How Does it Work: Stablecoin Economics
gDAI is a stablecoin backed by locked collateral tokens. gDAI borrowing is decentralized and non-custodial, meaning that only users have control over their funds.
gDAI can only be made with collateral backing it, either through approved collateral in vaults or through Swap.
To make gDAI through vaults, users can deposit collateral in their vaults and borrow up to ⅔ of the USD value of their locked collateral. Your newly minted gDAI can be found in your wallet (you may have to add gDAI as a custom token in your wallet using the gDAI (ghostDAI) contract address: 0x00000000).
Users can mint gDAI for DAI through the Swap page on the site. When you swap DAI for gDAI, new gDAI is minted by the treasury and the deposited DAI is held in the treasury as collateral.
Just like with the vaults when repaying debt, gDAI is burned when users trade gDAI for DAI through Swap.
The peg is maintained via the following mechanisms:
When the price of gDAI falls below $0.99 or rises above $1.01, users can engage in risk-free arbitrage through Swap. Read more about the Swap in the section below.
The liquidation ratio (minimum collateral to debt ratio) ensures that every gDAI is always backed by the collateral value in our vaults. When our vaults fall below the liquidation ratio, they can be partially liquidated. This means that some of the vault's debt is repaid by a liquidator, and in return the liquidator will receive some of the vault's collateral. The initial liquidation ratio will be set at 150%, which is subject to change by community proposals/voting.
Our vaults are overcollateralized (by 150%) to ensure that there is always collateral value to back the stablecoins minted. As the value of the collateral rises, more stablecoins can be issued as a rise in collateral price will increase your collateral to debt ratio. Conversely, as the value of the collateral falls, fewer stablecoins can be issued. This is implemented to maintain a minimum collateral to debt ratio of 150%.
The effect of collateral price changes on the GhoulDao protocol are summarized below:
- If collateral market price falls, the collateral to debt ratio will decrease, prompting users to either deposit more collateral or repay their gDAI debt
- If collateral market price increases, the collateral to debt ratio will increase, allowing users to either borrow more gDAI or withdraw some of their collateral
Swap allows users to mint gDAI with stablecoins and redeem stablecoins from gDAI. The 1% minting fee to create gDAI sets a price ceiling of $1.01 and the 1% fee to redeem stablecoins from gDAI sets a price floor of $0.99. The price of gDAI should trend close to $1, given that gDAI can only repay $1 worth of debt. The ceiling and floor on its price keeps it from diverging from its peg too much.
If the price of gDAI diverges from the peg, users can buy gDAI or sell gDAI at the Swap’s exchange rates. They can then make a profit in the market based on the difference from the peg. There is very low slippage on these transactions so engaging in this arbitration carries low risk.
Examples:
- Price over the peg: The price of gDAI increases to $1.05. A user can buy gDAI with 1.01 and then sell it on the market for $1.05, making a ~4% gain relatively risk-free.
- Price under the peg: The price of gDAI decreases to $0.95. A user can buy gDAI in the market for 0.95 USDC and sell it to the Swap for $0.99, making a ~4% gain relatively risk-free.
Swap ensures that there is always gDAI-DAI liquidity at a price that is close to the peg. This allows users to be able to repay their loans at close to $1 even if the price of gDAI deviates from the peg on other exchanges.
Example:
During Black Swan-type events where vault collateral values dip rapidly, vault owners may want to buy back gDAI to repay their vault debt and avoid liquidation. The increased demand for gDAI drives prices up, making it harder to pay back your loan at its true value.
The Swap also allows users to participate in arbitrage transactions to correct any divergence from the 1 USD peg.
Vaults: You can always mint gDAI through your vault, by adding collateral and minting gDAI up to the liquidation ratio against your collateral. See instructions here.
Other Options: Uniswap exchange will offer gDAI.
Last modified 1yr ago