Maintaining the peg of synthetic Real-World Assets (RWAs) to their real-world counterparts is a cornerstone of Airway’s protocol. The peg ensures that synthetic assets retain value parity with the underlying assets they represent, providing stability and trust in the system. Airway employs three key mechanisms to achieve and uphold this peg: arbitrage, liquidations, and the Concentrated Liquidity Rewards system.
1. Arbitrage
Arbitrage opportunities play a natural role in maintaining the peg of synthetic RWAs. When the price of a synthetic RWA deviates from its pegged value:
Above the Peg: Traders can mint synthetic RWAs by depositing collateral at the pegged value and sell them on the open market at the higher price, driving the price back down to the peg.
Below the Peg: Traders can purchase synthetic RWAs on the market at the lower price and redeem them by repaying the debt in the system, profiting from the price difference and driving the price back up to the peg.
This self-correcting mechanism, driven by market participants seeking profit, helps stabilize the value of synthetic RWAs.
2. Liquidations
Liquidations are a critical safeguard to maintain the health of the collateralized debt positions (CDPs) that back synthetic RWAs. If the value of the collateral in a CDP falls below the required collateralization ratio:
Automatic Liquidation: The protocol automatically liquidates the undercollateralized position to protect the stability of the system. The collateral is sold to cover the outstanding synthetic RWA debt.
Impact on the Peg: By ensuring that synthetic RWAs are always backed by sufficient collateral, liquidations help maintain confidence in the value of the synthetic assets, indirectly supporting the peg.
3. Concentrated Liquidity Rewards System
Airway’s Concentrated Liquidity Rewards system incentivizes liquidity providers to allocate capital within specific price bands on Uniswap V4. This targeted approach ensures:
Price Stability: Liquidity is concentrated around the peg, reducing slippage and volatility in trading synthetic RWAs.
Incentivized Support: Rewards are distributed to liquidity providers who actively contribute to maintaining deep liquidity at the pegged value, reinforcing the stability of synthetic RWA prices.
Combined Effect
These three mechanisms—arbitrage, liquidations, and the Concentrated Liquidity Rewards system—work together to ensure the peg of synthetic RWAs is consistently maintained.
Arbitrage provides a decentralized and market-driven correction mechanism.
Liquidations safeguard the collateralization integrity of the system.
Concentrated Liquidity Rewards enhance liquidity and price stability at the peg.
By leveraging these interconnected systems, Airway delivers a robust, automated solution for maintaining the value parity of synthetic RWAs, ensuring trust and usability within the ecosystem.
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