Stability

Reserve

We will use a protocol reserve as our primary stability mechanism.

• ESD can always be minted from the reserve for 1 USDC

• ESD can always be burned in the reserve for RR USDC, where RR is the current reserve ratio capped at 1.00

Hard Price Range

This creates a protocol-enforced price range of 1.00 < Price < RR for the stablecoin. At launch the RR will be 1.00 so it will be perfectly arbitrage-able, however the goal of this model is to widen this range slowly over time as we prove out our ancillary stability mechanisms.

Mitigating Bank Runs

By setting our "rage quit" price equivalent to the reserve ratio we eliminate the incentive to redeem early in the event of a bank run. Coupled with our ancillary stability mechanisms this means that the system should be able to weather a temporary period of under-collateralization without sparking a death spiral event.

Role of ESDS

ESDS acts as a seignorage share, governance token, and backstop collateral for the protocol.

ESDS can be purchased by the reserve and burned when RR is above target as a result of:

• Yield from reserve management

• Growth from reserve investments

• Revenue from ESD issuance after the target RR has been dropped below 1.00

ESDS can be minted by the reserve and sold when RR is below target.

Both of these processes will be manually executed via governance to start, with the goal of automating these processes as we gather more experimental data on this model.

Stabilizer

We will use a stability pool as our first experimental ancillary stability mechanism. This pool will function similar to a savings account with a floating interest rate to incentivize or disincentivize users to temporarily taking ESD out of circulation.

Yield, similar to coupon premiums, will be determined over a curve and is incremented during contraction and decremented during expansion, with a maximum to curb runaway inflation. Since this yield is guaranteed and immediately redeemable, this should require much lower rates in the 0-25% APY range.

Role of Reserve

Interest paid out to the Stabilizer is accounted for and settled by the reserve by purchasing and burning an equivalent amount of ESD on the market.

Safely Experimenting

To enable a safe experimentation environment once we’ve bootstrapped, governance can artificially lower the redemption price using an EXIT_TAX to create a non-zero hard price range. This enables safe efficacy testing for various ancillary stability mechanisms while the system is still over-collateralized and can easily rollback.