In the vast ocean of DeFi, stablecoins play a critical role in providing stability and predictability amidst the turbulent waves of volatility.

Among these stablecoins, Raft's R stablecoin has emerged as a reliable anchor for users navigating the DeFi space.

Let's explore how R maintains its peg and how these mechanisms set it apart from other stablecoin peg mechanisms.

The Importance of Maintaining the Peg

We all remember all too well what happens when a stablecoin loses its peg.

A stablecoin's ability to maintain its peg to a specific value (in the case of R, 1 USD) is essential for ensuring user confidence and facilitating seamless transactions.

A stable peg provides the following benefits for stablecoin holders:

1. Easiness of use as a medium of exchange

2. Reduced risk of being liquidated

3. Easiness of use as a unit of account in DeFi

Let’s explore how R keeps its value pegged to the US dollar.

How Raft Maintains its 1 R: 1 USD Peg

Raft protocol employs several code constraints and tactics to ensure R maintains its 1 USD peg.

We have devised a combined hard peg and soft peg dual system to ensure 1 R remains equal to 1 USD.

These mechanisms work in tandem to create a robust system that helps maintain the R token's value and prevent it from deviating too far from the intended peg.

Hard Peg

The hard peg is achieved through two different and complementary mechanisms:

• Overcollateralization: users need to provide at least $1.10 worth of wstETH to mint one R token. This results in the price being capped at $1.10, which acts as an upper barrier.

When the price of R rises over $1.10 per R, users have the option to make a deposit of wstETH worth $1.10, mint 1 R, and then sell it on the open market for more than $1.10 to lock in a profit without taking any risk.

The buying pressure exerted by arbitrageurs contributes to increasing the R price up to parity with the US dollar.

• Redemptions: the redemption procedure establishes a lower boundary for the R price, given that market players are presented with arbitrage possibilities anytime the price of R drops below $1.

In that situation, arbitrageurs can buy R on the open market for less than $ 1 and redeem it for $1 worth of wstETH. When an R token is redeemed by a user, that user's tokens are "burned" via a smart contract.

This decreases the amount of R that is currently in circulation, which causes its price to increase.

Soft Peg

The notion of a "soft peg", as opposed to a "hard peg", depends on the capability of a stablecoin design to motivate users to behave based on the assumption that the peg will be maintained in the future. This is in contrast to the "hard peg" concept.

For example:

When R trades for more than $1, there is no reason for current borrowers to pay back their debts. On the other hand, people who want to use R could benefit by borrowing it and then selling it on the open market.

When R trades for less than  $1, the opposite happens: borrowers are more likely to pay back their debts, and people who want to buy R buy it on the open market and redeem it.

Knowing how an economic system is supposed to work ahead of time provides a self-fulfilling process that makes it easier to trust that the system will work as planned in the future.

The soft peg mechanism also underlines that deviations from the parity are temporary, which makes market players who want to gain from them compete with each other. In turn, this would make these deviations last shorter.

R Advantages vs Other Stablecoins

While other stablecoins use mechanisms such as algorithmic supply adjustments or centralized reserves to maintain their peg, Raft's approach to R offers several advantages:

• Decentralization: R relies on overcollateralization and redistribution, minimizing reliance on centralized entities or governance intervention.

• Trustlessness: R's peg mechanisms are transparent and operate autonomously through smart contracts.

• Resilience: Raft's liquidation and redistribution mechanisms work together to protect the system from severe market fluctuations and potential black swan events.

Another element that makes R one of the most flexible decentralized stablecoins on the market is the redemption mechanism.

Stablecoins that don’t allow for direct redemption employ two main mechanisms:

• Peg Stability Module (PSM): stablecoins like DAI allow market participants to mint one DAI by depositing another stablecoin and vice versa. However, the MakerDAO PSM includes centralized stablecoins like USDC.

Since such assets are vulnerable to off-chain events such as regulatory enforcement, the PSM could end up having assets whose market value could permanently deviate from DAI’s PSM, resulting in potential bad debt for MakerDAO.

• DEX liquidity: stablecoins like MIM don’t allow for redemption and don’t use PSM. Users that want to exit their MIM exposure must trade it for other tokens in decentralized exchanges.

The ability for stablecoin holders to exit their position is then extremely reliant on the liquidity available on DEXes.

R overcomes the drawbacks of both mechanisms by ensuring all holders can redeem their stablecoins for $1 worth of collateral anytime, without worrying about asset censorship, depeg events, or lack of liquidity on decentralized exchanges.

Wrap Up

Raft's R token sails steadily in the DeFi seas, thanks to its robust peg maintenance mechanisms.

By leveraging overcollateralization and redemptions to maintain R’s peg, stability and trust are ensured for R’s users.

Now that you have a better understanding of how R maintains its peg, it's time to set sail on your own DeFi journey with Raft.

Find out more about Raft’s One-Step Leverage and how Raft compares to other leverage protocols.

Jump on board the Raft Discord and get involved in the R-evolution of decentralized finance.

Useful Links

• Website: https://www.raft.fi/

• Twitter: https://twitter.com/raft_fi

• Telegram Channel: https://t.me/raft_fi

• Telegram Group: https://t.me/raft