Arbitrage: Repayment

Demand Dynamics due to Repayment

Loan Repayment: Reducing Supply and Increasing Demand

Repaying loans is a critical arbitrage mechanism that directly affects peg stability by reducing the circulating supply of synthetic assets. When borrowers repay their loans, they remove synthetic assets from circulation, which helps push the market price back up if it has fallen below the protocol price.

Arbitrage Opportunity in Repayment: If the market price is below the protocol price, borrowers can buy synthetic assets from the market at the lower price and repay their loans at the protocol price. This creates market demand for synthetic assets, reducing supply and driving the price upward, helping to restore the peg.

Interaction with Collateral Management: Repaying loans also helps borrowers manage their collateral ratios, reducing the likelihood of liquidation. When borrowers repay their synthetic assets, they release collateral back into their control, allowing them to maintain a healthier collateralization ratio.