Mechanisms

Xloop employs a unique blend of mechanisms borrowed from renowned platforms in the DeFi ecosystem, combined with its own pioneering features. Here's a breakdown of these mechanisms and their functions:

1. Liquidation: Adopted from Liquity, the liquidation mechanism ensures the overall health and stability of the system. When a user's collateral falls below a specific threshold (the Minimum Collateral Ratio), their position becomes eligible for liquidation. This process involves the selling off of the user's collateral to repay the system and maintain its solvency.

2. Redistribution: Another feature borrowed from Liquity, redistribution works in tandem with the liquidation process. Whenever a user's collateral is liquidated, a portion of it gets redistributed to other users in the system. This incentivizes users to maintain healthy collateral ratios and contributes to the system's robustness.

3. Redemption: Users holding IOU tokens can initiate a redemption request to exchange these tokens for GMX, GLP or GM tokens, the collateral of the system. The system then identifies troves that are above the Minimum Collateral Ratio (MCR) and begins the redemption process from the least collateralized trove, moving upwards. This strategy ensures the solvency and safety of the system by only accessing troves that have sufficient collateral relative to their debt.

4. Fractional Minting: Drawing inspiration from Frax, Xloop introduces fractional minting, a dynamic mechanism that adjusts the collateral requirement for minting new stablecoins. By doing so, it aligns the supply of Xloop Dollar Coins (XDC) with market demand, ensuring price stability. The Fractional Minting Collateral Ratio is fluctuating between 93% and 100% in Xloop, providing consistency and reducing potential system shocks. The lower bound 93% ensures the whole system is always over-collateralized.

5. Arbitrage mechanism: One of the inherent beauties of decentralized financial systems is their reliance on market dynamics to ensure equilibrium. Xloop, inspired by systems like Frax, implements an arbitrage mechanism to adjust and stabilize the market price of $XDC:

• Price Above Peg: If the price of $XDC exceeds its peg (say $1), arbitrageurs can profit by minting new $XDC at the protocol-defined collateral ratio and then selling it at the higher market price. This process increases the $XDC supply until its price returns to the peg.

• Price Below Peg: Conversely, when $XDC is below the peg, arbitrageurs can profit by buying $XDC from the market and redeeming it with the protocol for collateral at a higher value. This process reduces the $XDC supply until its price returns to the peg.

Why is this essential?

• Automatic Stabilization: This mechanism ensures that $XDC remains stable without central intervention. The financial incentives drive the market participants to act in ways that bring $XDC's price back to its peg.

• Organic Demand and Supply Balance: As the arbitrage opportunities get exhausted, it indicates a balanced demand and supply, ensuring $XDC remains pegged.

• Enhanced Security: Relying on market-driven actions reduces vulnerabilities in the system, as there's no central party making decisions. Instead, numerous participants are making individual decisions based on their incentives, creating a more resilient and decentralized mechanism.

By integrating these mechanisms, Xloop offers a unique combination of stability, capital efficiency, and privacy in the DeFi space, setting it apart from other platforms in the ecosystem.