Feb 9, 2021

4 min read

SP2 User Guide: Shut the Door Behind You

The basic design of SP2 revolves around the notion of allowing people to buy coupons (d-bills) when Debase goes into a contraction (Epoch TWAP below the stability range; <0.95 under current settings, Epoch time: 24 hours) so they can earn a premium in Debase on those coupons bought when Debase into an expansion (Epoch TWAP > 1.05). By buying d-bills Debase holders exchange their DEBASE for coupons at a ratio of 1:1; these Debases are sent to the reward contract. Traditional coupon systems believe that the exchanged Debase is essentially taken out of circulation and if enough Debase tokens are taken out of circulation, then in theory the price of Debase should recover, but this alone may not be enough.

SP2 adds caveats to this system (see note at end) by capping the potential coupon premium rewards that can be earned in relation to the previous expansions (expansions are series of positive rebases) that happened. If during an expansion of 5 days Debase’s supply had expanded by 5%, after which it went into an contraction, then the potential reward that can be earned will be 5% of the circulating supply at the time that the contraction begins. By capping the rewards it can be seen that now coupons buyers will be competing with other Debase buyers for the rewards. As more buyers mean the rewards of previous coupon buyers will be diluted. So it’s within the user’s interest to buy coupons when the price of Debase is below peg and then push the price upwards above peg. Since coupons can only be bought when the price of Debase is below peg. In doing so they can shut the door on future coupon buyers and thus having a greater share of the rewards. This disincentivizes a long time being spent under the peg, which is a destabilizing property that leads to failure of coupon systems.

With this is mind Sp2 works around two TWAP oracles. One is the main oracle used to contract or expand DEBASE’s supply currently after every 24 hours. This oracle tells SP2 whether DEBASE has entered an expansion or contraction cycle. When SP2 enters into a contraction then the second oracle comes into play. Its job is to calculate DEBASE’s average price over a much shorter period (at current setting: 4 hours) and if the price is below DEBASE’s peg it allows coupons to be bought. Otherwise, it restricts coupon buying if the price is above peg until the next time the average price can update which would decide if coupons can be bought.

Log Curve with a peak around $1.2Dai

Finally, we enter into an expansion cycle when the main TWAP > 1.05 . Coupon buyers automatically start earning DEBASE just like how they would with a normal staking pool. However as mentioned in an earlier post, the coupon to DEBASE ratio is give out in relation to log normal curves like the one shown above. The closer the TWAP price of the main oracle is to the peak of the curve, the higher the ratio is (capped at 1). In other words, at the peak of the curve 100% of the reward can be earned while at lower curve values smaller % of the reward will be earned (Current setting of peak is at DEBASE price of 1.2 DAI).

Similarly, during the expansion cycle if say during over a period of 1 day the supply expanded by 2%. It would also be scaled downwards in relation to where the price of debase is on the log normal curve. So at the peak, the maximum 2% expansion will be accounted for (i.e. added to next contraction’s reward pot) while at other values the expansion percentage will be scaled downwards to smaller values.

Thus, SP2 design works around the idea of capping rewards in relation to Debase’s expansion, making users compete with other users for said rewards and giving out the maximum of those rewards at log normal curve peaks in order to stabilize the price action of Debase within a certain range.

Also, it must be kept in mind that rewards are only given out when expansions are happening and revoked otherwise. If rewards are given out over a period of 5 days but on the 4 day we go into a neutral or negative rebase. Then rewards for day 4 and day 5 will be revoked by the system. You will also be only able to claim any unclaimed rewards on next expansion.

Finally it should be noted that, this is ultimately a system built on reflexivity and in of itself is not the solution of ultimately creating stability, but rather to grow the DEBASE economy in a relatively predictable manner, till mechanisms of external stabilization kick in. On that note, stay tuned for SP4 and DM88 V2 pools.

SP2 designed By: jusTaPunkk, anon18382, Sabretooth
Writeup by: jusTaPunkk, inputs from anon18382
Note: Special thanks to Sabretooth for design of contraction system