Collateralization for iAssets with fixed supply

Graveyard
1

Hi all,

I’m very interested in the Indigo Protocol project and trying to understand everything the best I can. My question comes related to collateralization of assets with a fixed supply, having in mind Bitcoin.

As stated in the whitepaper:

So, for example, we can lock up some collateral to create a synthetic asset called iBTC that has the same value as Bitcoin on the Blockchain without having any real Bitcoin in the first place.

Let’s say 1000 iBTC have been created with an average price of 40000$, so the collateral amount of USD deposited is 40M$. At this point, BTC price is catapulted to 60000$. We still have 40M$ of collateral that would have to cover this 1000 iBTC, and we are 20M$ shy of covering everyone. How is this problem solved/prevented?

Also this parallel trading of iBTC can’t affect the price of BTC, right? It’s like trading paper pegged to the value of BTC via Oracles. Could a high volume of trading in iBTC break this pegging somehow?

I’m pretty sure it’s covered in the whitepaper but can’t wrap my mind around it, a simplified example would help.

Thanks

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Great question, well communicated. I had a similiar thought, but was struggling to put in text.

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All iAssets must be over collateralized. You wouldn’t be able to mint 1000 iBTC with $40M collateral if BTC was trading at $40k. So the situation you described would never occur.

iBTC won’t affect the price of BTC directly but it could affect price indirectly. A high volume of trading in iBTC won’t break the peg.

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Hi defiroose,

Thanks for the detailed answer. So by over-collateralizing, you have a “value buffer” against the iAsset, but if the price starts increasing at some point it would match it. What would the protocol do in such situation, if the value of the iAsset is going to surpass its collateral?

Cheers

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The position is liquidated

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