Holding the Peg through Seigniorage Shares
Since the launch of the Strudel protocol, we have seen the price peg of vBTC deviate from the price of BTC in both directions. The elastic supply that was meant to be created through trades in the power pool broke down after the first week, as arbitrage bots interfered with its operations. Since then the supply of vBTC is not elastic, and hence the price can not be stable.
We are proposing Seigniorage Shares, a concept introduced by Robert Sams in this paper, to link the supply of $TRDL and vBTC and reestablish an elastic supply.
Perpetual Auctions
A perpetual auction contract is introduced, running one auction per day:
- When the free-floating supply of vBTC needs to decrease, then \$TRDL is minted and auctioned for vBTC, which is then locked in the contract.
- When the free-floating supply of vBTC needs to increase, then previously locked vBTC is auctioned off by the protocol in exchange for \$TRDL, which is then burned.
Auctions are accessible through the Frontend of Dutchswap and will run continuously.
The figure below describes the principles of a Dutch Auction. The price starts high and continuously lowers with time progressing. Bids can be placed at any time while the auction is running and secure a price not greater than the current price. Once the number of tokens at auction multiplied by the current price match up to the sum of bids placed the auction concludes with every participant receiving the last active price.
If vBTC is at under 95 % of the averaged BTC price, the Auction manager creates an Auction to sell off $TRDL to buy back vBTC. Enough $TRDL is minted to stabilize the price of vBTC up to a percentual limit in the relationship of total $TRDL issuance. We will start with a very low percentage in the first auctions and slowly increase it depending on participation. At the start of an auction, the price of the $TRDL begins at 125% of the market price, denominated in vBTC. Over the auction duration, this price drops to 75% of the market price.
If vBTC is trading above 95% of the market price of BTC and the Auction manager holds vBTC it creates an auction to go in the adverse direction, buying back $TRDL and burning it. Because the price of the vBTC should be higher than the buying price, this should create a reduction of total emission if the project stays at the peg longer than it strays from it.
