How Lambda maintains the peg of btcUSD with dynamic supply and demand equilibrium
July 2nd, 2024

btcUSD stability is maintained through the actions of Lambda’s Autonomous Market Operators (AMOs) and Adaptive Interest Rate. These operators mint or withdraw btcUSD from the liquidity pool and dynamically adjusts borrowing rates based on supply and demand of btcUSD

Let’s take a look at how it works.

How Do the AMOs Work?

AMO mechanism
AMO mechanism

When btcUSD > $1

  1. AMOs mint additional btcUSD.

  2. The newly minted btcUSD is added to Curve liquidity pools.

  3. The btcUSD in Curve pools earns swap fees and yields

When btcUSD < $1

  1. AMOs withdraw btcUSD from Curve liquidity pools.

  2. The withdrawn btcUSD is burned.

  3. The market supply of btcUSD is reduced.

By increasing/decreasing the supply of btcUSD, AMOs bring btcUSD price back towards the 1 USD peg. This feature basically balances the supply of btcUSD, like a financial seesaw.

How Does the Adaptive Interest Rate Work?

Complementing the AMO mechanism, Adaptive Interest Rates work in tandem to maintain the stability of btcUSD's peg through dynamic adjustments based on market conditions. The core principle is simple: adjust the borrowing rates to influence supply and demand, thereby stabilizing the peg.

btcUSD > $1: Lower Interest Rates

When btcUSD's price is above $1, the borrowing rate decreases. This reduction makes it more attractive for users to mint and borrow btcUSD, increasing the supply and driving the price back down to the $1 target.

btcUSD < $1: Higher Interest Rates

Conversely, when btcUSD's price falls below $1, the borrowing rate increases. This hike discourages borrowing and encourages redemptions and interest payments, reducing the supply of btcUSD and pushing its price back up to the peg.

The formula for interest rate is as follows:

The formula for interest rate
The formula for interest rate

The adaptive nature of the interest rate helps maintain the peg by responding to changes in market conditions and the outstanding debt of the AMOs. It ensures that the supply and demand for btcUSD are balanced, keeping the price stable.

btcUSD's stability mechanism vs. other stablecoins

btcUSD's maintenance mechanism, which combines AMOs and an Adaptive Interest Rate mechanism, provides several advantages over traditional stability pools and single-method interest rate adjustments. This dual approach ensures that btcUSD can swiftly and effectively respond to market conditions, maintaining its peg with high precision and reliability.

These features would make btcUSD ideally attractive for Bitcoin holders looking for a stablecoin that offers both stability and responsiveness in the DeFi market.

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