How does the BENQI (QI) coin handle inflation?

The SAVe mechanism ensures QI holders benefit from consistent asset value and reduced token price volatility.

Dec 21, 2024 at 05:10 am

Key Points:

• BENQI's (QI) Stable Asset Value (SAVe) mechanism dynamically adjusts the supply of QI tokens to maintain price stability.
• The SAVe mechanism uses a target collateral ratio to determine the issuance or burning of QI tokens, ensuring that supply adjusts in response to changes in demand.
• QI holders benefit from a consistent value for their assets and reduced volatility in token price.

Article Content:

1. The Stable Asset Value (SAVe) Mechanism

The BENQI (QI) Stable Asset Value (SAVe) mechanism is a key element in its inflation management strategy. SAVe dynamically adjusts the supply of QI tokens to maintain a stable price, preventing substantial inflation or deflation.

The SAVe mechanism relies on a target collateral ratio to determine when to issue new QI tokens or burn existing ones. When the collateral ratio falls below the target, new QI is issued to increase supply. Conversely, if the collateral ratio exceeds the target, QI is burned, reducing supply.

2. Dynamic Supply Adjustment

The dynamic adjustment of QI supply ensures that the price remains relatively stable. When demand for QI increases, pushing its price above the target, the SAVe mechanism issues new QI tokens to meet the increased demand, bringing the price back to stability.

Conversely, if demand for QI decreases, causing its price to fall below the target, the SAVe mechanism burns QI tokens to reduce supply, raising the price back to stability.

3. Stability for QI Holders

By maintaining a stable price, the SAVe mechanism provides several benefits for QI holders:

• Consistent Asset Value: QI holders can expect their assets to retain a consistent value over time, reducing uncertainty and risk.
• Reduced Volatility: The SAVe mechanism helps dampen price fluctuations, reducing the volatility of QI tokens for both investors and users of the BENQI platform.
• Predictable Return: Stable prices enable QI holders to more accurately forecast potential returns on their investment.

4. Underlying Mechanisms of SAVe

The SAVe mechanism operates in conjunction with the following underlying mechanisms:

• Collateralization: QI tokens are backed by collateral assets on the BENQI platform, such as stablecoins or other cryptocurrencies.
• Collateral Ratio: The collateral ratio is a measure of the value of collateralized assets relative to the value of outstanding QI tokens.
• Target Collateral Ratio: BENQI sets a target collateral ratio that determines when to issue new QI tokens or burn existing ones.

5. Benefits of Inflation Management

The effective management of inflation offers several advantages for the BENQI ecosystem, including:

• User Confidence: Stable prices foster confidence among users that their assets are safe and less susceptible to inflationary pressures.
• Market Adoption: A stable QI token facilitates the broader adoption of the BENQI platform and its services, including lending, borrowing, and yield farming.
• Long-Term Viability: Inflation control promotes the long-term viability of the BENQI ecosystem by preventing excessive price volatility or devaluation of its assets.

FAQs:

1. What is the target collateral ratio for the SAVe mechanism?
The target collateral ratio is set by BENQI and can be adjusted over time based on the evolution of the ecosystem. Currently, the target collateral ratio is set at 120%.

2. How often does the SAVe mechanism adjust QI supply?
The SAVe mechanism operates in real time, continuously monitoring the collateral ratio and making supply adjustments as needed.

3. How is the collateral ratio calculated?
The collateral ratio is calculated by dividing the total value of collateralized assets by the total value of outstanding QI tokens.

4. What happens if the collateral ratio falls below the target?
If the collateral ratio falls below the target, the SAVe mechanism will issue new QI tokens to bring it back to target.

5. What happens if the collateral ratio exceeds the target?
If the collateral ratio exceeds the target, the SAVe mechanism will burn QI tokens to reduce supply and bring it back to target.