Peg Stability Module

DOLA Peg Stability Module (PSM)

The DOLA Peg Stability Module (PSM) provides direct 1:1 swaps between DOLA and USDS, serving as both a peg defense mechanism and critical liquidity infrastructure for FiRM liquidations. When DOLA deviates from $1, the PSM creates immediate arbitrage opportunities that restore balance while ensuring liquidators always have access to DOLA when needed.

The PSM is the successor to the original DOLA Stabilizer (launched February 2021), which facilitated simple DOLA-DAI swaps. The Stabilizer was deprecated in October 2023 after AMM Feds and FiRM made it redundant. However, the need for immediate DOLA liquidity persisted — particularly for liquidators during volatile markets. The PSM addresses the Stabilizer's limitations through ERC4626 vault integration for yield on reserves, configurable fees, modular architecture, and controller hooks for future enhancements.

How the PSM Works

USDS → DOLA (No Fee, 1:1 Ratio)

Users can swap USDS for DOLA at 1:1 with no fees when DOLA trades above $1. If DOLA is at $1.02 on Curve, arbitrageurs deposit USDS to mint DOLA, sell it at the premium, and profit from the difference. This arbitrage continues until DOLA returns to $1.

DOLA → USDS (20 bps Fee, 1:0.998 Ratio)

Users can swap DOLA for USDS at 1:0.998 (0.2% fee) when DOLA trades below $1. If DOLA is at $0.98, arbitrageurs buy cheap DOLA from the market, swap it through the PSM for near-par USDS, and profit from the spread. The 20 bps fee prevents the PSM from being used during normal volatility — it only activates when DOLA is meaningfully undervalued.

Key Features

ERC4626 Vault Integration: PSM reserves are deposited into sUSDS (Sky's yield-bearing USDS) rather than sitting idle. Yield accrues to the DAO treasury, creating revenue from otherwise unproductive capital.
Governance-Controlled Migration: Governance can migrate reserves to new yield vaults if better opportunities emerge or risks develop in the current vault.
Configurable Fees: Swap fees are adjustable through governance proposals. Fee profits route to the DAO treasury or other strategic priorities.
Controller Hooks: Enable future features like depeg circuit breakers, dynamic fee adjustments, or enhanced liquidation integration without contract redeployment.
Security Safeguards: Minimum supply checks prevent inflation attacks. Modular architecture limits blast radius of potential vulnerabilities.