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Defrost Finance is a decentralized protocol that allows you to leverage yield-bearing Tokens or other pool tokens from Avalanche and cross-chain protocols as collaterals for generating H2O, a USD-pegged stablecoin.

What are H2O and MELT

  • H2O is a decentralized, collateral-backed cryptocurrency soft pegged to the U.S. dollar. All circulating H2O is generated from the smart contracts and can be used to repay loans on the Defrost protocol. You can redeem the idle collateral at any time, provided that it satisfies the collateral requirement.
  • MELT is a governance token issued by Defrost, with a fair launch distribution model. MELT can be used for rewards, fees, insurance and voting power in the protocol. It incentivizes early users to use the Defrost protocol. The total supply of MELT is capped at 100,000,000.

How is the price of H2O kept stable

  • H2O is a soft-pegged currency, so there is no assurance that it will perfectly track the value of the US dollar. Rather, it maintains a free-floating peg that experiences low volatility against the USD. It achieves this through a combination of external market forces, internal economic incentives, and policy tools controlled by MELT token holders.
  • If H2O demand consistently exceeds H2O supply, or vice-versa, it creates a signal that MELT holders need to adjust the H2O savings rate, which is the tool for influencing the H2O demand. Raising the H2O Savings Rate increases the demand for holding H2O; lowering the rate decreases the demand for holding H2O. This ultimately translates to a stable H2O peg.
  • Stability Fees are another policy tool that can be used to adjust the supply side of H2O. Decreases in a Stability Fee, meaning lowering the cost of borrowing, can incentivize the additional creation of H2O. Similarly, increasing Stability Fees can reduce H2O generation.
  • Arbitrageurs also contribute to the short term stability of the peg by taking advantage of price differences across various H2O markets.