In this review, I would like to explain how LUSD is efficiently pegged to the US dollar. If LUSD is valued at less than $1, traders should purchase LUSD and then redeem it for ETH (since Liquity operates a system where 1 LUSD can be exchanged for $1 worth of ETH), which can then be sold for a higher USD value. By repeating this process, the price of LUSD will increase until it reaches $1.
When LUSD's value exceeds $1, users can take out a loan (with a 110% collateral ratio), acquire LUSD, and sell it given the price is above $1. This mechanism remains stable as we exchange our ETH collateral for LUSD on a 1:1 basis, which is then sold at more than 1:1 value. This represents a hard peg. Additionally, they have a soft peg for the purposes of borrowing or repaying loans to maintain a price close to $1. This is based on the understanding that the price will eventually revert to $1. If you borrow now while the LUSD price is above $1, you will have to repay less in the future, as you will be repaying the same LUSD amount when the token price returns to $1.
This mechanism showed as a stable one, so I can put 5 stars here. Show Less
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