Adaptive Peg Defense
Polaris incorporates buying and redeeming at peg to help pAssets trade around their target price.
Many collateralized asset systems are more effective at defending one side of the peg than the other, allowing supply to contract without providing an equally direct way to expand it under stress, or vice versa.
Polaris supports both directions, allowing pAssets to be bought with pETH or redeemed for pETH at their target value whenever market conditions create an arbitrage opportunity. Every buy and redemption at peg pays a fee, also referred to as peg arbitrage fee, which is distributed across the market’s positions, both mint and collateral-only.
| Condition | Arbitrage | Supply effect | Adaptive Peg Defense |
|---|---|---|---|
| Above peg | Buy at peg, sell | Supply expands, reducing price | Existing positions are upsized |
| Below peg | Buy, redeem at peg | Supply contracts, increasing price | Existing positions are downsized |
Above Peg
When a pAsset trades above its target price, market participants can buy newly minted supply at peg and sell it into the market for a net profit.
For example, if USDp trades above one dollar, a peg buyer can deposit ETH into the bonding curve, receive pETH and immediately buy newly minted USDp at peg before selling it above one dollar. This increases the circulating supply and naturally pushes the market price back toward its target.
Polaris extends this mechanism through the Adaptive Peg Defense, which treats buying at peg as an upsizing of the existing market. The added collateral, debt and fees are distributed across open positions according to protocol accounting.
This means the market can expand in response to above-peg demand without the peg buyer opening a position. Existing positions grow alongside the market and receive the fees from peg buys.
Below Peg
When a pAsset trades below its target price, market participants can buy the discounted asset and redeem it through the protocol for pETH at its target price.
For example, if USDp trades below one dollar, a peg redeemer can purchase USDp below peg, redeem it at peg for pETH and capture the price difference. The redeemed USDp is burned, reducing the circulating supply and encouraging the market price to move back toward target.
The same Adaptive Peg Defense model applies to redemptions, but in the opposite direction. Redemptions downsize the existing market by distributing collateral removal, debt reduction and redemption fees across open positions according to protocol accounting.
As a result, supply contracts through the same shared accounting model. Existing positions shrink alongside the market and receive the fees from peg redemptions.