How can eUSD stability be ensured?

eUSD stability is maintained through a combination of overcollateralization, liquidation mechanisms, and arbitrage opportunities. These factors work together to ensure that the value of eUSD remains close to its 1 USD peg.

1. Overcollateralization

Each 1 eUSD is backed by at least $1.5 worth of stETH as collateral. Overcollateralization helps maintain stability by ensuring that the value of the underlying collateral is greater than the value of the eUSD issued. This buffer reduces the risk of insolvency and provides a level of security for eUSD holders.

2. Liquidation Mechanisms

The Lybra Protocol incorporates liquidation mechanisms to protect the system from undercollateralized positions. If a user's collateral rate falls below the safe Collateral Rate, any user can volunteer to be a Liquidator and buy the liquidated portion of collateralized stETH, paying in corresponding eUSD (100% - Liquidation Reward Rate). This mechanism ensures appreciation pressure on eUSD and helps maintain stability.

3. Arbitrage Opportunities

Arbitrage opportunities arise when the eUSD price deviates from its 1 USD peg. Users can take advantage of these price discrepancies to make a profit and help restore the eUSD price to its intended value.

• eUSD price above 1 USD: If the eUSD price exceeds 1 USD, users can mint new eUSD by depositing ETH as collateral and then sell the newly minted eUSD on DEX. As more eUSD is sold, the market supply increases, pushing the price back down to 1 USD. Users can then buy back eUSD at a lower price or use it to repay their loans, realizing a profit from the price difference.

• eUSD price below 1 USD: If the eUSD price falls below 1 USD, users can purchase eUSD at a discounted rate on the market and then redeem it within the Lybra Protocol for $1 worth of ETH/stETH. As users buy up the undervalued eUSD, demand increases, driving the price back up to 1 USD. Users can either hold the redeemed ETH/stETH or sell it, profiting from the price difference.

In both scenarios, users engaging in arbitrage help to maintain the stability of eUSD by correcting price imbalances and restoring the eUSD price to its 1 USD peg.