xDollar Space (V2) - Price stability and Peg Mechanism of XIM
Primer: xDollar Space (V2) is a multi-chain interest-free lending platform that allows users to borrow their stablecoin, xDollar Interverse Money (XIM) by putting up crypto assets as collateral. How does the stablecoin XIM maintain its parity to $1 USD? What are the mechanisms to restore it to peg? We’ll explore this here.
Introduction
What is xDollar? It is a lending platform that allows users to deposit their crypto assets with a minimum collateral ratio of 110% to borrow XIM at 0% interest (with a small one-time fee). The platform supports the use of multiple types of tokens in different chains too.
xDollar launched their V2 in November and they are adding more features. Now users can also mint their stablecoin XIM by collateralizing other stablecoins (currently USDC only). This is an important addition because it helps to stabilize the price of XIM by maintaining its peg.
XIM Peg Mechanism
The price stability of XIM relies on 3 ways: soft peg, hard peg and stablecoin swap.
1) Hard peg
1 XIM can be redeemed (for a fee) for $1 worth of ETH. This forms the floor price of XIM because if the price of XIM falls below $1, arbitrageurs will buy up XIM and redeem it for a higher value of ETH. The minimum collateral ratio of 110% will create a price ceiling too.
2) Soft peg
Since xDollar treats 1 XIM as equal to $1 USD, the parity between the two becomes the implied equilibrium state. This is the Schelling point. Once XIM is less than $1, redemptions will increase which will raise the base rate for borrowing. This is important because it will make borrowing less attractive and help to stem the new supply of XIM into the market, thus restoring the parity of XIM.
3) Stablecoin Swap
xDollar Space (V2) provides an option to collateralize USDC (or any other stablecoins that are voted in by the community) for XIM with a minimum collateral ratio of 101%. This is a special trove that only accepts USDC as collateral and the liquidation and redemption functions are disabled. Users can close them and claim back their USDC.
So how do these 3 mechanisms help to restore parity to the stablecoin XIM?
Infographic
It is better to illustrate this with an infographic that we’ve done below. All 3 mechanisms will serve to nudge the price of XIM to $1 USD by aligning the incentives and hence the actions of users and arbitrageurs towards this target.
When $XIM is > $1 USD
When the price of $XIM is greater than $1 USD, arbitrageurs will deposit USDC to mint $XIM. They will sell the $XIM in the secondary market for profit, thus raising the supply of $XIM. This will cause the price of $XIM to fall, returning it to parity.
When $XIM is < $1 USD
When the price of $XIM is less than $1 USD, arbitrageurs will buy $XIM from the secondary market to redeem for the collateral that is worth more than $1 USD. They will earn a profit this way. But as the redemptions increase, the base rate for borrowing also increases, so it becomes less attractive to borrow $XIM. This will reduce the new $XIM supplied to the market. Price of $XIM goes up, restoring the peg to $1 USD.
Where to find out more information?
We hope this article helps to clarify some stuff about the price peg mechanism of XIM. If you’re interested in xDollar and want to find out more, do follow their social media channels here:
Twitter: @xDollarFi
Discord: https://discord.com/invite/c8c7Wm2EEx
All information presented above is for educational purposes only and should not be taken as investment advice. Summaries are prepared by The Reading Ape. While reasonable efforts are made to provide accurate content, any errors in interpreting and summarizing the source material are ours alone. We disclaim any liability associated with the use of our content.