Peg Protection

The DEX AMO within the OADA system actively maintains the peg around the target range by deploying liquidity from ADA reserves or minting more OADA when demand exceeds supply. If OADA is trading below the peg, indicating oversupply, the system can execute a swap where it trades 1 ADA from reserves for a slightly larger amount of more than 1 OADA, subsequently burning the excess OADA. This transaction results in ADA exiting the system at a profit for the AMO. The surplus difference between ADA and OADA is retained as perpetual liquidity within the system, thereby increasing the yield for sOADA holders.

Conversely, when OADA trades above the peg, signaling high demand, the system can mint a proportionate amount of OADA to dilute the cumulative asset value back down to the peg. This newly minted OADA is then used to provide additional liquidity in the pool, expanding the system's monetary base in response to increased demand. This expansionary policy allows the system to scale organically with market demand, ensuring stability around the peg.

This mechanism exemplifies a hard peg approach, a pioneering feature within the Cardano ecosystem that is standard among successful stablecoin and derivative protocol designs industry-wide. Importantly, the system safeguards against unprofitable transactions, ensuring that any swap between OADA and ADA is inherently advantageous. This feature effectively eliminates the risk of financial loss for the system during asset swaps, reinforcing the stability and profitability of the OADA ecosystem.

These mechanisms demonstrate how the DEX AMO actively manages the peg, ensuring that OADA remains stable and reliably pegged to ADA. By either selling ADA to purchase and burn OADA when the price is low, or minting additional OADA to meet excess demand, the system dynamically responds to market conditions. This approach is essential for maintaining the peg and ensuring the long-term viability and competitiveness of the OADA ecosystem.

To illustrate the mechanics of the DEX AMO in maintaining the peg, consider the following examples:

Example 1: Pegged Below Target

The system has 100 ADA as reserves (asset) and 100 OADA outstanding (liability). If the OADA price in the stableswap pool drops to 0.99 ADA, the system would intervene by selling 1 ADA into the pool. In return, it receives 1.01 OADA due to the price discrepancy. The system then burns the 1.01 OADA, reducing the total supply. After this transaction, the system's reserves and liabilities adjust as follows:

  • Reserves: 99 ADA

  • Outstanding OADA: 98.99 OADA

This action results in OADA being progressively backed by more ADA, increasing the backing ratio and thus the stability of the system. The higher reserve amount relative to the outstanding OADA enhances the yield funneled to sOADA, making it a more competitive product.

Example 2: Pegged Above Target

If the OADA price rises to 1.01 ADA, indicating that demand exceeds supply, the system responds by minting additional OADA. This newly minted OADA is deposited into the liquidity pool to dilute the cumulative value back down to the peg. This process ensures that the excess demand is met, stabilizing the price at the target peg. The steps are as follows:

  • The system mints the required amount of OADA to achieve the peg.

  • This OADA is added to the pool as liquidity.

Through these operations, the DEX AMO not only stabilizes the peg but also generates profits from arbitrage opportunities, which are then reinvested into the system. This cyclical process reinforces the system's financial health and stability.

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