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Price Stability

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Last updated 1 year ago

How does TAL closely follow the price of USD?

The ability to redeem TAL for ckBTC at face value (i.e. 1 TAL for $1 of ckBTC) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities. We call these "hard peg mechanisms" since they are based on direct processes.

TAL also benefits from less direct mechanisms for USD parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since Liquity treats TAL as being equal to USD, parity between the two is an implied equilibrium state of the protocol. Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying TAL is below $1), so too does the baseRate — making borrowing less attractive which keeps new TAL from hitting the market and driving the price below $1.

Read more about the price stability of the liquity protocol with by Robert Lauko.

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