Arbitrage: Borrowing

Supply Dynamics due to Borrowing

Borrowing: Increasing Supply and Market Equilibrium

When borrowers issue synthetic assets by locking collateral, they increase the synthetic asset supply in the market. This action is driven by the borrowing ratio, which dictates the required collateral to issue synthetic assets.

Borrowing Ratio’s Impact: A higher borrowing ratio means more collateral is required per synthetic asset, creating a more conservative issuance. However, the key factor in liquidation risk is the spread between the borrowing ratio and the liquidation ratio.

Supply and Peg Stability: Borrowing synthetic assets, especially when the market price exceeds the protocol price, helps balance supply and demand. Borrowers sell synthetic assets into the market, increasing supply and driving down the price toward the protocol value.