Effective immediately allowances will be returned to previous caps (listed below). The reason allowances were temporarily reduced to zero was because of the testing of protocol arbitrage via redemptions. Additionally, with SILK $0.08 underpeg the ShadeDAO took steps to ensure no additional supply could be introduced into the depegged environment. Now that protocol arbitrage is set to be activated imminently, allowances can be safely expanded.
- stkdSCRT: 500k
- USDT: 700k
- USDC: 1M
- stATOM: 1.25M
- stOSMO: 250k
- ATOM: 450k
- OSMO: 50k
- wETH: 700k
- wBTC: 400k
- stkATOM: 200k
Protocol Arbitrage is the process of redeeming SILK for collateral using the target SILK peg. In the process of performing the arbitrage, all vault positions have their debt paid off and also receive a premium in the form of a fee such that after redemptions are complete they are in a net positive position.
The protocol performs the following arbitrage:
Redeem 1,000 SILK at the $1.02 rate for USDC
Receive $1,020 worth of USDC (minus redemption fee)
Swap $1,020 (minus redemption fee) worth of USDC for $1,020 worth of SILK using the underpeg rate of $0.98
Redeem 1,020 SILK at the $1.02 rate for $1,040 worth of USDC (minus redemption fee)
- Accurate peg
- Borrowers are net positive from redemption fee
- Protocol earns arbitrage fees
- Borrowers need to be cognizant of debt redemption
- As a result of looping redemptions, the market discount that could be taken advantage of by borrowers is instead captured by the redeemer (until redemption fee exceeds the market discount) and distributed to SHD stakers in a democratized fashion
Vault User Story:
- Deposit 1,000 USDC and Mint 200 SILK (you owe 200 SILK of debt)
1,000 USDC * $1
200 SILK * $0.98 = $196 (because we are underpeg)
= $1,000 assets - $196 debt + $196 asset (SILK is both an asset & liability) = $1,000 net position
Next, a 200 SILK redemption occurs against your USDC vault
- You now have 1,000 USDC - 202.98 USDC (200 SILK * $1.02 - (200 SILK * $1.02 * redemption fee)) = 797.02 USDC remains in the vault,
- You still hold 200 SILK ($204)
- You now have 0 debt as the redemption wipes debt
797.02 USDC * $1
200 SILK * $1.02 (because SILK is back at peg)
= $797.02 assets + $204 SILK (now an asset owned by you, debt cleared) = $1,001.02 (+$1.02) net position
All TX Hashes + amounts will be posted on the forums after protocol arbitrage is complete. Impacted vaults for protocol arbitrage redemptions are the USDC & USDT vaults. USDC will be primarily used in this first instance. Note that protocol redemptions are permissioned solely by protocol.
In the process of this stability looping, vault holders will receive a fee from each redemption - the protocol pays a premium to these vault positions for allowing the protocol to redeem SILK against their collateral. If you want to learn more about redemptions you can read about them in the linked topics below. It’s key to note is that the redemption stability mechanism has been part of the protocol since the beginning, but unused as a result of SILK being primarily overpeg during it’s existence. We will have additional educational materials about this mechanism in the following days.
wBTC Redemption Post Mortem: wBTC Collateral Redemption Post-Mortem
Introduction to Collateral Redemption Mechanism: SILK Stability Restoration for Underpeg Scenarios
More details on collateral redemptions: Stability Mechanisms - Shade Protocol
Appreciate you all, looking forward to a more accurate peg.
-Shade Protocol Contributors