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Understanding Stable and the Omega
The basic mechanism
The Stable vault attempts to always give you back as many tokens as you originally supplied, plus any fees you might have earned, which are automatically compounded.
Remember that Stable vaults are denominated in their token, so you should get back the same amount of tokens as you supplied, but not necessarily the same value. So if your stablecoin loses its peg, or the major coin you held dumps, the system will not protect you.
Each Pylon pair accumulates some of its fees and revenue in an “insurance fund” used to support Stable LPs. This fund is activated when the system is under stress, and the Omega reduction factor is active.
Omega is an algorithmically defined factor that reduces the Stable liability when the underlying pool doesn’t have enough value to cover both Float and Stable.
The Omega factor is a temporary measure that protects the pool against panic withdrawals, ensuring a fair distribution of the liquidity and a chance for the pool to recover later. Without the Omega, the entire pool would get liquidated, with the fastest to exit receiving 100% of the money, and the rest remaining with nothing.
If the pool recovers, Omega will go away and the Stable LPs will be able to withdraw their full share, plus all the rewards and fees they earned in the meantime.
As long as the pair continues to generate trading volume, the pool will eventually recover.
Omega is roughly equivalent to the impermanent loss suffered by the pool. Like with the Float Delta balancing, the Pylon system is designed to hedge Omega and never let it accumulate to significant values.
If there is an Omega present, the Pylon system will use its “insurance fund” to cover the difference.
If the Float token dies (most commonly due to a rug pull), then Omega may never be reduced and the temporary loss becomes final.
Because of this, it’s important to pay attention to the token on the other side of the pair and decide whether you are comfortable with its risk.
An important design decision in Zircon is that the protocol itself doesn’t try to cover its pools.
The impermanent loss compensation and potential losses are the responsibility of the individual pools. One pool failing does not affect other pools or the Zircon protocol as a whole.
Similarly to Float's Divergence, Stable pools have an indicator called Health Factor, which can be High, Medium and Low.
The conditions that define the Health Factor are listed below:
- High: Omega is 0, or there’s enough liquidity to cover more than 50% of the vault without any reduction.
- Medium: The reserves are enough to cover more than 20% of the liquidity without applying Omega.
- Low: The reserves are insufficient to cover the liability and Omega is applied.