Thread by @danielesesta

1/ A little bit of context on this idea about a PSM for $MIM with $UST . Let’s start on the purpose of a PSM or Peg Stability Module. A Thread: 👇

2/ PSM is designed as a smart contract that allows always a 1:1 swap between two stablecoins and is usually implemented between a non-fiat backed stable and a centralised fiat backed one ( DAI-USDC example ) . The idea is to create a swap bath in case of depeg that can naturally

3/ generate arbitrage and stabilise a depeg scenario. So far $MIM has been very strong on the peg with the dollar and the system is working very well. There is tho one hedge case that is interesting and unique to the protocol during a strong downside / liquidation event:

4/ 1 $MIM for the borrowing/lending cauldron is always worth 1$ Chainlink, this means that if $MIM trades higher than 1 dollar each basis point it trades higher lowers the value the liquidator gets as fee for doing its job. The system is made like this to generate

5/ Incentives for people to open/close positions into CDPs and naturally arbitrage the $MIM@peg in within the system, but can pose a risk into a large liquidations event where all goes down and $MIM ironically goes up !

6/ $UST on the other hand is built differently. In case of chains of liquidation $LUNA can trade lower and lower and spiral down the peg, even tho it has been very good recently on holding it.

7/ I guess you’re starting to see the big picture 🤜🏾🤛🏾 wen the market turns bad down $UST tends to go lower than 1$ and $MIM higher to perform the liquidations happening on the protocol.

8/ If we had than a $UST - $MIM PSM Abracadabra can backstop the peg of $UST from falling and viceversa $UST brings down the price of a rising $MIM

9/ now yes! Anon you tell me you madman this is a massive risk for Abracadabra, what happens if $MIM gets dragged down with $UST in case of strong depeg? Well here kicks in Insurance 😎

10/ subscribing peg insurance on the $UST inside the PSM we are also insuring the peg of $MIM indirectly and avoid any risk. What do you guys think. Looking for comments and an open discussion on this .