Market-Pegged Assets (MPA) in Graphene are assets that can be borrowed from the blockchain by providing collateral to back it up. For example, to borrow gpUSD you have to lock up GPH as collateral. When the debt is paid back, the collateral will be returned.
The amount of GPH required for borrowing gpUSD is determined using an external price feed. The price feed contains several components that come into play here:
- The settlement price (SP), given as gpUSD/GPH - someone who owns gpUSD can request settlement and will have their gpUSD converted to GPH 24 hours later, at the settlement price.
- The margin call ratio (MCR) - in order to borrow X gpUSD you have to provide at least (X * MCR/SP) GPH as collateral. If the settlement price goes down, at some point SP/MCR will drop below your debt/collateral ratio, and you will be margin called.
- The maximum short squeeze ratio (MSSR or MSQR) - a debt position that is margin called will automatically try to buy gpUSD from the market, paying up to MSSR/SP GPH per gpUSD.
The intent of margin calls and MSSR is to protect the market. If the SP drops too much, it will eventually reach a point where the value of the collateral is no longer sufficient to cover the outstanding debt. In order to prevent that, the blockchain tries to close the debt position by buying back gpUSD from the market.
The MSSR provides an incentive to both traders and shorters to work towards that goal:
- For the owner of the short position, the MSSR is a penalty. This encourages him to always provide sufficient collateral.
- For the trader, the MSSR is an incentive to sell gpUSD, because the margin call pays more than the settlement price.
Throughout the example, MCR will be 2 and MSSR will be 1.1, i. e. you must provide at least 200% collateral, and margin calls will pay up to 10% above the market price.
- Suppose SP = 1 gpUSD/10 GPH.
- Alice borrows 100 gpUSD for 2100 GPH. This is OK, because it is more than required (100* MCR/SP = 2000).
- Suppose the value of GPH goes down, i. e. SP = 1 gpUSD/11 GPH.
- At this point, Alice's position is undercollateralized. The minimum required collateral for 100 gpUSD is now 100* 2 * 11 = 2200. Alice is margin called.
- Bob places an offer on the market to sell 20 gpUSD for 240 GPH.
- The blockchain checks that Bob's offer is within the short squeeze range. The maximum short-squeeze price is MSSR/SP = 1.1 * 11 = 12.1 GPH/gpUSD, while Bob only asks 240/20 = 12 GPH/gpUSD.
- The blockchain buys 20 gpUSD from Bob, using up some of Alice's collateral. Alice now owes 100-20=80 gpUSD and is left with 2100-240=1860 GPH as collateral.
- At this point, Alice's short position is safe again: The minimum required collateral for 80 gpUSD is 80* 2 * 11 = 1760 GPH.
Effectively, Alice has paid a penalty of 20 GPH, because she paid 240 GPH for an amount of gpUSD that was worth only 220 GPH. Bob has received a reward to 20 GPH for helping the blockchain secure the market, by selling (some of) his gpUSD.