Balancing the Demand

The zero funding rate mechanism has raised a question: how does LongOnly balance the demand for long positions and PUSD stablecoin (short positions)?

Pure.cash has introduced the following mechanisms to address this issue, using a specific market (e.g., ETH/USD) as an example:

1. Liquidity providers (LPs) absorb imbalances between long and short positions within its liquidity range and receive 35% of the trading fee income.

2. When long positions demand exceeds stablecoin demand:

• Preset Limit: The system sets a limit to ensure that the total of long positions does not exceed the sum of the LP pool liquidity and the issued stablecoins.

• Floating Fee Mechanism: When the utilization rate of the liquidity pool exceeds 90%, a floating fee mechanism is activated, increasing the cost of opening new positions. This mechanism prevents complete liquidity depletion and maintains system availability during high-demand periods.

3. When stablecoin demand exceeds long positions demand:

• PUSD Supply Cap: Once the preset PUSD supply cap (adjustable by the DAO) is reached, further PUSD minting is suspended, allowing only burning. With LongOnly’s competitive advantages, we expect long position demand to typically exceed PUSD demand when a reasonable cap is set, representing the protocol’s target equilibrium.

If long position demand decreases abnormally, deviating from this equilibrium and rapidly decreasing LP pool utilization, the “Active Redemption Mechanism” will be triggered to restore the balance.

• Active Redemption Mechanism: The Stability Fund directly buys back PUSD or purchases USDC, then uses the Peg Stability Module (PSM) to mint PUSD on a 1:1 basis with USDC. Those PUSD are subsequently burned, thereby reducing the supply of PUSD in the market and restoring balance.