[Discussion] Implementing a Peg Stability Module (PSM) for R

We launched Raft with the ambitious vision of becoming the most efficient leverage engine for Liquid Staking Derivatives (LSDs) and more. As we continue to grow and adapt, we are now considering the implementation of a Peg Stability Module (PSM), a crucial decision that requires your thoughtful input and consensus.

The decision to implement a Peg Stability Module (PSM) is a reflection of a thoughtful design choice that warrants careful consideration from the community as we introduce external assets that would back R. The underlying question at hand is whether price stability should be preferred over censorship resistance of the assets chosen for the PSM and in turn on its effect on the censorship resistance of R.

If R price remains consistently at $1, users gain certainty over their entry and exit points in One-Step Leverage, and R becomes increasingly attractive for payments.

Should the community express in favor of the introduction of a PSM, interest-bearing stablecoins like sDAI become an ideal solution, bringing in revenue with no additional risk.

This is a significant decision, impacting the functionality, security, and efficiency of Raft. Your views and votes are vital in aligning with Raft’s long-term goals.

What is a Peg Stability Module (PSM)?

The Peg Stability Module (PSM) aims to stabilize the price of R by allowing users to execute swaps between R and reserve currencies at a fixed price. By providing an environment for slippage-free trades and applying different fees for redemptions and minting, the PSM may provide a proven way of maintaining the value of R at $1.

The necessity of the PSM arises when the price of R deviates from the dollar. Two specific scenarios are:

  • When the R price is below $1: In this case, users can buy R at a cheaper rate and swap it in the PSM for reserve assets worth a dollar. This restores the price of R to $1 (adding buy pressure), provided that the reserve is large enough.

  • When the R price is above $1: Users can buy reserve assets for a dollar and swap them for R. This restores the price of R to $1 (adding sell pressure), provided the reserve is large enough.

The architecture of the PSM is segmented into Redemption and Minting Reserves, both with distinct roles, capacity limits, and daily usage restrictions.

PSM Redemption Reserve

This reserve determines how much R supply can be redeemed in exchange for external assets like interest bearing stablecoins. It’s defined based on liquidity and acquisition cost and can consist of a mixture of rented and protocol-owned liquidity (see below).

PSM Minting Reserve

This reserve controls how much R can be backed by external assets, commonly a stablecoin. Special provisions are made to halt minting if the price of the reserve asset (e.g., DAI) falls below $1, limiting R’s exposure to a depeg situation.

PSM Implementation


  • Market Stability: By accepting stablecoins, the PSM can perform minting and redemptions under any market condition, ensuring a consistent performance.

  • Yield opportunity for the PSM: By accepting yield-bearing stablecoins, like sDAI, as reserve assets for the PSM Minting Reserve, the yield accrued on such reserve assets could be either retained by the protocol or partially given back to Raft stakeholders


  • Costly Acquisition: Acquiring stablecoins as reserve assets for redemptions can be expensive and may affect the economic efficiency of the system.

There are two main options to acquire stablecoins for the PSM Redemption Reserve:

  • Renting liquidity: The Raft protocol could incentivize users to deposit stablecoins into the PSM module in exchange for the PSM protocol fees and RAFT liquidity mining incentives. To ensure the PSM can be consistently relied upon over time, stablecoin deposits could be subject to a lock-up for different time horizons (e.g., from 1 month to 1 year) chosen by the users. The share of PSM fees and RAFT incentives earned by the users will be increasing as the lock-up duration increases.

  • Buying liquidity (Protocol Owned Liquidity): The Raft protocol could acquire a portion of stablecoins as Protocol Owned Liquidity by selling RAFT through a long-duration Liquidity Bootstrapping Option during which users can deposit stablecoins in exchange for RAFT tokens.

The main element to consider is that the cost of renting liquidity is almost surely higher than the cost of acquiring it but it is spread out over time. Moreover, the performance of the PSM funded by rented liquidity is subject to the user choices in terms of lock-up periods. Hence, the longer they choose to lock their stablecoins, the more reliable and effective the PSM is. Finally, the future RAFT valuation also affects the convenience of renting vs buying liquidity in the short-term.

Conclusion and Call to Action

The decision to implement a Peg Stability Module (PSM) within Raft is a significant and complex one, and the first step requires the community to express its opinion on whether a PSM should be adopted at all. If the community decides against implementing a PSM, then we will continue to explore other avenues for ensuring the stability and growth of the Raft ecosystem. If the community deems the PSM to be an acceptable and beneficial addition, the next step is to determine which design option is the best fit for our goals and values.

The decision may depend on the strategic objectives, risk appetite, and available resources of the Raft community. Understanding the trade-offs and aligning them with the community’s vision can lead to a robust implementation that enhances R’s stability and functionality.

Your engagement in this decision is critical. We invite you to discuss, share your insights, concerns, and preferences in the comments below.


Hi @david,

Thanks for all the explanations on the PSM ideas for RAFT.

What confuses me is that the proposal suggests using a RAFT token to buy stablecoin liquidity. Given the sheer amounts a PSM would need to repeg R, this would put huge sell pressure on a potential RAFT token. This selling pressure, combined with zero utility, is likely to make the price of the RAFT token worth little to nothing.

The important questions here are:

  • What is the utility of the RAFT token?
  • How does this utility translate into value for the RAFT token?
  • How will the RAFT token be issued? Are there other avenues besides liquidity acquisition?

I am concerned about how much capital one can attract by selling a token with little utility. A token needs utility first to become valueable so that it can be sold for stablecoin.

In terms of the type of liquidity, I can support the use of sDAI.

Best regards,

Despite my lack of experience, this is my opinion:

  1. if the PSM is approved, I support the use of sDAI (maybe an agreement can be reached with MakerDAO?)

  2. I consider it better to buy liquidity than to rent it, it is more stable/secure in the long term.

That being said, I’m not sure about the liquidity needed to make a PSM work properly, and the correct parameters to make it work on a stablecoin like $R.

I mean, I’m not sure that a PSM at $1 will work correctly, as there will be a lot of selling pressure on $R, a lot of people will want to sell their $R at $1 (for loops or something) and that could deplete the fund.

I would like to know more about the possible parameters, maybe making a PSM at $0.99 and not at $1 is a good option.

My general thoughts:

Implementing multiple security/peg mechanisms in exchange for additional ‘expenses’ or other economical considerations can be answered through some sort of risk:reward analysis of each option for obtaining this stability. Realistically, the longevity of Raft is reliant of stability and trust in $R, with that being of the utmost of importance (ie the reward), the question is as you posed @david what is the best way to get there?

It seems that a combination of both renting and buying liquidity can be adopted through some sort of mechanism which weighs in favor of one of the two during different market conditions.

Ie. If the market is hungrier and more speculative in nature, users may be willing to take a bet on opting into longer duration $RAFT token liquidity mining where they expect substantial upside on that locked liquidity.

With the current conditions it seems like starting by renting liquidity as a means to immediately secure peg stability with the end goal to move to POL gradually could work. Also, there’s something to consider rather than just giving RAFT tokens, you could distribute call options on RAFT tokens which when exercised the rewards are distributed to that user AND to stakers of $RAFT. This aligns incentives on both sides (effectively users not dumping) and allows you to still get the stability. Again, or a combination of both normal LM and options LM. I think the answer is not black and white but rather a timely combination of both types of renting & buying liquidity as well as distributing tokens and call options as rewards.

Hope this helps.

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