USDM FAQs
Why would I use Meridian for borrowing?
Meridian offers interest-free loans and is more capital efficient than other borrowing systems (i.e. less collateral is needed for the same loan). Instead of selling ETH to have liquid funds, you can use the protocol to lock up your ETH, borrow against the collateral to withdraw USDM, and then repay your loan at a future date. You can hold the USDM for as long as you like as there is no interest to pay on the borrowing.
For example, borrowing in this way allows users to leverage their ETH positions up to 11 times. This can be achieved by lending ETH to get USDM and then selling the USDM on the open market to purchase more ETH — rinse and repeat. However this should not be taken as a recommended investment approach as there is significant risk involved and should only be used by experienced investors.
How can Meridian offer interest-free borrowing?
Meridian charges a one-time borrowing and redemption fee that algorithmically adjust to ensure that the USD peg is maintained. For example: If more redemptions are happening (which means USDM is likely trading at less than 1 USD), then the borrowing fee would continue to increase, discouraging further borrowing.
What is a Trove?
A Trove is where you take out and maintain your loan. Each Trove is linked to an Ethereum address and each address can have just one Trove. If you are familiar with Vaults or CDPs from other platforms, Troves are similar in concept.
Troves maintain two balances: one is an asset (ETH) acting as collateral and the other is a debt denominated in USDM. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, your Trove’s collateral ratio changes accordingly.
You can close your Trove at any time by fully paying off your debt.
What is the collateral ratio?
This is the ratio between the Dollar value of the collateral in your Trove and its debt in USDM. The collateral ratio of your Trove will fluctuate over time as the price of Ether changes. You can influence the ratio by adjusting your Trove’s collateral and/or debt — i.e. adding more ETH collateral or paying off some of your debt.
For example: Let’s say the current price of ETH is $3,000 and you decide to deposit 10 ETH. If you borrow 10,000 USDM, then the collateral ratio for your Trove would be 300%.
\frac{10 ETH \ * \ $3.000}{10.000 \ LUSD} * 100\% = 300\%
If you instead took out 25,000 USDM that would put your ratio at 120%
What is the minimum collateral ratio (MCR) and the "recommended" collateral ratio?
The minimum collateral ratio (or MCR for short) is the lowest ratio of debt to collateral that will not trigger a liquidation under normal operations (aka Normal Mode). This is a protocol parameter that is set to 110%. So if your Trove has a debt 10,000 USDM, you would need at least $11,000 worth of Ether posted as collateral to avoid being liquidated.
To avoid liquidation during Recovery Mode, it is recommended to keep ratio comfortably above 150% (e.g. 200% or better 250%).
What is MST?
Meridian Stability Token (MST) is the secondary token issued by the Meridian protocol. It captures the fee revenue that is generated by the system and incentivizes early adopters.
MST is a non inflationary ERC20 token with a maximum total supply of 10,000,000
MST rewards will only accrue to Stability Providers - users who deposit USDM to the Stability Pool, and Liquidity Providers - users who provide liquidity to the MLP trading pool.
All rewards are based on preprogramed functionality of the protocol and do not represent any sort of claim towards protocol developers or any third party.
How do I benefit as a Stability Provider from liquidations?
As liquidations happen just below a collateral ratio of 110%, you will most likely experience a net gain whenever a Trove is liquidated.
Let’s say there is a total of 1,000,000 USDM in the Stability Pool and your deposit is 100,000 USDM.
Now, a Trove with debt of 200,000 USDM and collateral of 400 ETH is liquidated at an Ether price of $545, and thus at a collateral ratio of 109% (= 100% * (400 * 545) / 200,000). Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (20,000 USDM), i.e. from 100,000 to 80,000 USDM. In return, you will gain 10% of the liquidated collateral, i.e. 40 ETH, which is currently worth $21,800. Your net gain from the liquidation is $1,800.
Note under normal circumstances depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to ETH, if the USD value of ETH is expected to decrease
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