How USBD Maintains Stability

1. Over-Collateralization

At the heart of USBD’s stability is over-collateralization. Every USBD in circulation is backed by more value in collateral than the amount of stablecoins issued, ensuring that the system can withstand market fluctuations. For instance, if you mint USBD, your crypto assets, such as Liquid Staked Tokens (LST) or Bitcoin, must be locked in at a 225% collateralization ratio. This cushion ensures that even during volatile market conditions, the value of USBD remains protected.

2. Collateralized Vaults

USBD is issued against collateralized vaults, where users lock their assets (e.g., BTC, LST) in exchange for USBD. These vaults are an essential part of Bima’s financial infrastructure, requiring borrowers to maintain healthy collateralization levels to avoid liquidation. By backing every USBD with a surplus of collateral, the platform ensures that the value of the stablecoin is always preserved, regardless of how much is borrowed.

3. Automatic Liquidation Mechanism

To maintain the security and stability of USBD, Bima Protocol employs an automatic liquidation mechanism. When the collateralization ratio drops below the required threshold, the system automatically sells a portion of the collateral to repay the debt. This prevents users’ positions from becoming under-collateralized, ensuring that the value of USBD is always backed by adequate reserves, even in turbulent market conditions.

4. Stability Fee

When users mint USBD by borrowing against their collateral, they pay a stability fee, which functions as an interest rate on the borrowed amount. This fee serves two purposes: it encourages responsible borrowing and helps control the overall supply of USBD. During periods of high demand, the stability fee can be adjusted upwards, preventing over-issuance and maintaining equilibrium between the supply and demand of USBD.

5. Debt Ceiling for Collateral Types

To minimize systemic risk, Bima Protocol employs a debt ceiling for each collateral type. This ceiling caps the total amount of USBD that can be minted from specific assets, preventing over-reliance on any one collateral. This risk management feature ensures that USBD remains stable even if the value of certain assets drops unexpectedly, helping to protect the peg against market shocks.

6. Price Oracles for Accurate Collateral Valuation

Ensuring the stability of USBD relies on real-time, accurate valuation of the collateral backing it. Bima Protocol integrates decentralized price oracles to monitor the market prices of collateral assets in real-time. This constant stream of data ensures that the platform can adjust to market fluctuations immediately, preventing under-collateralization and safeguarding the stablecoin’s value.

7. Market Demand and Liquidity Pools

Liquidity is crucial for maintaining the stability of any stablecoin, and USBD is no different. Bima encourages users to provide liquidity on decentralized exchanges (DEXs) and lending platforms, ensuring that USBD can always be bought or sold close to its peg. To incentivize liquidity, Bima may offer rewards to those who contribute to these pools, thus stabilizing the market price and preventing significant price deviations.

8. Governance and Adjustments

USBD is governed by an active and engaged community that can vote on key parameters such as collateralization ratios, stability fees, and debt ceilings. This decentralized governance model allows Bima Protocol to remain agile and adaptive to changing market conditions, ensuring that USBD remains stable even in times of extreme volatility. By giving the community a say, the platform ensures that decisions benefit the ecosystem and users alike.

9. Arbitrage Opportunities

Even in the rare event of price fluctuations, arbitrage opportunities incentivize users to keep USBD close to its peg. If USBD drops below $1, arbitrageurs can buy it at a discount and redeem it for more valuable collateral, pushing the price back up. Conversely, if USBD trades above $1, users can mint new USBD by depositing collateral and selling it at a premium, bringing the price back to $1. This natural market correction mechanism ensures that the stablecoin remains pegged, even during minor disruptions.