# Price Stability and Stability Pool

**`How does $USDQ pegs to $1?`**

In **Quill**, the ability to redeem $**USDQ** for **ETH** (or other collaterals) at face value (for example 1 **$USDQ** for $1 worth of ETH) combined with a minimum collateral ratio of **110%** establishes both a price floor and a price ceiling through arbitrage opportunities. These mechanisms are referred to as **"hard peg mechanisms"** because they rely on direct processes.

Additionally, **$USDQ** benefits from less direct mechanisms, known as **"soft peg mechanisms,"** that help maintain its parity with the USD. One such mechanism is the concept of parity as a **Schelling point**, where **$USDQ** is treated as equivalent to USD, establishing an implied equilibrium within the protocol. Another mechanism involves the borrowing fee on new debts: as redemptions increase (suggesting **$USDQ** is trading below $1), the base rate also rises. This increase makes borrowing less attractive, helping to prevent an oversupply of **$USDQ** in the market that could drive its price further below $1.

**`What is the Stability Pool?`**

The **Stability Pool** serves as the first line of defense in ensuring the solvency of the **Quill** protocol. It acts as a source of liquidity to repay debts from liquidated loans, thereby ensuring that the total supply of $**USDQ** remains fully backed.

* When a loan is liquidated, the corresponding amount of **$USDQ** for the remaining debt is burned from the **Stability Pool**'s balance to settle that debt. In return, the entire collateral from the liquidated loan is transferred to the **Stability Pool**.
* The **Stability Pool** is funded by users, known as **Stability Providers**, who deposit **$USDQ** into it. Over time, these providers may experience a pro-rata reduction in their **$USDQ** deposits, but they gain a pro-rata share of the liquidated collateral.
* As loans are typically liquidated when their collateral ratios fall just below 110%, it is anticipated that Stability Providers will receive a greater dollar value of collateral compared to the debt they help to repay.

**`Should I deposit $USDQ to the Pool?`**

Stability Providers will make liquidation gains, receiving a pro-rata share of liquidated collateral and of the interest paid by the borrowers.

**`Can I lose money by depositing funds into the Stability Pool?`**

While liquidations typically occur at collateral ratios well above 100%, there exists a theoretical risk that a loan could be liquidated below 100% during extreme market conditions, such as a flash crash or an oracle failure. In such scenarios, you might experience a loss because the collateral received may be less than the reduction in your deposit.

If $**USDQ** trades above $1, liquidations could potentially become unprofitable for Stability Providers, even at collateral ratios exceeding 100%. However, this situation is hypothetical as **$USDQ** is expected to return to its peg. Therefore, any "loss" would only be realized if you withdrew your deposit and sold **$USDQ** while it was still priced above $1.

It's also important to acknowledge that while the system is rigorously audited, there is always a possibility — however minimal — that a hack or bug could occur, leading to user losses.


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