I agree divergence protocol is a defense mechanism and stable coin do not necessarily need to be $1 for dapps to work.
The point of using collateralize level over a peg is that funds used to collateralize can be seen on chain and there’s actually something backing USTC, the fund used to back USTC can be used to buyback USTC at a discount ( e.g. $0.20 ) vs the assets used to back a USTC ( e.g. $0.25 ) that holder of USTC can redeem when trading below collateralized value.
I disagree that going for a collateralization level approach will lead to people dum ping USTC. The current state of USTC is without collateral and most forces that held the price up is people’s hope / speculation for USTC to build back to $1, these type of “premium” is hard to quantify and the more steady approach would be building collateral for collateralizing USTC from ZERO ( $0, as currently there is no fund set aside as USTC collateral fund ), funds that can be quantify and checked on chain, transparent for everyone to see the funds are there to back USTC, and a solid support where collateral funds can be the buyer in the market, instead of a stated peg relying on market demand alone for sufficient buyers.
The proposed capital is from CP, we are not going anywhere if we cannot find a way to increase funds we can spend in a sustainable way. Figures in proposal is for illustration and discussion purpose, amount for initial and continuous contribution is up to community to decide how much are we risking, starting small / large will still yield the same %.
Continuous contribution will maximize compounding effect to earn CP more interest but without this, funds put in liquidity pool will still be able to earn the swap fees and take advantage of volatile price movements of LUNC & USTC → providing more arbitrage opportunities to traders.
My proposal do not use CP actively to incentivize ( subsidize ) traders to trade, but rather passively by price difference for LUNC & USTC on CEXs vs liquidity pools on chain.
You can say the cost for this would be the risk CP take on for providing the liquidity in liquidity pools and price movement differences between LUNC & USTC that incur impermanent loss ( gaining less compared to holding neglecting swap fees earned ). Please refer below quote for details:
In the case of price moving higher and lower and return to where it is at, currently we will gain nothing and still have the same amount of asset, while putting in liquidity pool will earn you the swap fees during these times and the same amount of asset will still be here.
Minimizing slippage also have the pros of adding liquidity on chain, which have the potential to increase transactions on chain → increasing the tax proceed.
CP will shrink by necessary daily operation and infrastructure expenses, that’s why my proposal suggested a way to bring in a sustainable income stream, in search of more income for CP.
The main risk for providing liquidity in liquidity pool is that the assets ( LUNC & USTC ) put in liquidity pool decreases in price in the long run ( 3+ years ), which we assumed the asset will not decrease in price over time as more buildings and utilities coming back. Therefore this should not be a concern for CP to be a long term liquidity provider.
I think divergence protocol can work without CEX’s support IF we have sufficient collateral fully collateralizing USTC, which holders of USTC can redeem their USTC for collateral, the redeemed USTC will be burned and removed from circulation, causing no dilution to collateral per USTC. Although then divergence protocol will not be needed for defending the peg as the additional demand for USTC created by the arbitrage opportunity ( Discounted USTC vs underlying collateral backing USTC ) will give market participants incentive to bring itself back to peg. It will become more like a safeguard feature when price movement exceed certain movement.
And we are back to square one of earning the funds to collateralize USTC. Should the focus be put on earning and accumulating funds for collateralizing USTC than providing a floor for USTC be more effective for repeging USTC?
I understand dapps need a stable USTC to work with, but what divergence protocol provides is a false stability without sufficient collateral and when extreme market condition hits, insufficient buyers for USTC will get sellers pile up at peg and market confidence for flowing in and out USTC freely at peg will be lost, which I do not think the protocol can buy enough time for collateral to build up in time to avoid this situation given that no one will be willing to get cut and trade below stated peg at normal times.