⚖️Hyper-collateralization

Hyper-collateralization

USDO dynamically changes required collateralization ratio based on the price of the backing asset. As its price increases, a higher collateralization rate is required to buffer against sudden price drops.

Note that this page documents our recommended default values, and is not necessarily what is in use on any launched protocol (such as USDO). The intercept and slope in the scaling collateralization formula below can be set and changed by the owner/deployer of the contract.

For the current live USDO scaling collateralization formula and sample table, refer to the USDO Live Collateralization Settings page.

The USDO smart contract launched with a required minimum collateralization of 3.5x of the underlying asset, which would allow for approximately a 71.4% drop in the underlying asset’s value in order for the underlying asset to no longer be capable of supporting all dollar-pegged token claims (or, a de-peg event). In the case of Dogecoin, this would require the current price of Dogecoin ($0.08 USD) to drop to $0.023 USD.

As the value of the underlying asset increases, the USDO smart contract will automatically recalculate the level of collateralization needed, linearly increasing to requiring a 20x collateralization in the event of Dogecoin returning to its prior all-time-high of approximately $0.70, allowing for a 95% retrace in price while still remaining fully collateralized.

Scaling Collateralization Formula

From the above baselines, we can derive the following linearly scaling collateralization formula:

Collateralization Rate = m × Underlying Token Value + b

Where m is the slope of the line, and b is the intercept.

In our case of intended hyper-collateralization, m would be valued at 2661.29, while b would be valued at 137.10. With both m and b known, we can rely on the USDO smart contract to determine our required liquidity reserves, and the acceptable level asset depreciation from these levels. This logic can be tested with the below python snippet.

def calculate_collateralization(token_value): slope = 2661.29 intercept = 137.10 collateral_rate = slope * token_value + intercept acceptable_drop = 1 - (1 / (collateral_rate / 100)) return collateral_rate, acceptable_drop token_value = 0.70 collateral_rate, acceptable_drop = calculate_collateralization(token_value) print(f"Collateralization rate for ${token_value} is {collateral_rate}%, " f"acceptable drop: {acceptable_drop * 100}%")

Python implementation of the scaling hyper-collateralization algorithm

Scaled Collateralization Table

The following table outlines sample token prices and the respective required collateralization, as well as the price depreciation that it can support while remaining fully collateralized.

Token Price	Collateralization Required	Sustainable Depreciation
$0.08	350.00%	71.43%
$0.10	403.23%	75.20%
$0.12	456.45%	78.09%
$0.14	509.68%	80.38%
$0.16	562.91%	82.24%
$0.18	616.13%	83.77%
$0.20	669.36%	85.06%
$0.30	935.49%	89.31%
$0.40	1201.62%	91.68%
$0.50	1467.74%	93.19%
$0.60	1733.87%	94.23%
$0.70	2000.00%	95.00%
$1.00	2798.39%	96.43%

Due to the increasing amounts of collateralization required, we propose that collateralization is limited to 2000% (20x the underlying asset), allowing for a maximum sustainable depreciation of 95% of the underlying value. While extremely high, this protects against market peak draw-down.

Staking Incentive

Minting and burning of USDO tokens are handled in a decentralized fashion, where users can swap their underlying asset (in this case, wrapped Dogecoin) for USDO tokens, respective to the current value of Dogecoin as determined via pricing oracles.

Any mint or burn command will absorb a 0.025% fee, taken from the underlying asset (wrapped Dogecoin), of which 90% of this fee is redistributed to all staked parties, proportional to their staked amount of collateral. The remaining 10% is awarded to the heartbeat contract, or wallet in the case of a centralized pricing oracle setup.

Staking is a standalone process of swapping wrapped Dogecoin for USDO; with stakers solely providing wrapped Dogecoin, and then receiving any rewards due from any mint or burn command carried out while they remain in the pool.

Token swaps will contribute towards the collateralization of USDO, but only at their given 1:1 (sans fees) rate. Minting new USDO is only possible when the staking pool is above its target collateralization level.

Collateralized Functionality Limits

With the given scaling collateralization parameters known, USDO operates with a primary motive of protecting holders of the USDO token.

In the event of collateralization dropping below the required levels, the following functionality will be disabled:

Unstaking Participants may not unstake from single-staking services under the USDO contract until the collateralization levels have recovered above any given minimums as determined by the heartbeat service.

Minting USDO Tokens may not be minted in the event of collateralization falling below their minimum levels.

Burning/Redemptions Burning/redeeming USDO tokens will increase to a cost of 1% in fees in the event of the USDO contract becoming undercollateralized. This fee increases to 5% if the collateralization falls below half of its intended target.

This will ensure that in a worst case scenario, the USDO token will remain redeemable for 95% of its intended value.