⚖️Pegging

All Baki zTokens are overcollateralized, meaning that they will always guarantee sufficient value to back the zToken. Additionally, this will incentivise users to maintain the peg through adjusting the supply of zToken. Lastly, since any swap between currencies will be handled by the oracle, only the USD currency peg needs to be maintained to secure the entire system.

Collateral

Most importantly, to maintain a peg any protocol needs to ensure that the collateral balance is always greater than the outstanding debt. Unlike other collateralized debt position protocols, such as Maker DAO (DAI) or Abracadabra (MIM), Baki will exclusively use stable coins as collateral. The rationale behind this is to flip the traditional model found within crypto to back stable assets with volatile currencies. This is specifically done to avoid a situation where a user's position is liquidated due to movements in the collateral, rather than in movements in the FX markets that Baki's zTokens would track.

Moreover, Baki's collateralization ratio of 150.00% creates a buffer should there be any significant shocks in the FX prices. In the long term to make the protocol more capital efficient, this can be lowered in the provided protocol liquidity has enough depth.

Trading Above the Peg

If zUSD is trading above $1.00, then minters are incentivised to mint zUSD and sell it to earn the premium themselves. Additional minting of zUSD will drive the price down to the peg of $1.00.

Trading Below the Peg

If zUSD is trading below $1.00, then minters are incentivised to burn their zUSD. Users can buy back their debt at a discount since Baki assumes that zUSD always equals $1.00. The reduction of the supply of zUSD will result in the price returning to the $1.00 peg.