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3.6 Stability Mechanisms
There are four main mechanisms that MOR uses to maintain the soft peg to the dollar:
Whenever there is a surplus in demand, the PSM builds up a reserve of BUSD from arbitrageurs minting MOR at 1.001 BUSD and selling it on ApeSwap for a profit. These BUSD reserves maintain the peg when there is significant sell pressure. As long as there is BUSD in the PSM, the price of MOR can’t go below 0.99 BUSD. And if it did, it would be arbitraged away.
This PSM is the primary stability mechanism and in most scenarios wouldn’t be broken. 100% of the BUSD used for minting MOR in the PSM is held in the contract for redeems, and it also keeps the spread profits in BUSD to cover additional redeems.
When it comes to liquidations, the protocol always treats MOR as worth 1 BUSD, regardless of its market price. If the price of MOR is below the peg liquidators, the protocol will buy it back to be able to get cheap collateral from liquidation auctions.
This is related to the aforementioned point. stkMOR/BUSD is composed of 50% MOR and of 50% BUSD. The protocol values this MOR at market price, so if the price of MOR were to deviate substantially from the peg, it would liquidate those stkMOR/BUSD LP farmers with the highest leverage multiples (20-50x leverage). For these liquidations, the 50% of the collateral which is held in BUSD would be market sold to buy MOR—pushing the price closer to the peg.
If a user has minted MOR in a vault and it temporarily deviates from the peg, this is the best time to repay their outstanding MOR debt and profit the difference. This is especially true for leveraged yield farmers in ilks such as stkBUSD/USDC.
If you have minted 1,000,000 MOR you are profiting 10,000 BUSD for every 0.01 BUSD that MOR falls from the peg, assuming you buyback the MOR to repay your position.
Since these depegging scenarios are temporary all the borrowers are incentivized to rush and repay their outstanding debt and pocket the difference, by doing so they are pushing the price of MOR closer to the peg.
The formula for calculating system surplus is:
Outstanding MOR Debt + BUSD in the PSM − MOR in Circulation = System Surplus
The surplus shows how much MOR would be missing if everyone was to repay their outstanding debt and redeem any remaining MOR for BUSD through the PSM. The larger the system surplus gets, the easier it is to have a supply shock (i.e. not enough MOR in circulation to meet demand). During a supply shock, the price of MOR is arbitraged by minting MOR in the PSM, which puts more BUSD in the PSM contract.
If speculators notice that MOR is trading below the peg, they can buy the dip to pocket the difference when it repegs. Users can access metrics such as the system surplus and the health of ilks across all the vaults to ensure that it is just a market mispricing event.