Compensation Ratio
The system's equilibrium states are defined by the compensation ratio
Liquidity provided to the protocol would become a liability. A higher compensation ratio indicates a lower default risk. The compensation ratio is an important parameter in our protocol since it needs to be maintained above a certain level to avoid default.
If compensation ratio < 1, the token is under-compensated. And if compensation ratio > 1, it is over-compensated.
The protocol's liquidity would become a liability. A reduced default risk is indicated by a larger compensation ratio. The compensation ratio is a critical element in our protocol since it must be kept over a particular threshold to avoid default.
The token is under-compensated if the compensation ratio is less than one. And if the compensation ratio is greater than one, the area is overcompensated.
Asset Name | Asset | Liability | Compensation ratio |
|---|---|---|---|
USDC | 110 | 100 | c=1.1 |
USDT | 90 | 100 | c=0.9 |
DAI | 121 | 100 | c=1.21 |
When a swap occurs in Cashmere, the swap-from token's liquidity (in the system pool) increases, while the swap-to token's liquidity (in the system pool) falls.
Cashmere supports convergence toward equilibrium while penalizing deviation from it. As a result, price slippage has been defined as a function of the compensation ratio.
The higher the compensation ratio, the greater the CSM emission is to the stablecoin account.
Compensation Ratio System Diagram
Cashmere users can now earn more CSM from their staked assets thanks to the Interest Rate Model. Through liquidity mining incentives, this improvement will automate the rebalancing of liquidity pools.
In our stableswap, the compensation ratio is a crucial idea. The basic premise is that the higher the compensation ratio, the more CSM is emitted to the stablecoin account. The Interest Rate Model guards against the manipulation of compensation ratios. The majority of protocols use arbitrage operations to rebalance their pools. Based on CSM emission, we've devised a new method of rebalancing the pool (interest rate of stablecoins). The new concept encourages pool balance, and all customers may expect consistent yields on their investments.
The natural market movement provides an opportunity to increase the amount of CSM you receive from your staked assets. This encourages existing LPs to reallocate their liquidity while restoring the compensation percentages of different stablecoin accounts to 1.
As an example, consider the following diagram. You staked $20,000 USN on Cashmere, assuming that USN has a lower compensation ratio than USDT at the time. The APR for USDT will be greater than for USN. To reiterate, the greater the APR, the higher the compensation ratio.
By reallocating their deposits, liquidity providers can pursue higher rates. In this situation, you could unstake your USN, exchange it for USDT, and then stake that USDT on Cashmere. Congratulations! You can get a better return on your staked assets right now.
Interest Rate Model Diagram
LPs are rewarded for maintaining equilibrium. The asset levels of USN and USDT have not changed, as their respective amounts have not been altered. However, unstaking reduces USN's liability by $20K, whilst staking raises USDT's liability by $20K. The compensation ratio of USN rises as a result of this market action, and our LPs help rebalance the pool in this way.