📕Overview

Mechanics of USDs Stability and Delta-Neutral Hedging

• Solenes’s USDs is a stable, synthetic dollar asset designed to maintain a reliable peg to the US dollar while remaining fully decentralized, on-chain, and resistant to traditional financial system dependencies. Through delta-neutral hedging, USDs minimizes collateral volatility, providing users with a stable, scalable medium of exchange within the Solana ecosystem.

Overview: Delta-Neutral Hedging and USDs Stability

• USDs achieves its peg stability through an automated delta-neutral hedging strategy. When users mint USDs, the protocol simultaneously creates a corresponding short position in derivatives markets that offsets the risk of price fluctuations in the underlying collateral assets. This method of hedging ensures that changes in the value of collateral are balanced by gains or losses in the short position, maintaining USDs’ value with minimal deviation from its dollar peg.

How the Peg Stability Mechanism Works

• Collateral Deposit and Hedging: When users mint USDs by depositing collateral assets (e.g., SOL, stSOL), the protocol atomically opens a short position equal to the dollar value of the collateral on a derivatives exchange. This delta-neutral position absorbs potential losses in collateral value by offsetting them with gains in the hedge, ensuring that the synthetic dollar backing of USDs remains stable.

• Rebalancing Collateral and Hedge: The protocol frequently rebalances the collateral and hedge to maintain an accurate dollar peg. As the market value of collateral fluctuates, the short position is adjusted programmatically to align with these changes, thereby stabilizing USDs even in volatile market conditions.

• No Leverage in Hedging: Solenes avoids significant leverage in its hedging positions, keeping the margin required for each short position close to the exact value of the collateral. This minimizes risk and ensures that backing assets are fully covered without the need for excessive capital.

Practical Example of USDs Hedging

Let’s illustrate the process with a simple example:

• A user mints 100 USDs by depositing $100 worth of stSOL as collateral.

• The protocol then opens a corresponding short position in stSOL futures, equivalent to $100.

• If stSOL’s price decreases, the short position gains value, offsetting the loss in collateral value and maintaining the stability of USDs.

• This ensures that the collateral backing for USDs remains consistent with the dollar peg, regardless of short-term market fluctuations.

Revenue Generation for USDs Stability

The Solenes protocol generates revenue that supports yield generation for sUSDs holders and strengthens USDs stability. Key revenue streams include:

• Staking Rewards: If USDs is backed by staked assets like stSOL, consensus rewards from these assets contribute to the protocol’s revenue. These rewards help offset costs and enhance yield for sUSDs holders.

• Funding and Basis Spread: By maintaining delta-neutral positions, Solenes can capitalize on the spread between the cost of funding the short position and the collateral’s yield. For example, if derivatives funding rates are positive, the protocol earns a return that further bolsters USDs stability.

• Dynamic Reinvestment: Solenes reinvests this revenue in yield-generating activities within the protocol to maximize returns for sUSDs holders and ensure that USDs remains a sustainable asset.

Automation and Risk Management in Hedging

To ensure consistent peg stability, Solenes uses an automated system to monitor and adjust the hedge positions. Key components of this system include:

• Automated Hedging: The protocol continuously tracks collateral prices and automatically rebalances hedge positions to reflect real-time market conditions.

• Rebalancing Mechanism: Regular rebalancing of collateral and short positions helps maintain the peg, especially during periods of high volatility, preserving the dollar value of USDs.

Risk Considerations and Mitigations

While the protocol's design reduces exposure to many risks, it is not entirely risk-free. Key risks and mitigations include:

• Smart Contract Risk: The protocol’s code is rigorously tested and audited to prevent vulnerabilities.

• Liquidity and Counterparty Risk: The protocol utilizes multiple exchanges and liquidity sources, reducing exposure to any single provider.

• Market and Exchange Risk: By diversifying and actively monitoring short positions, Solenes minimizes potential losses in extreme market conditions.

• Solenes’s approach to stability through delta-neutral hedging establishes USDs as a scalable, resilient form of synthetic money that can withstand market volatility, serving as a robust collateral and transactional asset within the DeFi landscape.

• Hedging and Automation Overview of how the protocol automates hedging to maintain stability, using derivatives to balance the risk of collateral price fluctuations.

• Rebalancing Mechanism Details on how the protocol rebalances collateral and hedging positions to ensure long-term stability and a consistent peg.