Stability Mechanism

How do we maintain the peg.

Overview

Maintaining the peg is crucial for the success of any stablecoin.

The price of USDh, like any other asset, is determined by market supply and demand. Depegging occurs when there’s an imbalance between buyers and sellers.

Peg Maintenance

Since Approved Participants (APs) can mint and redeem USDh for one USD from the protocol, they are incentivized to arbitrage any imbalance and bring the USDh price back in line with the peg.

As an hypothetical example:

If there are too many sellers and the price of USDh drops below its $1 peg, APs can buy the token at a discount and then immediately redeem $1 worth of assets from the protocol for profit.

If USDh trades above its $1 peg, APs can mint USDh for $1 and sell it into the market for more than $1 for an immediate profit.

As long as the protoco's assets meet or exceed the liabilities, the system can very effectively maintain the peg.

Risk Management System

Hermetica's operational complexity comes from the fact that it has to make sure that its USDh liability is fully hedged. An operational failure may lead to an uncovered positions and hence lead to a value loss for USDh.

To minimize this possibility, our risk engine runs risk checks every 100 milliseconds and reconciles our liability against our assets. Hermetica runs multiple risk engines in parallel across multiple geographic locations and cloud providers in order mitigate the possibility of a third party failure.

Hermetica Insurance Fund

The Hermetica Insurance Fund is a reserve of assets maintained by Hermetica to safeguard against negative funding rate environments as well as other unforeseen adverse events.

The Insurance Fund mechanism takes a portion of the protocol yield generated in positive funding rate environments and sets it aside for periods of negative funding.

For more information about the Hermetica Insurance Fund, please visit this page:

Hermetica Insurance Fund