Shade Protocol — A Community Series: Economic Symbiosis

Article #4

author: VJ

The Economic Symbiosis of Shade and Silk

In nature, “symbiosis” is the concept of a mutually beneficial relationship between two species. Flowers and insects. Trees and fungi. Buffalo and oxpecker. Without the benefits each brings to the relationship, the other wouldn’t flourish.

Shade and Silk reflect this symbiosis in their economic relationship to one another. The goal of this piece is to help you grasp how Shade and Silk work together.

Silk is an algorithmic stablecoin pegged to a basket of assets and currencies as the ultimate hedge against economic volatility.

Shade functions, in part, as a stabilizer token for Silk. But before we can understand exactly how the stabilizing works, it is helpful to grasp the basics of how Silk and Shade are minted and converted:

  • Shade and Silk are both minted by depositing sSCRT into the DAO’s Treasury
  • You can burn Shade and convert to Silk, or burn Silk to convert to Shade

Fun fact: both minting and entry are zero slippage. So you, as a user, don’t have any value slip between your fingers during these transactions. But why would you want to burn Shade to mint Silk, or visa versa?

The market incentive for you to convert between Shade/Silk might — in part — be to participate in the stabilization of Silk. And there are some real market incentives to do so. These are encapsulated in an economic principle called “arbitrage”.

What is Arbitrage?

If Silk’s target peg is $1 and it floats up to $1.08 for a week, then meanders down to $.75 for a while… Ummm… that is not a good stablecoin.

So who controls that price action? Ultimately, it is up to the open market. And that includes you. Luna and USDT have proved that this model can work quite well.

If the supply of Silk was too great for market conditions, then its value would drop below the peg to, say, $0.98. This price point indicates that the supply is too large (and thus, demand insufficient) to support a $1.00 price.

If you value the utter stability of Silk, we know it’s best for the supply and demand dynamics to be balanced “just so” in order to create that price target of $1.00.

So what can the market and individual users do about that? If the price was sitting at $0.98 and you held $1000 worth of Silk, it’s arbitrage time. With zero slippage, you would burn your Silk to convert it and mint Shade. You just accomplished a few things:

  • Decreased the supply of Silk (and increased its scarcity). This will serve upward price movement.
  • Purchased Shade at a 2% discount (since 1 Silk mints $1 worth of Shade and at the time of purchase your Silk was valued at $0.98)

If you have $1000 worth of Silk you just made $20 in ten seconds. You could sit on your freshly increased supply of Shade to take advantage of future market opportunities (in the reverse). Or you could rapidly exchange some of those shrewdly earned rewards on an AMM (automated market maker) for an asset of your choice.

And of course, you could play this game in reverse. If Silk is trading at $1.02, that means the supply is too scarce for a $1.00 price point. So as a user, your move is to increase the supply of Silk by converting your Shade and minting Silk. If you burn $1 worth of Shade to mint 1 Silk you are:

  • Increasing the supply of Silk (and decreasing its scarcity). This will serve to drive the price down.
  • Minting Silk for $1 that the market currently values at $1.02.

With your Silk, and the price of Silk sitting above target, you can exchange it for another asset.

Market Incentives for Silk Stability

The market incentivizes users to keep the peg. More specifically, you are rewarded for helping keep Silk at the peg. And these are the basics of arbitrage. You are taking advantage of price disparities in a way that is both individually rewarding and profoundly helpful to the stability of Silk.

Maybe you see the potential opportunities and are thrilled to get your arb on!

Or maybe you hear all this and think, “That sounds like a lot… Gosh, I just wish I had a super-smart robot that could do all this for me.”

Well, good news, Synthesis (the DAO Treasury) actually has an arbitrage bot that is making these kinds of market moves. The bot’s name is Sky. It likes expensive cheese, red wine, and making money in crypto (or wait, is that you?…) Sky never sleeps and always watches Silk relative to the peg. If you are a Shade holder, you get to benefit from that passively.

So as the Shade Protocol ecosystem rolls out you can actively arb, or just let the rewards for holding Shade roll in (treasury dividends, staking, and stabilizer airdrops).

Regardless of your approach, now you have a fuller picture of the economic symbiosis between Shade and Silk.

We expect Silk to make a strong case for being the most stable asset on the planet (and if that claim seems outlandish, you can read more about it here, Silk Whitepaper.

And a core part of Silk’s stability is this interplay with Shade. Silk will calibrate to its peg as the market values the peg and resolves disparities. Silk’s stability is good for its utility as a stablecoin and also highly rewarding for Shade/Silk users.

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