Price Pegging
Transparent proof-of-reserves and arbitrage
The numa protocol combines and improves on two of the most popular pegging mechanisms: proof-of-reserves and arbitrage.
Transparent proof-of-reserves
The numa protocol radically improves on existing reserves-based stablecoins. The collateral that backs our synthetics is readily visible on-chain: no more wondering if your stablecoin issuer has the funds in the bank to collateralize their stablecoins. At any moment in time, users will be able to view the dollar value of the rETH vault in comparison to the dollar value of synthetics in circulation: this will be displayed on the website.
Popular stablecoins, such as USDT or USDC, rely on users having trust in the issuers to have the money required to back the tokens they issue. The market decides its level of trust in the stablecoin issuer and then prices the token accordingly: if the market believes that Tether has $1 for each USDT in circulation, then the market treats each USDT as $1.
The numa protocol removes the trust inherent in existing systems: users can rest easy knowing that their tokens are backed by reserves that can be viewed anytime, on-chain. The market can always price nuMoney synthetics appropriately and maintain their price pegs, since there is no question regarding reserves: they are transparent.
Abritrage
Additionally, the numa protocol provides arbitrage opportunities to maintain price pegs: arbitrageurs can trade on the free market to restore price parity. The divergence between the quoted oracle price and the market price of a nuMoney creates an arbitrage opportunity that supports the peg by allowing tokens to be minted at the oracle price, rather than the market price of said nuMoney. As such, arbitrageurs are incentivized through the opportunity for profit.
Example—$nuUSD price drops below peg:
$nuUSD market price drops to 98¢.
Arbitrageur buys $nuUSD on a DEX, slipping the price of $nuUSD to $1, so the average price of $nuUSD purchased is approximately 99¢.
Arbitrageur burns $nuUSD and mints $NUMA at a rate of 1:1—1 $nuUSD for $1 of $NUMA.
Since the arbitrageur paid 99¢ for each $nuUSD purchased, they have profited approximately 1%.
Example—$nuUSD price exceeds peg:
$nuUSD market price is $1.02.
Arbitrageur mints $nuUSD at a rate of 1:1—$1 of $NUMA for 1 $nuUSD.
Arbitrageur sells $nuUSD at a rate of $1.02, slipping the price of $nuUSD to $1, so the average price of $nuUSD sold is approximately $1.01.
Since the arbitrageur only paid $1 for each $nuUSD minted, they have profited approximately 1%.
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