AUSD Price Stability Module

Price stability is the most important quality of a stablecoin and is the key factor required to drive the adoption of AUSD. To ensure that AUSD can maintain its peg of $1 USD, we have provided all the necessary tools to help arbitrageurs easily conduct arbitrage on AUSD if its price temporarily moves off its $1 peg, earning them profits on each case of successful arbitrage.
​How Arbitrageurs keep AUSD at peg​
​Implications of Stable Swap module on AUSD​
​AUSD Peg Insurance Fund​
How Arbitrageurs keep AUSD at peg
There are two scenarios where arbitrageurs can conduct arbitrage to earn them profits while helping AUSD retain its 1 USD peg:
1.​AUSD price goes above $1 USD (1 AUSD > 1 USD)​
2.​AUSD price goes below $1 USD (1 AUSD < 1 USD)​
Below, we've laid out how arbitrage is conducted in each scenario. 
Scenario 1: AUSD price goes above $1
1.The AUSD Arbitrageur flash mints AUSD through the FlashMintModule 
2.The AUSD Arbitrageur receives AUSD from the FlashMintModule 
3.The AUSD Arbitrageur then swaps AUSD to BUSD through PancakeSwap's AUSD-BUSD pool 
4.Since 1 AUSD is now worth more than 1 BUSD, the AUSD arbitrageur receives more BUSD than the original amount of AUSD he minted 
5.The AUSD Arbitrageur then uses Alpaca’s StableSwapModule to swap BUSD to AUSD at a 1:1 ratio 
6.The AUSD Arbitrageur then returns the AUSD they flash-minted to the FlashMintModule, and pockets the difference as profit from the arbitrage
Scenario 2: AUSD price goes below $1
1.The AUSD Arbitrageur performs a flash swap by borrowing underpriced AUSD from PancakeSwap
2.The AUSD Arbitrageur receives AUSD from the flash swap
3.The AUSD Arbitrageur swaps AUSD to BUSD at a 1:1 ratio using the StableSwapModule
4.The AUSD Arbitrageur then closes the flash swap by returning the BUSD to PancakeSwap, pocketing the difference as profit from the arbitrage
Implications of Stable Swap on AUSD
The content below is taken from the original Twitter's thread by Samsara, Alpaca Finance's head of strategy and marketing
AUSD's Stable Swap is based on MakerDAO DAI’s time-tested PSM. The module offers 3 primary utilities
1: Facilitate arb for arbitrageurs
Swap is faster, cheaper & more reliable since it is 1:1 with no price impact. Easier swap attracts more arbitrageurs which will lead to stabler peg.
2: Conditional support on buy side
As arbitrageurs come in & AUSD utility rises over time, there will be periods when buy demand drives AUSD to stay between $1-1.002. During those times, BUSD will amass in BUSD Reserve to create a limited hard peg to keep AUSD>.998. This conditional support is 1 of multiple influences to keep the peg stable, and it is NOT meant to be a hard peg on the buy side. However, the Stable Swap has a much stricter influence on the sell side peg which is actually much more important than the buy side peg.
3: Hard peg on sell side
BUSD will always be mintable 1:1 to AUSD which guarantees arbitrageurs will keep it <$1.002 (.002 buffer for .2% fee) Hard peg on sell side is more important than buy side because AUSD is primarily a borrowed asset…To illustrate AUSD’s role as a borrowed asset to understand why sell side peg is most important, we need to write out AUSD’s main use cases/strategies, which I will do below in order of arguably most to least frequent among users (use cases A-C)
Use Case A: Borrow AUSD to stake: mint AUSD & stake it in AUSD-BUSD or elsewhere
Here, users barely care about AUSD price because their AUSD exposure is neutral; when they close their positions, they will return the same amount of AUSD they borrowed, regardless of price. The only effect AUSD price can have on borrowers who are AUSD neutral is IL within an LP pair like AUSD-BUSD. However, such IL is trivial for a single digit % price move. Even if AUSD were to harshly depeg to .89 when users closed their positions, loss from IL would be 0.17%
Use Case B: Cycle/loop Borrowing AUSD: mint AUSD multiple times to increase leverage on collateral.
This is when users deposit collateral like BUSD, mint AUSD & sell that into more BUSD. Then redeposit the new BUSD to mint more AUSD, and so on. Strategy A of Borrow to stake could be said to be neutral/indifferent to the AUSD peg. Meanwhile, Strategy B of looping AUSD borrowing is SHORT on AUSD, and is the primary reason why a hard peg on the sell side, keeping AUSD below <$1, is vital. To unwind their positions, users who loop AUSD will have to buy back AUSD. If AUSD price substantially rises after they opened their positions, they would have to pay more for buying AUSD and would thus take losses. This is why their positions have short exposure. As a leverage strategy, Strategy B is in theory higher risk. So having a hard peg on sell side of <$1, when combined with AUSD’s Alpaca Guard-like liquidation protection, allows users who loop AUSD to minimize sell side risk, making it easily estimated & effectively trivial.
Use Case C: buy AUSD to stake in AUSD-BUSD or elsewhere.
This is similar to Strategy A with the difference being that users, who are attracted to a utility opportunity for AUSD such as staking in AUSD-BUSD, buy AUSD directly instead of minting it. Because Strategy A of borrowing to stake is typically higher ROI than buying to stake (as long as liquidation risk is appropriately monitored), buying to stake is commonly used by less experienced users who are uncomfortable or unaware of how to mint/borrow AUSD. Buying to stake is also a more common DeFi use case which is why users are comfortable with it, and there are cases where it makes sense. Strat C is the only one of the 3 that’s long on AUSD and thus cares about buy side peg. Yet, it is also the least commonly used strategy. Early on in a stablecoin’s life, which is AUSD’s stage now, buying to stake isn’t used as much as the other 2 strategies. Most buys are from arbs. As a stablecoin’s ecosystem utility increases over time though, buy and stake use cases increase, such as with DAI now.
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Regarding the buy side peg, it’s also important to realize that there is a long-term peg guarantee implicit in the economics because net market buying for all strategies is >=0. That’s because when AUSD is sold, it has to be bought back later to close the position. Selling of AUSD can only happen after it is minted.
Borrowers who stake(Strat A) don’t buy or sell
AUSD loopers sell, but then have to buy back later 
Buyers who stake have to buy first
Thus, net buying of AUSD is >=0 for all strats, which is a long term $1 peg guarantee
On a final note, one additional buy side peg mechanism is interest rate control. If AUSD price ever drops too low, we can raise borrowing interest rates to encourage Loopers of AUSD to do buy backs of AUSD, which creates positive net buy pressure and corrects the price up.
As we continue to roll out utility, more users of Buy and stake(Strat C) will enter which will create buying pressure to offset the temporary selling pressure of Loopers(Strat B), and even push the peg above $1 which will build the BUSD Reserve for further stability. 
In summary, a stablecoin’s peg gets tighter over time as utility and circ supply grow. AUSD is sound & safe but still in a very early stage; We’ve rolled out <1/3 of public core components. If you know these principles though, you can already mint AUSD to earn high yields>20%
AUSD Peg Insurance Fund
To put our money where our alpaca mouths are (when they’re not on grass), and to show commitment to growing AUSD, we will allocate up to 40% of Dev Fund earnings to a Peg Insurance Fund that will guarantee AUSD’s price stays at ~$1, buying AUSD on the open market to support its price should it ever dip.
We recently shared an analysis on Alpaca’s platform revenue which is substantial (~$100 Mn annualized) So you can count on this Peg Insurance Fund as a reliable source of funding to continuously support AUSD’s $1 peg.
With this ongoing backstop fund, it will be very difficult for AUSD’s price to drop below $1, and in addition, in the unlikely case it should ever be necessary, our Alpaca Team will always be at the ready to put in additional measures to ensure AUSD holds it peg.
The Dev Fund capital transfer to the Peg Insurance Fund will only activate should AUSD’s price drop below the determined parameters. The ongoing capital transfer would then remain active, and continuously buy AUSD, until AUSD price returned above the determined parameters.