Vader Protocol - Burn/Mint Mechanism Of USDV
Primer: Vader Protocol is a liquidity protocol that combines the best ideas in DeFi together. They have a stablecoin USDV that is deeply integrated with the system. This article explores the burn/mint mechanism of the stablecoin USDV and how this ensures that the price peg of USDV is maintained.
Vader Protocol is a liquidity protocol that anchors a slip-based automated market maker (AMM) with its native stablecoin USDV. The liquidity pools use USDV as the settlement asset and also offers impermanent loss protection. By implementing protocol owned liquidity via bond sales, the backing and purchasing power of the stablecoin will be supported as more and more reserves are built up in the treasury.
The stablecoin USDV is pegged to USD $1. So how does the system ensures the price peg of USDV? This is what we’re going to explore in this article. First, let’s find out what are the two native tokens used in the Vader Protocol.
What is USDV and VADER token?
Vader Protocol has 2 tokens. USDV is the native stablecoin and VADER is the other counterpart. What is the use case for each token? Let’s find out.
VADER is minted when VETH is burnt at a ratio of 10,000:1 via a Merkel snapshot. 50% of the minted VADER received upfront and the rest of the 50% is vested over one year. VADER can be staked for xVADER as a single liquidity pool to farm even more VADER and to take part in the governance of the protocol. What is interesting is that VADER can be burnt to mint USDV. The system will also use a TWAP function to sense the price of VADER in USD and this will have an important part to play in the price stability of the USDV stablecoin.
Vader Protocol uses USDV as the base asset which serves to drive liquidity and demand for it. Like VADER, USDV can be burnt to mint VADER too.
How does this burn/mint mechanism ensure the price stability of the USDV token?
Vader Protocol has a burn/mint mechanism that DeFi users will find familiarity with. It is similar to the TerraUSD (UST) stablecoin and LUNA token.
There are two phases to ensure the price peg of USDV is maintained: Expansion phase and the Contraction phase.
This happens when the price of USDV is greater than USD $1. Users are incentivised to burn VADER and mint USDV, resulting in an increase in the supply of USDV to meet the higher demand for it. The price of USDV thus drops and returns to the peg of USD $1.
The contraction phase happens when the price of USDC drops below USD $1. Users are incentivised to burn USDV and mint VADER instead. As the supply of USDV decreases, the price of USDV will increase, returning it to peg.
All the above information can be summarised into one infographic shown below. Take a look at it:
We hope this will clarify how the incentives due to the burn/mint mechanism of USDV and VADER tokens serve as a way to make sure that the stablecoin USDV will maintain price peg of USD $1.
Where can I get more information?
If you’re interested in the Vader Protocol, do follow and join their social media channels:
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