We hope this newsletter finds you well. As part of our commitment to transparency and community engagement, we’d like to share some key updates and insights into the evolving landscape of Indigo Protocol and $iUSD.
Understanding the Current State of $iUSD
Firstly, we acknowledge the concerns regarding the recent depegging of $iUSD from its $1.00 value. This shift is primarily due to an increased supply of $iUSD in the market, as users leverage the interest-free loans offered by Indigo Protocol to gain more exposure to $ADA and other Cardano Native Tokens. While this strategy benefits the Cardano ecosystem at large, it has led to an oversupply of $iUSD, impacting its peg. We are optimistic for the integration of $iUSD with Liqwid, a premier lending platform on Cardano. This strategic move will enable $iUSD to be used as isolated collateral, enhancing its utility and demand within the ecosystem. This integration is live today and is a significant step in broadening the use cases of $iUSD, thus contributing to its demand, stability, and market confidence.
As we continue to innovate and evolve, we would like to share deeper insights into two pivotal features of Indigo Protocol V2 — the Redemption Margin Ratio (RMR) and the new Interest Mechanism. These features are integral to Indigo’s Hard and Soft Peg mechanisms, ensuring the stability and robustness of $iUSD and other iAssets.
1. Redemption Margin Ratio (RMR): A Hard Peg Mechanism
The RMR is one of the crucial components designed to enhance the stability of iAssets. It provides an effective arbitrage opportunity upon redemption, thereby encouraging market correction and stabilization of the peg.
Example of RMR in Action:
- Scenario: Consider ADA priced at $0.40 and an iUSD RMR set at 200%. Suppose there is a CDP with a Collateral Ratio (CR) of 130%, comprising 40,000 ADA and a debt of 12,307 iUSD (equivalent to 30,767 ADA).
- Redemption Process: To redeem the CDP to the maximum RMR of 200%, the following occurs:
- Redeemable Assets: 21,534 ADA (equivalent to 8,613.6 iUSD)
- Post-redemption CDP balance: 18,466 ADA with a debt of 3,693.4 iUSD (equivalent to 9,233 ADA)
- New CR: 200%
- Benefits for the Redeemer: By paying 8,613.6 iUSD, the redeemer unlocks 21,534 ADA. The distribution of the unlocked ADA would be:
- Redemption (97% or $0.97 per $iUSD): 20,887.98 ADA
- DAO (1%): 215.34 ADA
- Redemption Fee (2% returned to CDP owner): 430.68 ADA
Effect: This mechanism incentivizes the purchase of iUSD at lower prices on DEXes and redemption at a higher value, progressively stabilizing the peg with each redemption.
While RMR is an important piece of this system, its purpose and intent is not to cause frequent redemption against Indigo CDPs or to force users to have a collateral ratio above the RMR but rather to provide a hard peg above $0.97. The Interest mechanism is designed to increase when redemption takes place. Generally speaking, if a redemption takes place, it would imply that $iUSD was below peg economically and that interest should increase to tighten the peg back to the appropriate target price of $1.00. It is these two mechanisms working together that help balance the peg of $iAssets.
2. Interest Mechanism: A Soft Peg Approach
Implementing an interest rate on CDPs adds a crucial layer of stability, encouraging responsible borrowing and timely repayment. Having both the Redemption Mechanism and Interest available to adjust based on the supply and demand of each iAsset gives the Indigo DAO more effective and responsive parameters. It is crucial to understand that these solutions complement each other by setting an effective hard peg minimum value of $0.97 through Redemption, and dynamically adjustable interest to stabilize this much narrower window of volatility. By increasing or decreasing interest, the Indigo DAO can choose whether to incentivize or disincentivize the minting or spot buying of $iUSD and by how much.
Impact of Interest on Market Dynamics:
- Base Interest Rate: Set at 5% for example, accruing on CDP debts, payable upon closure or liquidation.
- Elevated Interest Rate: Upon redemption, an increased interest rate may be introduced.
- Market Adaptability: The DAO can adjust this rate to respond to market conditions. For example, if there’s a frequent oscillation around the redemption rate of $0.97, the base interest can be increased to disincentivize the further increase of supply through minting and therefore moderate the potential leverage taken by the user base.
- Incentive for Stability: The introduction of interest rates incentivizes CDP owners to manage their positions proactively, contributing to the overall stability of iAssets.
In response to the vote presented by a member of the DAO, Indigo has recently increased the Minimum Collateral Ratio (MCR) for $iUSD from 120% to 150%. This decision aims to moderate the leverage available through Indigo protocol and support the restoration of $iUSD’s value on DEXes. It’s important to recognize that such adjustments are not instantaneously effective. The impact of this change will gradually unfold over the next few weeks as the market adapts and rebalances in response to the new MCR. We appreciate your understanding and patience as these changes take effect.
We believe in the power of collaboration and innovation for the benefit of the entire Cardano ecosystem. Our developments are designed not just to enhance Indigo Protocol but to contribute positively to the broader ecosystem, fostering growth, stability, and prosperity for all participants. Your support, feedback, and active participation are the driving forces behind our continuous improvement. We invite you to engage with us, share your insights, and be a part of shaping the future of DeFi on Cardano.