How does USDaf maintain $1 peg?
Last updated
Last updated
USDaf is the USD-pegged stablecoin issued in Liquity V2. It’s fully decentralized, overcollateralized and backed by wBTC, tBTC, cbBTC, sUSDe, sDAI, sUSDS, sfrxUSD, and scrvUSD.
In contrast to most of its competitors, USDaf is a resilient stablecoin by design:
Not subject to collateral changes and protocol upgrades (immutable)
Directly redeemable (always convertible in a fast and liquid way)
Liquity V2's market-driven monetary policy through user-set interest rates enables USDaf’s peg to dynamically respond to situations where the token is above or below $1.
When USDaf trades above $1, borrowers tend to reduce their rates due to lower redemption risk, making borrowing more and holding USDaf less attractive. This helps correct the price downwards.
In contrast, when USDaf trades below $1, arbitrageurs will initiate redemptions to restore the peg. Moreover, borrowers' exposure to redemption risk prompts them to increase interest rates, boosting demand for USDaf (and Earn deposits) and pushing its price upward.
