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Mezo Documentation

mUSD Architecture

mUSD is currently available only on Mezo matsnet (Testnet), but the details here will apply to Mezo Mainnet.

The protocol allows Bitcoin holders to Borrow and Mint mUSD (Mezo USD stablecoins) by using their BTC as collateral. This means users can access USD-denominated liquidity while keeping their Bitcoin investment intact.

Custody

A user opens up a position by calling BorrowerOperations.openTrove, providing BTC, and requesting mUSD. The BTC is routed to the ActivePool, where it stays until one of the following actions occurs:

  • Withdraws (BorrowerOperations.withdrawColl)
  • Pays off their debt (BorrowerOperations.closeTrove)
  • Redeems collateral (TroveManager.redeemCollateral)
  • Is liquidated (TroveManager.liquidate)

Liquidated positions are either paid for by the StabilityPool, in which case the BTC is transferred there, or the debt and collateral are absorbed and redistributed to other users, in which case the BTC is transferred to the DefaultPool.

Maintaining the Peg

The price floor of $1 is maintained through arbitrage, an external USD <-> BTC price oracle, and the ability to redeem mUSD for BTC $1 for $1 via TroveManager.redeemCollateral. As an example, if mUSD trades for $0.80 on an exchange and Bitcoin is selling for 1 BTC = $100k, a arbitrageur with $800 could take the following action:

  1. Trade $800 for 1000 mUSD
  2. Redeem 1000 mUSD for 0.01 BTC ($1000 worth of BTC)
  3. Sell 0.01 BTC for $1000

The arbitrageur started with $800 and ended with $1000 (ignoring fees). This trade buys mUSD and burns it (for the backing BTC), causing upwards price pressure. This trade continues to be effective until the price resets to $1.

The price ceiling of $1.10 is maintained using the minimum 110% collateralization ratio. If mUSD trades for $1.20 on an exchange, and Bitcoin is selling for 1 BTC = $100k, an arbitrageur with $100k could take the following action:

  1. Buy 1 BTC (worth $100k)
  2. Open up a trove with 1 BTC as collateral, and the maximum 90,909 mUSD as debt.
  3. Sell 90,909 mUSD for $109,091.

The arbitrageur started with $100k and ended with $109k (ignoring fees). This trade sells and mints mUSD, causing downward price pressure. This trade continues to be effective until the price reaches $1.10.