This topic is a little confusing, so Iāll make an example
Parameters:
- sICX value at start $1
- Total bnUSD at start 10,000,000
- Price of sICX drops to $0.90
- 5% Positive Rebalancing threshold
- Rate Limit of 20% Positive Rebalancing is hit
- Total bnUSD when rate limit hits 12,000,000
Leslie, Ron, Tom, and Andy all have 10,000 sICX collateral at the start. They all have a different amount of bnUSD loan.
Leslie:
10,000 sICX collateral ($10,000 value)
1,000 bnUSD loan
10% LTV
Ron:
10,000 sICX collateral ($10,000 value)
2,500 bnUSD loan
25% LTV
Tom:
10,000 sICX collateral ($10,000 value)
3,500 bnUSD loan
35% LTV
Andy:
10,000 sICX collateral ($10,000 value)
4,500 bnUSD loan
45% LTV
- Price of sICX drops to $0.90
- bnUSD is valued at $1.06
- Positive Rebalancing is happening until the rate limit of 20% is reached, No more Positive rebalancing until the next day
- 2,000,000 bnUSD is minted by borrowers and used to buy sICX that is added to their collateral.
- sICX price for rebalancing is 0.86 bnUSD (as it is bought with overvalued bnUSD, so the price to borrowers is lower than the market price of $0.90)
Leslie:
10,232.55 sICX collateral ($9,209.30 value)
1,200 bnUSD loan
13.03% LTV
Ron:
10,290.70 sICX collateral ($9,261.63 value)
2,750 bnUSD loan
28.69% LTV
Tom:
10,406.98 sICX collateral ($9,366.28 value)
3,850 bnUSD loan
41.10% LTV
Andy:
10,523.26 sICX collateral ($9,470.93 value)
4,950 bnUSD loan
52.27% LTV
Edit: Now, imagine this happens in the last hour of the day, and during the next hour, the first hour of the next day, positive rebalancing continues.
-
Price of sICX drops to $0.80
-
bnUSD is valued at $1.06
-
Positive Rebalancing is happening until the rate limit of 20% is reached, No more Positive rebalancing until the next day
-
2,400,000 bnUSD is minted by borrowers and used to buy sICX that is added to their collateral.
-
sICX price for rebalancing is 0.86 bnUSD (as it is bought with overvalued bnUSD, so the price to borrowers is lower than the market price of $0.90) (for day 2; I kept the rebalancing price high as the price of sICX was dropping, to create harsher effect)
Leslie:
10,511.62 sICX collateral ($8,409.30 value)
1,440 bnUSD loan
17.12% LTV
Ron:
10,930.23 sICX collateral ($8,744.19 value)
3,300 bnUSD loan
37.74% LTV
Tom:
11,069.18 sICX collateral ($8,855.34 value)
4,620 bnUSD loan
52.17% LTV
Andy:
11,374.66 sICX collateral ($9,099.73 value)
5,940 bnUSD loan
65.28% LTV
In the Perfect Storm scenario, of Rate Limited Positive rebalancing happening in a short time (at the end of day 1 and start of day 2), the change on LTV for the four borrowers looks like this:
Leslie:
10% to 17.12% LTV
Ron:
25% to 37.74% LTV
Tom:
35% to 52.17% LTV
Andy:
45% to 65.28% LTV
Discussion Points:
- Is 20% the right amount for rate limiting?
- Higher, lower?
- Going too low might hurt the peg (and value as a stable product) of bnUSD.
- Going too high might not provide any support for borrowers.
- With larger price drops, the change in LTV is exasperated.