How does Silk maintain its peg? A deep dive.
ICI’s AI generated summary:
- Silk maintains over collateralized stablecoin peg with a diversified asset basket.
- Silk tracks assets like Canadian dollar, US dollar, Bitcoin, Yen, Euro, and gold using stability mechanisms.
- Silk’s peg value slowly tracks asset price movements, providing inflation and volatility hedge.
- Assets should back the debt for stability
- Silk maintains solvency through over-collateralization, with 300% collateralization per silk
- Users are kept safe with a 33 loan to value ratio, ensuring stability unless they borrow more or asset value drops
- Borrowing more silk could raise the risk of liquidation.
- Borrowing more against assets raises the risk of getting closer to 80% liquidation.
- A decrease in Bitcoin value triggers a liquidation to maintain solvency and collateralization.
- Silk is burned in exchange for stability pool taking over liquidated positions.
- The liquidation mechanism allows other participants to pay off a user’s debt in silk and receive the user’s assets at a discount, maintaining system-wide solvency.
- The stability pool, as the liquidated position, receives the liquidated assets and sends their silk to the burn contract, reducing the amount of debt in the system.
- Silk maintains solvency through smart contracts and borrower control.
- Borrowed silk is under full control of the borrower and not on a smart contract.
- During liquidation, stability pool silk is burned and borrowers maintain control of their debt
- Value of debt increasing affects Vault position
- Debt appreciation puts Vault position under strain, increases LTV to 81, triggering liquidation
- Inverse is true, if silk Peg decreases, Vaults become healthier, less liquidations
- Arbitrage opportunities when silk is below target peg
- Market price below target peg creates opportunity for user to buy silk at a discount.
- Buying back discounted silk helps push silk back to its target peg.
- Silk maintains solvency through arbitrage opportunities.
- Arbitrage allows people to pay off debt at a discount.
- Selling silk at a market rate greater than the smart contract rate helps maintain the Peg.
