Protocol Mechanics
How does the protocol maintain stablecoin peg?
How does the protocol maintain stablecoin peg?
Monolith uses a multi-layered approach to maintain peg stability:
- Peg Stability Module (PSM): Automated buy/sell mechanisms that add/remove liquidity during volatility
- Dynamic Interest Rates: Higher rates during high utilization discourage excessive borrowing
- Redemption Mechanisms: Users can redeem stablecoins for collateral at market rates
- Arbitrage Incentives: Price discrepancies create profit opportunities for arbitrageurs
What is the difference between paid and free debt?
What is the difference between paid and free debt?
Paid Debt:
- Accrues interest over time based on utilization
- Requires active management and monitoring
- Higher potential returns through leveraged positions
- Subject to liquidation risk
- No interest accrual
- Lower maintenance requirements
- More conservative risk profile
- Limited by available free debt capacity
How are interest rates determined?
How are interest rates determined?
Interest rates are calculated dynamically using our InterestModel contract:
- Base Rate: Minimum borrowing rate (typically 0%)
- Utilization Multiplier: Rate increases with protocol utilization
- Kink Point: Accelerated rate increases above 80% utilization
- Time-based: Rates are continuously updated
What is the collateral factor?
What is the collateral factor?
The collateral factor determines how much you can borrow against your collateral:
- Typically ranges from 70-90% (borrow 70-90% of collateral value)
- Lower factors = more conservative (less borrowing power)
- Higher factors = more leverage (higher risk)
- Factors adjust based on asset volatility and protocol health
How do liquidations work?
How do liquidations work?
Liquidations protect the protocol by closing undercollateralized positions:
- Trigger: Position falls below liquidation threshold (typically 110-120% collateralization)
- Liquidator: Any user can liquidate the position
- Incentive: Liquidators receive a bonus (typically 5-10%) on the collateral they repay
- Process: Debt is repaid, remaining collateral distributed to liquidator and borrower
What is the immutability deadline?
What is the immutability deadline?
The immutability deadline is a time-lock mechanism that prevents certain protocol changes after a set period:
- Purpose: Ensures protocol stability and user trust
- Timeline: Typically 6-12 months from deployment
- Effect: Core parameters become immutable
- Governance: Only emergency changes allowed after deadline
How does the redemption mechanism work?
How does the redemption mechanism work?
Users can redeem stablecoins for underlying collateral:
- Redemption Rate: Based on protocol’s debt-to-collateral ratio
- Fee: Small redemption fee (typically 0.03%)
- Process: Burn stablecoins, receive proportional collateral
- Purpose: Provides exit liquidity and peg stability
What is bad debt socialization?
What is bad debt socialization?
How does the protocol handle price feeds?
How does the protocol handle price feeds?
Price feeds are critical for accurate valuations:
- Chainlink Oracles: Primary price source for major assets
- Fallback Mechanisms: Multiple oracle sources for redundancy
- Staleness Checks: Automatic deactivation during prolonged outages
- Update Frequency: Real-time updates with configurable heartbeats
What are the protocol fees?
What are the protocol fees?
Multiple fee types exist:
- Borrowing Fees: Interest paid on debt positions
- Redemption Fees: Small fee for redeeming stablecoins
- PSM Fees: Fees for buying/selling through the stability module
- Protocol Fees: Portion of interest retained by protocol (typically 10%)