Reactivate redemption mechanism as stability module

What is currently happening with UST is very interesting.
To me it clearly shows that the whole crypto market really needs a fully decentralized, reliable to market crashes stablecoin. USDH is on a good path to fulfill this BUT:

  • I would like to launch a discussion on what would the best stability module again.

  • Even if USDC is nice and seems solid, I’m not convinced that is the best option for the PSM module. Which coin is? Thank god UST was not implemented yet here.

  • After some thougts, I think that the best stability module would be to bring back the redemption system alive. Instead of backing USDH with another stablecoin, let’s back it with pure cryptos! I think that is the main strength of Hubble.

  • The liquidation system seems to work really well at keeping the protocol safe/stable.

  • I just got my position liquidated today, but actually it’s not that all bad, I still have all the assets I borrowed as USDH -10% of the initial value of what I gave as collateral. Now I realise that it could also have been much worse (with the market plunging 30% in 1 day, I clearly was not careful enough here, and without this liquidation, my bag could be even lower that what it is now).

  • So why not use the same system for a stability module?

  • Now that recovery mode has been disabled, having a high LTV does not affect the community.

  • So wouldn’t it be fair to have a system where the people with the highest LTV’s have chances to get affected by redemptions?

  • From what I understood - and somehow I think this was not explained well enough in the past - the redemption system allows for anyone to exchange their USDH with some collaterals of the people with the highest LTVs, and make some arbitrage gains if USDH goes below peg.

  • This means that the people with the highest LTV would get a certain amount of their collateral exchanged by USDH (without their full consent, yes, but still when you think about it it might not be that bad at all). Their risky assets would be replaced by a stablecoin, USDH. Even this could lower their LTV and reduce their risk of being liquidated automatically. I would include a small fee of x% tough, because the people doing the redemption cannot decide what exact asset they would get (potentially risky - maybe there is ways around this too, I leave that to someone else, maybe since there is already arbitrage, fees are not needed, I leave the math to someone else), so it would be fair that they would get these assets at a certain premium.

  • This would basically be a Peg Stability Module not backed by another stablecoin, but by other fully decentralised cryptos.

  • Of course one drawback is that this system is dependent on a proper functioning Oracle, (which is tricky when the network goes down).

  • But cannot this potentially be addressed somehow? (With like an Oracle buffer memory refreshed all x minutes/seconds? Or whatever else? A reserve of some sort? If Solana can resolve their network stability issues this would not be a problem. Going multichain ? So for this to fail all networks would have to go down at the same time (don’t get me wrong i still love solana and the community even after these incidents <3 )

  • Apart from this risk -network outage or oracle not functioning properly- which hopefully can be adressed, this system would be nearly flawless, and could give us a truly fully decentralised, crash-resistant stablecoin backed only by cryptos allowed on the platform.

  • And somehow I think it’s fair that the people with the highest LTV’s contribute to this, they take higher risks, so isn’t it fair if they would support the stability of USDH at the same time?

  • The system could be that the top X Loans would be affected by potential redemptions of potentially max X % of their position (I think there was something like that in the initial redemption proposal), with them getting a notification when they get in the “redemption group”.

  • This might be an extra motivation for people to lower their LTV’s for those that want to avoid a redemption, even if as I said, I think it’s not all that bad. Imagine, worse, you could get liquidated! So what’s the problem of some of your collateral being replaced by a stablecoin?

  • This might not be perfectly written, or have flaws, so please someone do not hesitate to rewrite this, pick up on the idea, and find a solution to back USDH by decentralised assets.

  • I think it would be really sad that USDH be backed by USDC in the end. Hopefully I’m not the only one thinking this! Otherwise please convince me why that would be ok.

Peace :v:

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If you want to satisfy both: exchange rate stability, liquidity, and decentralization, you must have a fast and powerful destruction mechanism in the face of Soros.

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One of the big concerns with the Redemption Mechanism is that it doesn’t offer a robust solution for above-peg arbitrage. When USDH is below peg, redeeming it for $1 of crypto on the platform is a no-brainer. However, when it’s above peg, there is no incentive to Redeem it for less than it’s worth.

If you look at the current UX with the stability pool (USDH vault), numerous users have come to the Discord, frustrated/concerned that their USDH balance is now lower than it was. We are solving this via auto-compound, but you can imagine the frustration when now suddenly the BTC balance in your loan is lower than it was yesterday. This is an inherently flawed mechanism if we are to provide as good a UX as possible.

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