Depeg protection tutorial

Stablecoins, in other words, pegged cryptocurrency, is a coin, token, or asset on a blockchain tied to a currency issued by a government or bank.

Fiat-linked cryptocurrencies are considered examples of stablecoins. They were created to deal with extreme fluctuations. Most stablecoins are pegged to the US dollar. There are also stablecoins in EUR or GBP.

Each stablecoin is designed to have a FIAT monetary value in reserve. Some are issued when the same amount of fiat money is deposited. Others use algorithms to stabilize their coins.

Stablecoins stabilize their price by decreasing or increasing the overall amount of supply. The changes in token supply change the relative price of each token until it reaches the same price as the FIAT currency.

Stablecoins with collateral tokens, such as USDT and DAI, are mined and burned as needed, with the newly minted tokens backed by other digital assets.

Algorithmic stablecoins stabilize through smart contracts and other mechanisms that automatically adjust the supply of the stablecoin to maintain its peg to the underlying asset.

A 'peg' is a fixed price for the exchange rate between two assets. This minimizes trading risks and provides planning security.

In cryptocurrencies, a peg refers to stablecoins pegged to a FIAT currency.

Depeg refers to the event of the FIAT-Peg exchange rate drifting apart. The stablecoin is no longer stable and loses value. Trust is lost, many people exchange into other stablecoins and the depegged stablecoin crashes.

USDC, for example, is a fully reserved-backed stablecoin, meaning every USD Coin is backed by actual cash and short-dated United States treasuries.

Despite this, USDC issuers, Circle, announced 2023 on March 10 that USDC had depegged from the U.S. dollar, with around $3.3 billion of its $40 billion in USDC reserves stuck in the now defunct Silicon Valley Bank.

The bank — the 16th-largest in the U.S. — collapsed on March 10 and is one of the biggest bank failures in U.S. history. Given USDC’s collateral influence, other stablecoins followed suit in de-pegging from the U.S. dollar.

On March 11, the USDC-USD rate collapsed to 0.878874 cents. On March 13, the USDC was worth 0.99 cents again. Since then, the USDC has been stable. This scenario would have triggered a depeg event in the smart contracts of our depeg protection product.

This event occurred during our testing phase of the finalized Etherisc depeg protection web app. In our web app, you can protect USDC against a depeg event. At the first moment, we were scared. Then came the conviction for having designed precisely the right product at the right time!

Connect your wallet with our Etherisc depeg protection web app on the Ethereum mainnet and ensure your wallet holds a small amount of ETH to afford the transaction fees.

'Apply for USDC pepeg protection' is the landing page in the web app. You can also access them by clicking the 'Depeg Protection' or the 'Apply' button. You can also click 'APPLY FOR NEW POLICY' in the upper right corner of the 'Policies' section. You can purchase a policy and protect your USDC against a depeg case here.

Here are the input options:

In this section, you can see all your policies. You can select in the top left corner of the table to have all your policies displayed or only the active ones. You can also create new policies by clicking on 'APPLY FOR NEW POLICY' in the top right corner of the table.

The red line marks the 0.995 US dollar limit.

The green line marks the 0.999 US dollar limit.

The blue line shows the current USDC price. If the USDC price drops below 0.995 US dollar, the line will turn orange. If the USDC price does not recover above the 0.999 US dollar line within 24 hours, the depeg case occurs and the line turns red.

In the following chapter, you will find more information about the depeg case.

When you click the 'Price' Button, you can see the current rate of USDC against the US dollar.

If you click 'Reference pricefeed,' you will be redirected to our data source. We get our data from Chainlink.

You can see three cases in the upper left section in the' Price' area. Stable, 'triggered at' and 'depegged.'

The USDC price is considered to be 'stable' as long it does not fall below the trigger level of 0.995 US dollar.

A 'depeg event' is 'triggered' when the Chainlink USDC/USD price feed on the Ethereum Mainnet falls below 0.995 US dollar. In this case, the product smart contract is temporarily deactivated and policies can no longer be sold. This is to prevent that malicious actors could exploit the situation and buy cover in a situation where the risk is high.

If the Chainlink USDC/USD price fails to recover over or equal to 0.999 within 24h, the product enters into a 'depegged' state. As for the 'triggered' scenario, policies can no longer be sold.

The product is closed. As the policy owner, you can claim during a claim window of seven days. Once claimed, the policy is fulfilled with the depeg and thus also terminated.

The depeg payout price is defined by the latest chainlink USDC/USD available at the 'depegged at' event. The time of the depeg event is defined by the 'triggered at' event plus 24 hours.

The depegged payout price is used for all calculations, regardless of when a policy holder made their claims. The maximum payout price is up to 20% of the value of your protected amount.

An Example: The depegged payout price is 0.9. So, if you purchased protection for 10,000 USDC for a particular Mainnet wallet, you would receive 1,000 USDT (1 - 0.9) * 10,000) (assuming the USDC balance on your protected wallet is at least $10,000 USDC at the time of payout).

You can claim the amount due to you after the 'depegged' status is activated. To do this, connect to the web application via Metamask using your protected wallet. Then, click on your policy under 'Policies.' In your policy, you then click 'Claim.' Claiming from the protected wallet is your proof that you are the rightful owner of the protected wallet.

Once a depeg event happens, you have a time window of seven days to create your claim. Create your claim as soon as possible.

Using the Moralis Balance Api, the actual USDC balance of your protected wallet at the 'depegged at' event is determined and the amount of USDT due to you is transferred to your wallet.

The idea is that you should be flexible in deciding what to do. When the product enters the 'triggered' state, you can start thinking about how you see the situation. You have 24 hours to evaluate the market and the situation. After 24 hours, the product returns to the 'normal' state (when USDC goes back above 0.999) or goes into the 'depegged' state.

Another critical point in introducing the 24 hours is that we want to avoid triggering a depeg case too quickly.

In the case of a depeg event, the policy holder has a grace period of seven days to create her/his claim. If the policy holder creates a claim, the associated payout needs to be made before the bundle investor can pull out the remaining funds. Once the grace period is over, the bundle investor might close the policy and withdraw capital immediately, in which case no payout will happen.

When you create a risk bundle, you start staking USDT.

You can also manage your risk bundles. Every change in a risk bundle is associated with minimal transaction costs.

Here are the input options:

Stake

You can add more USDT to your risk bundle.

Unstake

Unstake is possible if the balance exceeds the capital that is needed to cover the current policies. Otherwise, the button will not be displayed. You can unstake at most the amount 'Balance' - 'Locked capital.' If you unstake the maximum possible amount, you cannot sell any more policies from this risk bundle.

Extend

As a risk bundle owner, you can extend your bundle lifetime by clicking the 'EXTEND' button. The button will be activated 30 days before the bundle’s lifetime expires. So you can extend within the last 30 days of your risk bundle’s lifetime. Once the risk bundle has expired, you can no longer extend the lifetime.

Transaction fees are incurred when extending the lifetime of a risk bundle, but they are low because only the new end date is transferred.

We offer you the period between the minimum (14 days) and maximum (180 days) possible lifetime for an extension. You can choose freely. You can extend the lifetime of your risk bundle as often as you want.

Lock

You can lock your risk bundle. Gas fees are incurred when locking the risk bundle. After you have confirmed the lock via your wallet, the 'LOCK' button is deactivated and the 'UNLOCK' button is active. You can sell no more policies. The existing policies continue to run normally.

Please note: The 'State' Locked means the complete risk bundle is locked. The 'Locked capital' shows the amount for which policies already exist.

Unlock

The risk bundle is activated again. You can sell policies again.

Close

You have the possibility of closing the risk bundle before expiry. You can only close the risk bundle irrevocably when there are no more open policies in the risk bundle.

If you want to close a risk bundle before the 'Open until' date, you can lock it first and then close it after all policies covered by the risk bundle have been closed.

Burn

After closing the risk bundle, withdraw your USDT by clicking the first 'Unstake' button. After that, you enter the remaining amount and confirm with the second 'Unstake' button.

Now you can burn the risk bundle. The NFT is also burned in the process. The risk bundle is empty and no longer has an owner.

USDT rewards come from depeg protection net premiums purchased against your risk bundle, minus claims. If no policies are sold, no rewards accumulate. When a depeg event occurs and claims are paid, the claims are deducted from your reward. Depending on the depeg price, the collected net premium may not cover the claims. In this case, the missing amount of USDT is taken from your invested risk capital,

USDT staking rewards = net premiums - claims

You can claim your rewards after the end of the risk bundle lifetime and when all policies associated with the risk bundle have been closed.

If your wallet offers maximum gas fees for the transaction, you can set the price to a maximum of 25GWei, confirm the transaction, and take a nap. During our 'friends and family' period, we made some transactions with an upper limit of 25 GWei. The most extended duration was one day.