DOLA Peg Mechanism
DOLA is a debt-backed stablecoin that maintains its $1 soft-peg primarily through market-driven borrowing and repayment dynamics on FiRM. Unlike algorithmic stablecoins that rely on contract-enforced minting and burning by protocol operators, DOLA's supply naturally expands when users borrow against their collateral and contracts when they repay their loans. The protocol manages DOLA supply through specialized smart contracts called Feds — with the FiRM Fed handling overcollateralized lending, the PSM Fed enabling direct stablecoin swaps, the legacy AMM Feds, and Frontier Fed representing deprecated lending positions.
The DAO delegates peg monitoring and parameter adjustments to the Treasury Working Group (TWG) and Risk Working Group (RWG), who ensure lending capacity aligns with sustainable peg maintenance and adjust Fed operations based on market conditions.
When DOLA Trades Above $1 (Shortage of Supply)
When DOLA consistently trades above $1, two mechanisms work to restore the peg: organic borrowing incentives through FiRM and direct arbitrage through the PSM.
On FiRM, users can borrow DOLA at $1 par value and immediately sell it on the open market for more than $1, pocketing the difference (minus DBR costs and gas fees). Simultaneously, the PSM provides immediate arbitrage opportunities. When DOLA trades above $1, arbitrageurs can deposit USDS into the PSM at a 1:1 rate to mint DOLA, then sell that DOLA on the open market at the premium price. This creates instant DOLA supply to meet excess demand.
When DOLA Trades Below $1 (Excess Supply)
When DOLA trades below $1, market forces again provide natural stabilization, with FiRM debt repayment contributing to peg recovery.
Borrowers on FiRM can buy DOLA from the market at below-par prices (say $0.98) and use it to repay their $1 par value debt, effectively reducing their obligations at a discount. DBR can play a role in incentivizing debt repayment as well. When DBR trades at low prices, borrowing DOLA becomes cheap, encouraging users to take out loans and increasing DOLA supply. This additional DOLA flowing into markets creates downward pressure on the peg. Conversely, when DBR trades at high prices, users who secured their loans at lower rates are incentivized to repay their loans (as they can profit from selling their remnant DBR balance) by buying DOLA from the market and burning it. As borrowers repay loans, they remove DOLA from circulation (it's burned when repaying debt), creating buying pressure that helps restore the peg.
Debt-Level Targeting and Dynamic Capacity
The TWG and RWG don't target specific DOLA supply levels but rather manage sustainable debt capacity based on the protocol's ability to lend without decimating the peg. This capacity is dynamic and depends heavily on DOLA demand drivers (or "DOLA sinks") such as sDOLA, jrDOLA, and liquidity depth across DEXs — deeper liquidity can absorb larger borrowing without significant price impact.
When DOLA peg is stable, the working groups may increase lending capacity through higher daily borrow limits, injecting more liquidity via the FiRM Fed into select markets, and/or approving new collateral types. When liquidity is thin or the peg shows stress, capacity may be constrained to prevent excessive DOLA issuance that the market can't absorb. The PSM's reserves and capacity are similarly monitored to ensure it can serve its dual role of peg defense and liquidation support without creating new vulnerabilities.
Current DOLA Backing Breakdown
DOLA's backing is highly concentrated in FiRM's overcollateralized lending, with minimal exposure to other sources. This concentration in FiRM is a feature, not a bug. FiRM's fixed-rate lending model with conservative collateral factors and robust liquidation mechanisms provides the strongest backing for DOLA. The protocol has deliberately shifted away from relying on DEX Liquidity Feds (which were more prominent in the pre-FiRM era) in favor of lending-backed DOLA, which has clearer backing and better capital efficiency.
Bad Debt and Unsecured DOLA
A small portion of DOLA's backing is currently unsecured due to bad debt accrued during the April 2022 Frontier exploit. This bad debt represents a small and shrinking fraction of DOLA's total backing. The DAO has committed substantial resources to repaying bad debt using protocol revenues from FiRM, and strategic investor swaps (detailed in the INV Tokenomics section). Progress is tracked transparently on the Bad Debts page. As FiRM generates consistent revenue and the repayment plan continues, the influence of bad debt on DOLA's backing diminishes month by month.
Historical Context: Pre-FiRM Era
DOLA's peg mechanism has evolved significantly since the protocol's founding. DOLAs supply evolved from coming primarily from the Frontier Fed (2021-2022), to AMM Feds (2022-2023), to now the FiRM Fed (2024-present).
In the AMM Feds era, DOLA was more akin to an algorithmic stablecoin; maintaining its $1 peg through supply management in the various Fed deployments that managed DOLA liquidity in DEX pools on protocols like Curve and Balancer.
These AMM Feds would add DOLA to liquidity pools when price rose above $1 and remove DOLA when price fell below $1, using the trading dynamics within the pools to maintain the peg. This model worked but had limitations: DOLA was backed by LP positions rather than direct overcollateralized borrowing, capital efficiency was lower, and peg maintenance required more active management.
The launch of FiRM in late 2022 fundamentally changed DOLA's backing model. By offering fixed-rate DOLA borrowing against high-quality collateral, FiRM created sustainable demand for DOLA that didn't rely on liquidity mining incentives or complex DEX strategies. Over time, the FiRM Fed grew to dominate DOLA supply while AMM Feds contracted.
This evolution represents a maturation of DOLA's peg mechanism — the current model is more capital efficient, easier to understand, and provides stronger backing than the historical AMM-dominated approach.
Monitoring the Peg
Users can monitor DOLA's peg health and Fed operations in real-time through several resources:
Price Tracking
Current DOLA price across major DEXs is displayed on the Liquidity page. If DOLA consistently trades away from $1, expect Fed operations to adjust supply in response.
Fed Activity
The Feds Policy page shows every Fed expansion and contraction transaction, allowing you to see exactly when and how the TWG is managing supply. Look for expansion transactions when DOLA is above $1 and contraction transactions when below $1.
Supply Evolution
The DOLA & Feds page displays historical DOLA supply, showing how total circulation has changed over time in response to demand fluctuations and peg management operations.
Backing Verification
The "DOLA sources overview" chart on the DOLA & Feds page breaks down exactly what backs every DOLA in circulation. If you ever have concerns about DOLA's backing, this chart provides complete transparency into the composition.
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