DOLA Supply Management
The Fed contracts are made to expand and contract DOLA supply. They are controlled by Inverse Finance governance and they are a powerful tool for DOLA peg management. There are three different types of Fed contracts. All of them share some qualities like having the ability to expand DOLA supply by minting and supplying DOLA directly to the connected liquidity pool or lending market DOLA supply while a contraction withdraws and burns DOLA.
A great way to keep track of all the ‘expansions’ and ‘contractions’ of DOLA supply is via the ‘Feds Policy & Income’ or 'DOLA & Feds' tabs on the Transparency page.
Expands and contracts the DOLA supply of the lending market which is made available to be borrowed through over-collateralized loans.
If DOLA’s market price goes above $1, there is more demand than there is supply in the open market. To counteract this, Inverse Finance will mint more DOLA into existence on the ‘Supply’ side of partnering lending markets to become available for borrowing.
An increase in lending supply causes the variable interest rate for borrowing DOLA on that lending market to decrease. As DOLA becomes cheaper to borrow, more DOLA gets borrowed and the circulating supply in the market increases.
If DOLA’s peg falls below $1, then the opposite is done, meaning DOLA on the supply side of lending markets is retracted and ‘burned’.
- Demand for DOLA increases = Fed increases DOLA supply to match this.
- Demand for DOLA decreases = Fed decreases DOLA supply to match this.
A decrease in lending supply causes the borrowing interest rate to increase, which leads people to buy back DOLA to pay off their loans. As DOLA becomes cheaper to borrow, more DOLA gets borrowed and the circulating supply in the market increases. This additional buy-pressure in the market returns the value of DOLA back to $1.
Expands by minting and supplying DOLA directly to the AMM liquidity pool while a contraction withdraws and burns DOLA from the pool. Expansions/contraction are done in response to demand changes for DOLA in a specific liquidity pool.
if a user expresses demand and deposits the counterparty token in the pool or someone swapped for DOLA, the Fed can be expanded to bring the pool back to balance. This also balances DOLA’s $1 price peg.
When the demand for DOLA decreases, the Fed Chair contracts the DOLA supply, reducing the DOLA overweight in the pool, bringing the price or peg back to par.
Simply put, the goal is to find equilibrium for DOLA:
- Demand for DOLA increases = AMM Fed increases DOLA supply to match this.
- Demand for DOLA decreases = AMM Fed decreases DOLA supply to match this.
This is a very powerful mechanism for peg management and gives Inverse Finance the ability to scale DOLA supply up or down rapidly in each individual liquidity pool, ensuring a more stable peg even in highly volatile times.
While DOLA is deposited in the liquidity pool, the Fed earns any rewards sent to LP’s which in turn are sent back to the DAO Treasury. The current policy is to recycle these rewards back into “bribes” to the liquidity pool, subsidizing the liquidity expense of the DAO, otherwise paid in INV.