LUSD Peg Stability

How does LUSD Chicken Bonds system improve the LUSD peg stability?

The LUSD Chicken Bonds system accumulates protocol-owned LUSD. When users bond LUSD, it is initially deposited to the Stability Pool (via B.Protocol).
When a user Chickens In their bonded LUSD becomes protocol owned and gets split between the Reserve and the Permanent bucket.
LUSD in the Permanent Bucket can be shifted out of the Stability Pool and into the Curve pool (via the Yearn Curve vault). Funds in Curve can also be shifted back to the Stability Pool.
Shifting funds in or out of the Curve pool changes the Curve LUSD spot price, and Curve is the main venue for LUSD trading.
The system ensures that shifting of funds is only possible when it improves the peg. See shifting conditions.

What are the conditions for shifting LUSD between the Stability Pool and Curve?

The following conditions apply:
  • The shift must always improve the LUSD peg on Curve. That is, it must bring the LUSD spot price closer to 1.0, without crossing the 1.0 boundary. In practice, a slight “buffer zone” is in place with boundaries just above and below 1.0 to ensure at least slight profitability of shifting for the system. The boundaries of the price buffer zone are [x.y].
The graphic below shows viable shifts:
These additional restrictions apply: - Shifting is disabled for an initial bootstrap period 45 days. During this period, all system funds will reside in the Stability Pool (via B.Protocol)
-Shifting funds operate on a ‘commit-shift’ scheme. If you want to shift funds to or from Curve, you must start a shifter countdown (1 hour) after which a time window opens (10 minutes). Shifting is only possible during this time window.

Who can shift system funds between the Stability Pool and Curve?

Anyone. Shifting functionality is permissionless, but subject to restrictions (see below)

What are the incentives for shifting LUSD to or from Curve?

There's no direct financial incentive to call it - the caller will incur gas costs. However, anyone who would benefit from an instant LUSD peg improvement - for example, an LUSD borrower who wants to repay their loan - is incentivized to call it.
For example: if LUSD is above peg, a Liquity borrower seeking to buy LUSD to repay their Trove may decide to first use Chicken Bonds to shift system funds to Curve before buying their LUSD. After the shift, they can buy LUSD at a better price closer to 1.0.