MOR Stablecoin: Built for Stability
The shocking events of recent days have rightly bought the importance of stablecoin stability front and central. After all, stablecoins are supposed to be…stable.
Grabbing the headlines is UST, which is an algorithmic stablecoin created by Terraform Labs. The value of such stablecoins is held (in theory) to a dollar via an algorithm maintaining a balance between the stablecoin and a partner coin — in this case LUNA — with traders burning and minting for profit to maintain the peg.
As we have witnessed though, when this setup fails the results are catastrophic, and highlight the essential need for stablecoins to be properly backed by underlying collateral with stability mechanisms that work. So the big question is: what makes a safe stablecoin and how has it maintained its perfect peg in spite of the market downturn?
Tell Me MOR……
MOR is soft-pegged to the US dollar. It offers a unique take on the borrowing/lending mechanics made so successful by Maker DAO and DAI, with the crucial addition of being able to mint/borrow the MOR stablecoin with collateral that is earning yield.
Of course, the most important part of any stablecoin is being able to hold its peg. The second one is having the tools to quickly come back to peg if it ever depegs. MOR has been designed with this firmly in mind and in this Medium we outline exactly how this is achieved.
Tools to Hold the Peg
1. Peg-Stability Module
MOR incorporates a Peg-Stability Module (PSM) which provides the first and most important layer of defense for the dollar peg. This incorporates stablecoins such as USDC and DAI with a fixed redemption rate so, as long as it holds funds, the peg can be arbitraged almost instantly.
In fact, when major moves happened with MOR over the last few days, that moved the peg, we have seen that bots and other private parties quickly buy the discounted MOR on DEXes and then immediately sell it for a profit on MOR’s stableswap/PSM page. This can be done because there is more than enough collateral backing MOR’s peg.
2. Debt Repayment Flow
As users borrow MOR to leverage their collaterals, MOR will always need to be bought back to repay outstanding debts.
3. System Surplus
The System Surplus creates an imbalance between supply and demand. The larger it is the more debt there is outstanding relative to the available MOR in circulation before debt holders start needing to mint MOR through the PSM to repay their debts.
Tools to Recover the Peg
1. Increasing Stability Fees on Specific Ilks
In the event MOR has depegged then all MOR in circulation remains debt valued at 1 MOR = 1 USD that is repayable. The Growth DeFi DAO can incentivize debt holders to repay this MOR by increasing the stability fees on specific collaterals (i.e. “ilks” in Maker DAO’s terms). This would mean that debt holders would repay their MOR debt which would cause MOR to move back towards its peg.
2. System Surplus
As mentioned previously, the System Surplus would continue to create a supply/demand imbalance in favor of the peg. This is where MOR shines. Because of how MOR is set up, market downturns often strengthen the peg of MOR. So how does the crypto market downturn affect a stablecoin such as MOR? During the recent market downtrend, vault liquidations increased, which added to MOR’s System Surplus, thus increasing its backing. Simply put, MOR is one of the most capital efficient stablecoin, even in the most volatile of markets. MOR’s profitability is 2–3x greater than other stablecoins like DAI (of which MOR is a fork) and MIM.
3. Game Theory
If a user has minted MOR in a vault and it temporarily deviates from the peg, this is the best time to repay their outstanding MOR debt and profit the difference. This is especially true for leveraged yield farmers.
If you have minted 1,000,000 MOR you are profiting 10,000 BUSD for every 0.01 BUSD that MOR falls from the peg, assuming you buyback the MOR to repay your position.
Since these depegging scenarios are temporary all the borrowers are incentivized to rush and repay their outstanding debt and pocket the difference. By doing so they push the price of MOR closer to the peg.
Speculators can also take advantage knowing that the DAO has the tool to increase the stability fees and essentially force a repegging if needed.
4. Liquidation Demand
Whenever there is a liquidation the MOR to repay the debt is either bought back from the open market or minted through the PSM.