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