Peg Stability Module (mainnet only)

The Peg Stability Module (PSM) is a smart contract that allows users to swap between two assets at a fixed exchange rate. Unlike liquidity pools in decentralized exchanges, the exchange rate in the PSM does not change based on the available liquidity.

Monarch has implemented a PSM that allows anyone to swap between monUSD and USDC. The PSM has the goal of stabilizing the price of monUSD through an hard peg mechanism that allows the market to seamlessly capture any deviation from the peg and restore it without any negative impact for neither monUSD borrowers nor monUSD holders.

The Mechanics of the PSM

The PSM enables users to perform the following actions:

• Swap 1 USDC for 1 monUSD: the user deposits USDC and mints an equivalent amount of monUSD. There are no fees involved when minting monUSD against USDC.

• Swaps 1 monUSD for 1 USDC minus fees: the user deposits monUSD and receives an equivalent amount of USDC minus a fee. This swap can be executed only if the PSM holds enough USDC in the reserve. The MonUSD to USDC conversion in the PSM is currently disabled (the fee for such swap is set to 100%) but it will be reduced at a later date.

The utility of the PSM is evident during periods in which the monUSD price deviates from $ 1:

• Upward peg: if the monUSD price is higher than the USDC price, users can deposit 1 USDC, receive 1 monUSD and sell monUSD in the open market to lock in a profit. Although one could assume USDC to generally trade at $ 1, this mechanism is profitable as long as the monUSD price is higher than the USDC price, regardless of USDC trading at $ 1.

• Downward peg: if the monUSD price is lower than the USDC price, users can deposit 1 monUSD, receive 0.999 USDC and sell USDC in the open market to lock in a profit. Although one could assume USDC to generally trade at $ 1, this mechanism is profitable as long as the monUSD price is lower than the USDC price minus fees, regardless of USDC trading at $ 1.

Built-In Safety Measures

In scenarios where the USDC price in US dollars falls below a predetermined threshold, the PSM will automatically halt operations. This critical safety measure is designed to protect the integrity of the monUSD token and its peg to USDC. Doing so offers an additional risk mitigation layer, ensuring the system can adapt to extreme market conditions.