Stability Module

The module holds and manages the collateral assets (e.g., ETH, BTC, LP tokens) that back the stablecoin. It defines the collateral ratio, liquidation thresholds, and rules for adding or withdrawing assets. This creates the foundational value reserve for the system.

When the stablecoin trades below its peg (e.g., $0.99), the module allows users to swap stablecoins for discounted collateral, burning the stablecoins and reducing supply. When above peg (e.g., $1.01), it mints and sells new stablecoins for a profit. This arbitrage mechanism creates economic incentives that push the price back to the target.

If a user's collateral value falls below the required minimum (collateral ratio), their position becomes eligible for liquidation. Keepers or the protocol itself can liquidate the undercollateralized position, selling the collateral to repay the stablecoin debt, often incurring a liquidation penalty for the user. This protects the system's solvency.

Collateral within the module often generates yield (e.g., staking rewards, lending interest). The module captures this yield, using it to fund protocol operations, buy back and burn governance tokens, or distribute it to stablecoin holders and stakers as a form of protocol-controlled value or rebate.

Key parameters like stability fees, collateral ratios, liquidation penalties, and supported asset types are typically governed by a decentralized autonomous organization (DAO). This allows the system to adapt to market conditions and manage risk through community-led proposals and votes.

The primary reserve asset for most stability modules. These provide direct price anchoring and high liquidity.

• Examples: USDC, USDT, DAI.
• Role: Offer a 1:1 redeemable claim, acting as the first line of defense during a depeg event.

Yield-bearing derivatives of staked native assets (e.g., stETH, rETH).

• Purpose: Generate protocol revenue from staking rewards to fund operations or buybacks.
• Risk: Introduces exposure to the underlying Proof-of-Stake network's slashing and liquidity risks.

Represent ownership in a decentralized exchange liquidity pool (e.g., Uniswap v3 positions).

• Purpose: Generate fee revenue and deepen liquidity for the protocol's own assets.
• Consideration: Subject to impermanent loss and smart contract risk of the underlying DEX.

Tokens that confer voting rights in other DeFi protocols (e.g., AAVE, COMP).

• Strategic Role: Used for protocol-owned liquidity strategies or to influence governance in aligned ecosystems.
• Volatility: Typically more volatile, held for long-term strategic value rather than immediate stability.

Tokenized versions of a blockchain's base currency (e.g., WETH, WBNB, WAVAX).

• Function: Provides a foundational, network-native asset that is essential for gas and core DeFi operations.
• Characteristic: Generally considered a low-risk reserve, though correlated with the network's own economic activity.

Basket tokens representing a curated portfolio of assets (e.g., DeFi Pulse Index - DPI).

• Objective: Risk diversification across a sector, reducing reliance on any single asset's performance.
• Mechanism: Provides broad, passive exposure managed by a separate index methodology.

Assets (e.g., ETH, BTC, or other stablecoins) locked in a smart contract to back the value of a stablecoin. The collateralization ratio determines the system's safety margin.

• Over-collateralized: Requires more collateral value than the stablecoin issued (e.g., DAI).
• Algorithmic: May use dynamic, non-traditional collateral pools or seigniorage shares.

The primary economic force that drives a Stability Module. When the stablecoin's market price deviates from its peg, arbitrageurs are incentivized to profit by:

• Buying below peg and redeeming for higher-value collateral.
• Selling above peg by minting new stablecoins with collateral, increasing supply. This activity pushes the price back toward the target.

A decentralized reservoir of assets within an Automated Market Maker (AMM) that provides the essential trading liquidity for the stablecoin. A deep liquidity pool (e.g., a USDC/DAI pair) is critical for:

• Enabling efficient arbitrage.
• Minimizing slippage during large trades.
• Serving as a secondary price discovery and stabilization layer.

The smart contract function that allows users to exchange a stablecoin for its underlying collateral assets at the peg price. This is the foundational guarantee of value.

• Direct Redemption: 1:1 claim on specific collateral (common in custodial models).
• Algorithmic Redemption: Claims on a basket of assets or future seigniorage, often with a time delay or penalty to discourage bank runs.

The profit generated from creating currency. In algorithmic stability modules, seigniorage refers to the value captured when new stablecoins are minted without direct collateral backing.

• This value is often used to fund treasury reserves or buy back and burn governance tokens.
• It represents a key difference from purely collateral-backed models.

A token (e.g., MKR for MakerDAO) that grants holders voting rights over the Stability Module's critical parameters. Governance typically controls:

• Collateral types and their risk parameters (debt ceilings, liquidation ratios).
• Stability fees (interest rates on minted debt).
• System upgrades and emergency shutdown procedures.