Peg Mechanism

zUSD stability is maintained through a combination of overcollateralization, liquidation mechanisms, and arbitrage opportunities. These factors work together to ensure that the value of zUSD remains as close as possible to its 1 USD peg.

1. Over-collateralization

Each 1 zUSD is backed by at least $1.5 worth of LSTs as collateral. Over-collateralization helps maintain stability by ensuring that the value of the underlying collateral is greater than the value of the eUSD issued. This buffer reduces the risk of insolvency and provides a level of security for zUSD holders.

2. Liquidation Mechanisms

The Lybra Finance Protocol incorporates liquidation mechanisms to protect the system from undercollateralized positions. Suppose a user's collateral rate falls below the safe Collateral Rate. In that case, any user can volunteer to be a Liquidator and buy the liquidated portion of collateralized LST, paying in corresponding zUSD (100% - Liquidation Reward Rate). This mechanism ensures appreciation pressure on zUSD and helps maintain stability.

3. Arbitrage Opportunities

Arbitrage opportunities arise when the zUSD price deviates from its 1 USD peg. Users can take advantage of these price discrepancies to make a profit and help restore the zUSD price to its intended value.

• zUSD price above 1 USD: If the zUSD price exceeds 1 USD, users can mint new zUSD by depositing ETH as collateral and then sell the newly minted zUSD on a DEX. As more zUSD is sold, the market supply increases, pushing the price back down to 1 USD. Users can then buy back zUSD at a lower price or use it to repay their loans, realizing a profit from the price difference.

• zUSD price below 1 USD: If the zUSD price falls below 1 USD, users can purchase zUSD at a discounted rate on the market and then redeem it within the Lybra Protocol for 1 USD worth of ETH/Rebase LST. As users buy up the undervalued zUSD, demand increases, driving the price back up to 1 USD. Users can either hold the redeemed ETH/Rebasing LST or sell it, profiting from the price difference.

• Flash Loan: The additional step that has been added to boost fund safety on Lybra V2 during the eUSD liquidation process works as follows. Whenever eUSD is converted to peUSD, the eUSD is locked in the mainnet contract. This locked eUSD plays an important role in ensuring the safety of the funds. This is because the locked eUSD can be used to make flash loans that facilitate liquidation.