Note: This article is not financial advice. Hubble Protocol does not endorse any of the tokens or platforms mentioned in this article.
Key Takeaways
- Hubble Protocol has implemented a PSM to help maintain USDH's peg.
- Users can participate in risk-free arbitrage between USDH and USDC using the PSM.
- Hubble focuses on strengthening USDH's peg to increase use cases for the stablecoin in DeFi.
Hubble is excited to announce the launch of the Peg Stability Module (PSM), a mechanic that will play a part in keeping USDH pegged 1:1 with the US Dollar.
The USDH stablecoin is Hubble’s core offering. So, for Hubble to continue its growth in Solana DeFi and beyond, USDH has to remain pegged as tight as possible to the US Dollar.
What is the PSM?
The concept of a Peg Stability Module was first introduced on the MakerDAO forum in November 2020, and it went live a month later. The idea was simple: make DAI, the Maker stablecoin, tradable 1:1 with another stablecoin directly via a Maker smart contract.
Since Maker’s PSM was implemented in December 2020, the DAI peg has been remarkably stable:
The success of Maker’s PSM in maintaining the DAI peg proves that it is an effective piece of stablecoin infrastructure, warranting its usage for USDH as well. Thus, Hubble’s PSM is built according to the same model.
Initially, the Hubble PSM will be an on-platform, 1:1 swap between USDH and USDC. Implementing this mechanism on-platform allows arbitrageurs to bypass market slippage while paying a constant 0% fee for minting USDH via USDC, and a 0.5% fee for burning USDH to redeem USDC.
How the PSM Enables Easier Arbitrage
USDH is soft-pegged to the US dollar. This means market forces can impact USDH's price, pushing it below or above its 1:1 peg. When demand for USDH increases, the price of USDH can rise above $1. Because USDH is purposed as a stablecoin, a rise in price needs to be neutralized.
This is done via arbitrage, for example, swapping USDH to USDC between different exchanges where the USDH-USDC price ratio differs. However, swapping in this manner will incur slippage on every trade, which means that large amounts need to be swapped for arbitrage to become profitable.
This is where the PSM comes into play. Instead of incurring slippage on every trade, the PSM allows arbitrageurs to bring USDH to Hubble to withdraw USDC slippage-free, or vice versa, depositing USDC to mint USDH, depending on whether USDH is below or above its peg. This makes arbitrage frictionless and includes a number of other utilities.
How the PSM Provides Utility to Hubble Protocol and Its Users
As mentioned, the PSM has various utilities, all of which tie into ultimately ensuring USDH price stability. First, and significantly, the PSM allows for above and below-peg arbitrage.
Above-Peg Arbitrage:
Say USDH is trading at a premium of $1.05. A user can acquire USDH and swap it for USDC on the market. If a user acquires 100 USDH at $1.05, they have $105 in market value. From here, they can get 105 USDC, assuming USDC is trading at $1.
Now, they can bring this USDC to Hubble and mint USDH 1:1, thus ending up with 105 USDH, whereas they started with 100 USDH. If they repeat this arbitrage, they can continue collecting the difference.
So how does this impact the USDH peg? Because the arbitrage entails swapping from USDH to USDC, there is increased “selling pressure” on USDH. Each time USDH is sold for USDC, the circulating supply of USDH increases and pushes the USDH price back to $1.
Below-Peg Arbitrage:
When USDH is below peg, the process is much the same, but instead of starting with USDH, the arbitrageur starts with USDC. Any user can swap USDC for USDH on an exchange, and then they can bring this USDH to the Hubble PSM to exchange it for USDC.
For example, if USDH is trading at $0.98, then 1 USDC can be swapped for 1.02 USDH on the market and exchanged for $1.02 worth of USDC (minus the 0.5% fee) from the PSM. The increased buying pressure on USDH, and its decreased supply on the market, lead to the USDH price rising back to $1.
USDC Reserve Build-Up
Second, when USDH is trading above its 1:1 peg, arbitrageurs will deposit USDC, building up a USDC reserve for the protocol, which ties into the pegging mechanism itself.
When USDH is above peg, users can swap it for USDC on the market and deposit this USDC into Hubble's PSM, thus minting USDH. This USDC is then kept as a reserve within the PSM's smart contract.
Why is this significant? Because this is what allows for below-peg arbitrage. When USDH is below peg, users can bring it to the PSM and redeem USDC from this reserve.
Naturally, as USDH fluctuates above and below the 1:1 peg, the reserve fills up and “naturally unwinds” depending on USDH price. Thus, the USDC reserve is integral to the arbitrage mechanism.
Confidence in USDH
Third, when USDH maintains a tighter peg, it establishes confidence in Hubble and USDH as a stablecoin with multiple use cases.
As was outlined in the official PSM Forum Proposal in April, there is a direct correlation between a stablecoin’s peg stability and that stablecoin's utility in DeFi. Few users and protocols are interested in a pseudo-stable stablecoin that drifts everywhere.
The Risks of Having a PSM
Besides smart contract risk, the PSM mitigates market risks besides those associated with the stablecoins within the PSM model. In this case, for the Hubble PSM, this risk will only be USDC for the foreseeable future.
What can potentially happen, and why the risk of the PSM is directly related to the stablecoin that it takes in, is that a large amount of USDH can become “backed by” USDC.
There is a centralization risk involved with USDC, as Circle has the ability to blacklist, or “freeze” USDC accounts. Hubble accepts the measure of risk that this entails, though, at present, it is evident that USDC makes the most sense.
And, of course, Hubble will consistently reevaluate this decision as the protocol moves forward. Proposals on the Hubble Forum regarding the PSM will be evaluated earnestly, and discourse around the PSM, in general, is welcome.
How the PSM Has Been Implemented
After its official presentation to the community via a Forum Proposal in April 2022, the PSM was set to go live in May.
However, the official launch was delayed in favour of conducting further testing, as well as submitting the code for a security audit. The PSM was launched in private beta with USDC as the deposit token, and the protocol has been testing the arbitrage mechanism since then.
Hubble’s PSM has now been live for over two months, and it works as expected. The USDH peg has been defended on several occasions via the PSM, both lowering the market value of USDH back to $1.00 and raising it after the Crema hack dumped an unusual amount of USDH on the market.
At present, around 2.6 million USDH currently in circulation have been minted via the PSM, meaning that the PSM has a USDC reserve of 2.6 million.
As an additional security measure, maximum withdrawal limits have been added to the PSM as a line of defense should an exploiter attempt an infinite mint attack.
Finally, the PSM has a 0.5% fee on burning USDH to withdraw USDC and a 0% fee on depositing USDC to mint USDH.
Conclusion
The Peg Stability Module is now live via the PSM page in Hubble's dApp and can be used by anyone. Hubble is confident that the PSM will serve its utility in strengthening the USDH peg in the long term, leading to greater confidence in the protocol and increased use cases for USDH in DeFi.
That being said, the PSM will not be Hubble’s only peg defense mechanism.
Keep in Touch
