Stabilization Mechanisms

VBUSD collateralization is maintained by initially splitting funds into half spot wstETH and half 1x short and reinitializing when needed. Although this theoretically maintains the backing of VBUSD regardless of ETH price action, it is occasionally possible for the collateralization to come up short for a few different reasons. The protocol has multiple stabilization mechanisms to counteract this, ensuring that the collateralization of VBUSD remains full.

Possible Reasons for Destabilization:

• Funding Fees: We expect the treasury to profit from the funding fees on its ETH short position on GMX, as shorts are usually paid funding fees by longs (because the short side is usually less popular). However, if the opposite is temporarily true, the Sinking Fund can cover these fees.

• GMX Position Open Fees: GMX charges a flat percentage (0.05%-0.07%) on the notional size of all leveraged crypto positions. However, this fee is covered by the position opening and redemption fees.

• Slippage: GMX 2.0 calculates asset price change based on the executed order size. The trader pays for slippage accordingly. Furthermore, the protocol will have to swap ETH for wstETH, which will also incur fees. Users will pay this fee on deposit, but the protocol may occasionally have to engage in rebalancing swaps.

• Settlement: The requested order price may not necessarily reflect the settlement price. Any difference could be paid for by the protocol.

• Fees from Reinitialization: The protocol reinitializes its spot and short holdings when the short is within 30% of liquidation. This action incurs position open fees and slippage. It also introduces a delay between position closing and opening because of the GMX keeper system.

Stabilization Methods (in priority order):

1. The Sinking Fund can be used

2. wVBUSD can be slashed from the wVBUSD Safety Pool

3. GoVBUSD can be slashed from the GoVBUSD Safety Pool and sold

4. GoVBUSD can be minted and sold - the total minted within 1 week can't exceed 5% of the supply at the beginning of that week

5. The collateral reserves then shrink, resulting in fractional collateralization

Maintaining full collateralization of the VBUSD Stablecoin is the protocol's first priority. Embedded Yield is given to users and the team when VBUSD is fully collateralized!