“Will FUSD ever hold peg?”

Revenant Labs
5 min readMay 14, 2021

Yes. Hopefully?

FUSD is a Fantom native stable coin that’s backed by the Fantom Opera team. Comparatively, it’s like what BUSD is for Binance Chain, except it’s on Fantom and it’s worth ~$0.40.

This is a huge problem for a multitude of reasons.

  1. TONS of people will lose their FTM once the Fantom team decides to add liquidations.
  2. Nobody wants to use an “unstable” stablecoin.

To understand why liquidations are important to a stable price, we must first understand how FUSD is minted. (You can skip to the TL;DR if you already have a good understanding of this).

According to the Fantom Foundation website, one must lock-up their FTM, and they can mint FUSD at a 1:1 ratio to the USD price.

Taken from https://fantom.foundation/defi/

Minting is collateralized at 500%, meaning that 1000 FTM priced at $0.80 will allow you to mint 1000 * 0.8 * 1/5 = 160 FUSD.

However, because FUSD is worth around ~$0.40, you are only getting around $64 of actual value. Normally, this is where liquidations come in to save the day.

Expanding upon the previous example, let’s say the price of FTM drops to $0.70. At this price, you are only suppose to be able to mint 1000 * 0.7 * 1/5 = 140 FUSD. But you’ve already minted 160 FUSD. In this situation, you are undercollateralized and under risk of liquidation.

While no-one wants to be liquidated because you lose all your FTM, it’s an important mechanism that keeps the price of FUSD pegged to $1. This price stability occurs because there is demand for FUSD in the case that someone is unable to maintain the proper collateralization ratio.

Continuing on with the example, you decide to gamble the 160 FUSD on CSGO knives and end up losing all your FUSD. Currently, you are at risk of liquidation, and you don’t have the funds to payback the 20 FUSD that is required to keep a 500% collateralization ratio.

Now, someone else does have the funds to payback the loan. They buy 140 FUSD and are able to liquidate you for the underlying collateral of 1000 FTM. The liquidator profits 1000 * 0.7 -140 = $560. You end up losing 160 -1000 * 0.7 = -$540.

TL;DR: Liquidations keeps price stable because it incentivizes minters to not over mint FUSD and it incentivizes the buyback of FUSD to maintain a proper collateralization ratio. Additionally, liquidators are willing to buy FUSD to make a quick buck when minters are being too risky.


As a result, people are over-minting FUSD because they have no fear of liquidations. Over-minting will be a huge problem since the Fantom Team has promised that they will add liquidations in the future. Once liquidations are added, a lot of people will lose their FTM because they are undercollateralized. (FTM price will probably tank too because liquidators typically market sell their collateral into another stablecoin such as USDC).

Additionally, there is NOTHING you can do with FUSD except sell it for another token. (Spirit originally provided rewards for FTM-FUSD LPs, but was removed). Because of these two factors, there is no surprise that FUSD is only worth ~$0.40.

Wait, but there’s more to exploit?

Indeed. Without liquidations, people are “folding” their FUSD. Essentially, people are:

  1. Minting FUSD with their staked FTM
  2. Selling FUSD into FTM
  3. Re-staking their FTM
  4. Mint more FUSD
  5. Repeat

While this may seem like a good idea to leverage up on ~10% APR, this can be pretty dangerous. @Simp2win details a similar situation that happened with $vBNT and the risks associated with “folding”.

In summary, people who are “folding” their FUSD will get screwed once FUSD holds peg.

Let’s say someone completed the process we talked about above with 1000 FTM at $0.80 and FUSD at $0.40.

  1. Mint 160 FUSD with 1000 FTM
  2. Sell 160 FUSD to 80 FTM
  3. Stake 80 FTM
  4. Mint 16 FUSD
  5. Sell 16 FUSD to 8 FTM
  6. Stake 8 FTM

This strategy works out great if FUSD stays at $0.40 or dips lower since they are earning yields on an additional 88 FTM. However, if FUSD increases in price, which it eventually will when FUSD holds peg, people folding will lose a lot of money.

Let’s see what happens when this person tries to withdraw all their FTM when FUSD goes to $1.

  1. 8 FTM can only buy 6.4 FUSD (Need 9.4 FUSD more to unlock 80 FTM)
  2. 80 FTM can only buy 64 FUSD (Need 94 FUSD more to unlock 1000 FTM)

That’s 9.4 + 94 = $103.4 or 64.6% loss compared to just holding FUSD that you originally minted to unlock 1000 FTM. If you can’t afford to get that additional 103.4 FUSD, the 1000 FTM is liquidated as well.

Unfortunately, many people are implementing this risky strategy, raising sell pressure on FUSD, and lowering the price of FUSD even more.

So, why should Fantom users care?

A direct consequence of an “unstable” stablecoin is that it lowers the legitimacy of the Fantom Blockchain as a whole. Binance Chain’s native stablecoin BUSD is able to consistently hold peg, and there are ~7.8 billion BUSD in circulation. In comparison, there is around ~48 million FUSD in circulation. FUSD isn’t even the most popular stablecoin on Fantom

With the most popular stablecoin being USDC at ~37 million circulating supply on Opera, Fantom only has ~101 million properly working stablecoins (~32 million circulating supply for DAI and fUSDT each). BUSD alone is 70x the circulating supply of FUSD.

Lacking a reliable native stablecoin, the growth of the Fantom ecosystem is significantly stunted. Low liquidity prevents whales from entering the space because of high slippage costs for moving capital around.

As avid Fantom supporters, we believe that getting FUSD to peg is a dire issue that needs to be addressed, and we’re not waiting around for that to happen.

While we can’t add liquidations, we can introduce new usages for FUSD to drive up demand for our forgotten stablecoin.

Welcome StakeSteak protocol: providing interest-bearing FUSD and FUSD LP rewards.

Prices and total supply data was taken on 5/13/2021 from Ftmscan and CoinMarketCap