System Stability

There needs to be sufficient xAVAX supply for the system to operate correctly and constrain the volatility of the aUSD NAV. As stated, a convenient way to think about the system’s ability to do this is to consider the entire system as one big CDP:

The total AVAX reserve represents the total CDP collateral. The total aUSD supply represents the borrowed amount, and the xAVAX supply represents the difference between supplied collateral and the total borrowed amount.

Viewed through this lens, we can measure the health of the system in a similar way as a CDP, using the collateralization ratio. Another way to state that the system requires sufficient xAVAX supply is to say it requires a CR over 100% to function correctly.

The CR is calculated as the value of the AVAX reserve divided by the value of the aUSD supply, multiplied by 100%. Example 1

Metric	Value
AVAX price	$20
Total reserve market cap	200 AVAX - $40,000
aUSD market cap	$28,000
xAVAX market cap	$12,000
CR (Collateral Ratio)	142.85%

Example 2

Metric	Value
AVAX price	$20
Total reserve market cap	200 AVAX - $40,000
aUSD market cap	$22,000
xAVAX market cap	$18,000
CR (Collateral Ratio)	181.8%

Minting aUSD or xAVAX, as well as adjusting the NAV of either token will have an impact on the CR. If the system CR were ever to fall to 100%, that would imply that the NAV of xAVAX would be zero, so it can be seen as liquidation.

On the other hand, while aUSD would remain mintable and redeemable, its Δ would jump to 1, meaning it would be exposed to the full price movements of AVAX (i.e. no longer be a stablecoin). The protocol has a risk management module that kicks in if the CR falls too low, to help ensure that does not happen. Note: As long as CR > 100%, aUSD can be kept to Δ=0.