Mechanism

The protocol implements a very simple mechanism to operate. This mechanism provides decentralization & excellent price stability for DSU.

Reserve

The reserve represents the protocol managed assets with a chosen custodian. In its current iteration EmptySet utilizes Compound Finance to custody the assets. This provides two benefits: relatively low-risk yield that accrues back to the protocol & assets are held in a large pool of assets. However, in response to emerging risks the protocol may vote to upgrade itself to replace the custodian of the reserve assets.

Mint

Users are able to come to the protocol with the elected asset, in this case USDC, and mint DSU. The USDC will be deposited into the custodian alongside the protocol's reserve assets. In return for the USDC a token (cUSDC) is held by the reserve.

Redeem

Any user with DSU is able to come to the protocol and redeem it for the underlying reserve asset. When this occurs, the reserve will return cUSDC equal to the face value of the DSU token to the custodian and receive back the underlying USDC. The USDC is sent to the user & the DSU is burned.

Benefits

The simplicity of the mechanism provides a few of benefits:

Perfect Price Arbitrage - DSU will have excellent stability as arbitrageurs are able to utilize EmptySet's Mint/Redeem facilities to maintain peg in cases of large slippage between USDC & DSU during trades.

Decentralization - Utilizing a decentralized custodian to manage reserve assets reduces the centralization risks associated with some stablecoins.

Sustainability - Using a decentralized lender to custody assets provides sustainable yield to the protocol without requiring dillutive tokenomics.

Failsafe

Reserve Ratio

The reserve ratio is the ratio of the USDC-denominated value of the reserve over the currently issued DSU. During normal operation this ratio will equal or exceed 100%.

In extenuating circumstances like an exploit or a bug the ratio may drop below 100% . In this case the redemption price is pro-rated such that redeeming earlier does not guarantee an optimal exit result. This prevents bank runs in times of uncertainty to allow the protocol time to recover if possible.

Empty Set Share

In addition to acting as a seignorage share and governance token, ESS can backstop the reserve for the protocol.‌ At any time, governance may vote to mint and sell ESS to raise RR if it drops below its expected operating value.