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.