3.2 Peg-Stability Module(PSM)
PSMs are a key component of DAI and Maker. MOR uses much of DAI’s architecture, and the PSM is one of the key stability mechanisms.
The PSM enables anyone to mint MOR using BUSD and redeem MOR for BUSD. The initial parameters for the PSM would be:
Debt Ceiling: TBD
Mint Fee (tin): 0.1%
Redeem Fee (tout): 1%
This means that as long as the debt ceiling has not been reached, you can mint as much MOR as you want at a fixed rate of 1.001 BUSD. Arbitrageurs can take advantage of this if demand pushes the price above this threshold.
A user can also redeem their MOR at a fixed rate of 0.99 BUSD. Again, if sell pressure pushes the price temporarily below this threshold, arbitrageurs can take advantage of the price difference.
The reason for having a wider spread (110 bps compared to DAI’s 10 bps) is that the main trading pair of MOR is the MOR/BUSD ApeSwap Liquidity Pool. This pool has a swap fee of 20 bps, bringing its total buy/sell spread to 40 bps. With a 110 bps PSM spread, it leaves enough margin for the MOR price to fluctuate around the peg and trade most of the volume on ApeSwap. This provides additional benefit to ApeSwap via the trading fees from higher volume and in turns helps to incentivize MOR/BUSD LPs.
As an additional benefit, even if the PSM has lower volume than it would with tighter spreads, the overall net system surplus generated will likely still be much higher, assuming a similar trend to DAI’s USDC PSM.
Please note that 100% of the BUSD that comes into the PSM from minting MOR stays in the contract waiting for MOR redemptions. No BUSD is used to buyback GRO. This alone further overcollateralizes MOR. This means that, for example, if 1,000 MOR is minted in a day, and then redeemed, the contract holds the 11 BUSD in spread fees for whenever another MOR holder wants to redeem for BUSD.
In the case of DAI, one of the biggest concerns is holding too many stablecoins in the PSM. For MOR, there is an easy fix for this simply by increasing the debt ceiling of yielding stablecoin collaterals. These yielding collaterals enable users to capture the yield spread between the stability fee they are paying to the protocol and the yield they are earning from the collateral (e.g. yield farming on PancakeSwap).
With a 102% minimum collateralization ratio (50x max leverage), users can jump in and turn a standard sub 10% yield on stablecoins into hundreds of percentage points. This makes it very attractive to capture whenever the debt ceiling is raised.
- Collateral (Ilk) type: stkBUSD/USDC PancakeSwap LP
- Yield: 8.5% APY
- Stability Fee: 6%
- Yield Spread: 2.5% + Put Extrinsic Value
- Minimum Collateralization Ratio: 102% (50x max leverage)
- Max Yield with 50x leverage: 270% APY
With max leverage, users can turn a 8.5% APY into a max of 270% APY. In addition, they have a Put on MOR for free, as they didn’t have to pay a premium.
This means that if MOR deviates and its price temporarily falls, they can profit extra as seen in the following example:
- Leverage used: 50x (49 MOR borrowed, 1 BUSD worth of equity)
- Average Sell Price: 1 BUSD/MOR
- Current Price: 0.99 BUSD/MOR
If the user buys back and closes down their position, they would earn 0.49 BUSD of profit for every 1 BUSD they deposited (an extra 49% ROI).
The further MOR’s price decreases, the more incentivized users are to buyback MOR and close their positions. Here is an example:
Note: A user can use these types of vaults to short MOR if they are bearish and think its price will decrease. While their position is open, they will also be earning the yield spread.