How to link Real World Asset Price
Last updated
Last updated
The mechanism by which zAsset is linked to the price of physical assets is based on the design of incentives for users to participate in the ecosystem. Below we describe the two incentive designs and the variable interest rate for CDP that support this mechanism.
The larger the zAsset price on the DEX is compared to the Oracle price, the greater the incentive for sLP token staking. This leads to more users creating CDPs in order to obtain sLP tokens. This means that zAssets are supplied to the DEX, helping to bridge the price gap.
The Liquidators can liquidate CDPs, that fall below the minimum collateral rate, with their own zAssets. In liquidation, the zAssets are exchanged for collateral assets based on the Oracle price. Therefore, when the price of zAssets on the DEX lower than the Oracle price, users can acquire arbitrage opportunities to procure zAsset at the DEX and liquidate CDPs.
Liquidators are also entitled to a liquidation discount. This discount amount is usually larger enough than the price difference between zAsset and Oracle on the DEX. Thus, users have a greater incentive to participate in liquidation in most cases. Especially when the DEX price is smaller than the Oracle price, they will be rewarded more.
The incentive is especially strong when the DEX price is lower than the Oracle price.
ZDX adopts a variable interest rate model for CDPs (called the the Stability Fee). This interest rate model adjusts the interest based on the price difference between the DEX price and the oracle price (the Premium). The Premium is represented by the price difference between the DEX price and the oracle price and when the DEX price is greater than the oracle price, the Premium is greater than zero.
The Stability Fee plays a role in adjusting the demand and supply of zAsset in the DEX market. When the Premium is large (DEX > Oracle), by increasing the interest rate of the CDP, the issuance of short CDPs increases, thus increasing the supply of zAsset in the DEX. This in turn pulls the DEX price back to the oracle price. When the Premium is small (Oracle > DEX), by reducing the interest rate, the DEX price rises, approaching the oracle price.
These mechanisms bring the zAsset price closer to the Oracle price. It is important to note, however, that zAsset and Oracle prices are not perfectly aligned. These two incentives can be changed by governance in the future.
