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.
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.