Using arbitrage
Last updated
Last updated
When the parity of a kCoin falls below the target value, the protocol mints new XKP and buys that kCoin. When a kCoin is overvalued, it will mint that kCoin to then buy XKP. Since it buys kCoins at a low price and sells at a higher price, profits will be made.
In the Strategies section of the Kopi App, users can find the Arbitrage tab and the available tokens, known as aAssets. Each aAsset has a vault of cAssets and kCoins. Whenever the value of a kCoin falls below its target value, the protocol uses the available cAssets to buy kCoins. When the value is above parity, kCoins are sold in favour of the cAssets.
While this strategy to generate yield can be done with tokens such as USDC, using cAssets, such as cUSDC, offers additional benefits: cAsset tokens generate income whenever users take out loans. Hence, holding cAssets not only reduces idle capital but also generates income.
Users can participate by adding funds into the arbitrage vault such as cUSDC, or underlying tokens like USDC. In the latter case, the protocol adds USDC to the Money Market to receive cUSDC and the arbitrage vault receives these new tokens. In return, users will receive aAssets, like asUSDC.
The amount of aAsset token the user receives depends on the value of the deposit: When the arbitrage vault has 100 cUSDC and you add another 100 cUSDC, your deposit represents 50% of the vault, so the tokens you get must represent 50% of the supply. If there are 100 asUSDC in circulation, you receive 100 asUSCD.
Note that the relation of cUSDC and asUSDC likely is not 1:1: If in the previous example, the circulating supply of cUSDC instead of 100 is only 10, you will only receive 10 asUSCD. However, the value of the tokens you receive in both cases is the same.
In cases the vault contains not only cAsset tokens but also kCoins, the value of the kCoins is converted to the value of the cAsset token using current market prices.
Redeeming aAsset tokens means giving back your tokens to the protocol and receive the corresponding share in form of cAsset tokens.
The amount of cAsset tokens you receive when reedeming depends on the share of the returned tokens in relation to the total supply: If there are 100 cUSDC in the vault, and you redeem 10 asUSDC and there are 100 asUSDC in circulation, your redemption represents 10% of the vault's value, which entitlies you to 10 cUSDC.
Note that you can only receive cAsset tokens when there are enough tokens available in the vault: When the connected kCoin is below peg and the protocol has used the cAsset tokens to buy the kCoins, there might not be enough cAsset tokens in the vault to fulfill your redemption request. In that case you either have to wait till the protocol has bought back the cAsset token or you sell your aAsset tokens on the market.
