DSD V2: DIP-10 High-Level Spec

Background

The core mechanics of DSD to maintain the 1$ peg consist of supply expansion during a positive price deviation, and supply contraction during negative price deviation. Similar dynamics are implemented among nearly all algo stable coin designs, yet none of them has demonstrated a sustainable method of maintaining the peg.

With DIP-10, we introduce a complete revamp of the debt-cycle mechanics and eliminate the current coupon approach

Proposed Changes:

Inspired by perpetual futures funding rates — the mechanism currently proven to work best for pegging one asset to another — we want to take a big leap forward and achieve (near) mechanism symmetry between expansions and contractions.

User Stories:

In any state:

  • As a user who holds free float DSD, I am able to burn DSD for CDSD 1:1
  • As a user who holds coupons, I am able to migrate coupons (principal+premium) to CDSD
  • As a user who holds CDSD, I am able to bond CDSD to the DAO

When the protocol is in contraction:

  • As a user who holds CDSD bonded to the DAO, I receive 95% of contraction rewards (former debt) per epoch
  • As a user who holds DSD bonded to the DAO, I receive 5% of contraction rewards per epoch (capped at 0.006% > 20% APY)
  • As a user, I am not able to buy coupons anymore (as there is no debt anymore)
  • As a user who holds free float or bonded CDSD, I am NOT able to redeem CDSD for DSD

When the protocol is in expansion:

  • As a user who holds CDSD bonded to the DAO, I am able to redeem a partial amount of my bonded CDSD for DSD 1:1 per epoch.
  • While there are unredeemed CDSD, 50% of expansion rewards get distributed to CDSD stakers, pro-rata, to their holdings, making them redeemable 1:1 to DSD
  • As a user who holds free float CDSD, I am NOT able to redeem my CDSD for DSD.

Timeline and progress

The team has already started working on the full technical specifications and implementation. Some implementation details are still being worked out, and we will share the progress and current developments in the #changelog channel in Discord.

Mission

The new debt cycle mechanics introduced by DIP-10 are mandatory steps to make DSD the first uncollateralized algo stable coin that is able to sustainably maintain its peg, which is crucial to our mission of becoming a trusted and adopted reserve asset for DeFi.

The first fully DeFi compliant USD stablecoin.