Pricing Stability

Specifically pertaining to underlying LSTs

A basic example of how tapETH ensures the pricing stability of underlying LSTs would be as follows:

  • stETH and ETH have an ideal composition of 50/50~ (technically there should be a greater amount of stETH due to the time-adjusted discount as a result of withdrawal times but we’ll ignore it for this example)

  • However, a whale withdraws a huge amount of ETH liquidity which causes a cascade of withdrawals

  • The pool now has an oversupply of stETH e.g. 75/25

  • StableAsset would then initiate the following:

  1. A discount on stETH i.e. swap 1 ETH for >1 stETH (or >1 ETH’s worth of stETH)

    • This also means that users are able to redeem 1 tapETH for an increased amount of stETH

  2. A premium on ETH for swaps i.e. swap 1 ETH for <1 stETH (or <1 ETH's worth of stETH)

    • As a result, users will be able to mint additional tapETH per ETH they deposit

These discounts and premiums can then be realized by leveraging the other pools within Tapio which are in a state of balance, or alternatively, swapping for tapETH using an external pool (e.g. tapETH-ETH on Balancer) to redeem it, or mint tapETH and swapping it for ETH externally.

By doing this, it has encouraged users to remove stETH from the pool, and also simultaneously incentivized the deposit or swapping of ETH into the tapETH pool, resulting in the re-pegging of stETH happening extremely quickly. Having this dual approach is far more effective than just placing a discount on the oversupplied asset - as is the case with conventional LP pools.

Not to mention, having tapETH as a independent and functional asset as the LP token means that users have 4 different methods of not only profiting from arbitrage, but also maintaining the pegs of the underlying assets (and tapETH itself).

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