PSM
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Peg Stability Module(PSM) is a method for maintaining KCD price peg by supporting exchange of KCD with stablecoins such as USDT and USDC.
| PSM fee | |
|---|---|
Stablecoin to KCD | 0.5% of Stablecoin |
KCD to Stablecoin | 1% of Stablecoin |
PSM is a contract-based feature that allows for arbitrage when the price of KCD rises above a certain level. By adjusting the supply of KCD through arbitrage, it is expected to reduce price volatility.
The reason for the different PSM fee rates is that the PSM is designed to respond more to situations of KCD Undersupply. Therefore, there is a difference in PSM fee to make it easier to mint KCD than to burn, even if the same arbitrage opportunity arises.
| With PSM Fee | Without PSM Fee | |
|---|---|---|
KCD Price Volatility | Adequate | Low |
PSM Mint Amount (KCD minted through PSM) | Adequate | High |
KCD Earn Interest (assuming equal deposit weight to total mint) | Adequate | Low |
PSM requires fee in order to prevent indiscriminate KCD mint and burn through PSM. Without PSM fee, there may be below long-term risks :
Even infinitesimal fluctuation in KCD Price can create arbitrage opportunity, which could then result in KCD peg becoming overly dependent on PSM (read more at ‘Peg’)
KCD minted through PSM does not accrue Stability Fee, but can still be deposited in KCD Earn; Therefore, although total volume of KCD Earn is increasing, KCD Earn Interest from Stability Fee remains unchanged, ultimately leading to decrease in KCD Earn Interest.
For these reasons, arbitrage trading using CDP mint is encouraged to be prioritized when there is moderate KCD price fluctuation. PSM Fee is designed to allow PSM to be used only in excessive KCD price fluctuation.
KCD/USDC ratio = 1.02
Input Token : 1,000 USDC
PSM : 1,000 x (1 - 0.005) = 995 KCD received
Swap KCD to USDC : 995 x 1.02 = 1,014.9 USDC received
Expected Return: 14.9 USDC (Yield 1.49%)
KCD/USDC ratio = 0.98
Input Token : 1,000 KCD
PSM : 1000 x (1 - 0.01) = 990 USDC received
Swap USDC to KCD : 990 / 0.98 = 1010.2 KCD received
Expected Return: 10.2 KCD (Yield 1.02%)
As a result, even if KCD price fluctuates, there will always be demand for arbitrage via PSM, which allows KCD supply to be regulated and maintain KCD peg.
