auction) to pay back aUSD debts.

  • Auction Length Duration of the auction once liquidation of an active CDP is automatically triggered by the system.

  • Auto Extension Period To discourage sniping, the length of all auctions is automatically extended for a short period if a last-minute bid is placed, shortly before the preset auction close time. An auction will be continuously extended for another auto extension period if another new bid is placed during the current extension period, and the auction will be only closed when no further bid is placed in the latest extension period.

  • Bid Increment A bid increment is a minimum amount by which a bid must be raised for the next bid. Increments are determined by the market value of the auctioned collateral and the current bid price to promote efficient bidding.

  • Lot Size To liquidate a CDP backed with a high valuation of collateral that associated with a large amount of outstanding aUSD debt, the total collateral will be broken into smaller lots to be auctioned separately.

3. Adding New CDP Collateral Asset Type

ACA Token holders may vote to add a new type of crypto asset as collateral to generate CDPs and set its risk parameters and liquidation auction parameters.

4. Removing Existing CDP Collateral Asset Type

ACA Token holders may vote to remove an existing type of crypto asset to be accepted as collateral to generate future CDPs, e.g. considering such assets becoming too risky.

5. Adjusting Oracles

Oracles are essential for normal operation of the ACALA network that ACA Token holders may vote to add new Oracle or remove existing ones.

6. Making Network Upgrade Decision

ACA Token holders may vote to make a strategical decision on network upgrade as the whole network grow, such as whether to upgrade the existing network from a Polkadot Parachain to an independent chain bridging to Polkadot.

7. Triggering Emergency Shutdown

ACA Token holders may vote to trigger the Emergency Shutdown procedure immediately in emergency situations.

Original: Home · AcalaNetwork/Acala Wiki · GitHub