Imbalance Protections
Last updated
Last updated
To ensure the stability of the and prevent significant imbalances, several protection mechanisms are activated when the imbalance between the of longs and the balance exceeds certain thresholds. These protections include temporary restrictions on key user actions, such as and the , as well as opening or closing . In synergy with the and the , these mechanisms ensure the continuous and automatic rebalancing of the USDN protocol in the event of prolonged imbalance.
The dip accumulator is a protection mechanism against sharp drops in long trading expo resulting from liquidations. See the section for more details.
The funding rate serves as an incentive to add assets in the side of the protocol that is underrepresented or remove assets from the other side. See the section for more details.
The illustration below shows the 4 main actions of the protocol.
Depending on the observed level of imbalance, some of these actions are forbidden. Two main thresholds are used to trigger these protective measures: a slight imbalance (e.g. 5%) and a significant imbalance (e.g. 6%).
Slight imbalance: When there is an excess of long positions compared to the vault balance, the protocol prevents any new opening of long positions, which would exacerbate the imbalance.
Significant imbalance: If the imbalance continues to grow beyond the second threshold, in addition to preventing new long positions, the protocol also suspends vault withdrawals. This prevents a liquidity outflow from the vault, which would further exacerbate the imbalance.
Slight imbalance: When there is an excess of assets in the vault, the minting of new USDN tokens is temporarily prevented, which would increase the imbalance.
Significant imbalance: If the gap between the vault and the trading exposure of longs continues to increase, the closing of long positions is additionally restricted. By prohibiting the closing of long positions, we prevent the trading exposure from shrinking further, which would worsen the protocol's imbalance.
These restrictions are temporary and last only as long as necessary for the protocol's imbalance to fall below the defined thresholds. As soon as the imbalance falls back below the thresholds, all operations become fully available again without limitations.
Since multiple mechanisms are in place to proactively balance the protocol, these restrictions are activated only in extremely rare cases and solely to protect the system. Moreover, it is important to understand that when these restrictions occur, users who are "blocked" often benefit significantly:
If closing long positions is restricted: It indicates an excess of liquidity in the vault, causing the funding rate to become strongly negative, providing a boosted yield for long positions that remain open.
These protective measures help maintain a healthy and balanced protocol, ensuring a better experience for all users in the long run.
These measures are not designed to restrict users but to ensure the stability of the USDN protocol and create a healthy and sustainable on-chain environment for all participants. As the (TVL) in the protocol evolves, these threshold values can get updated by the to ensure that users don't get unnecessarily blocked and to optimize the security of the system.
If vault withdrawals are suspended: It means there is a high demand for long positions, leading to a highly positive funding rate, which results in increased for USDN token holders.
