Arbitrage

Mutuum’s stablecoin is designed with a fixed on-chain valuation of $1, creating potential arbitrage whenever the market price deviates above or below that threshold. Arbitrage plays a key role in stabilizing the stablecoin’s price and maintaining its peg to one U.S. dollar.

If the stablecoin’s market price exceeds $1 (e.g., $1.05), borrowers can mint new stablecoins at the protocol’s $1 baseline and sell them on the open market at the higher price, pocketing the difference. This process expands the stablecoin supply and applies downward pressure on its market value. Once the price moves back toward $1, the user can repurchase the stablecoins at or near $1 to repay the debt, retaining any profit. By increasing supply during periods of higher market pricing, arbitrage participants help bring the stablecoin back in line with its $1 peg.

If the stablecoin trades under $1 (e.g., $0.95), users with outstanding borrow positions can purchase it at a discount and repay their debt, effectively retiring $1 worth of liability for less than the nominal cost. This action reduces the stablecoin supply and pushes the price upward. Arbitrageurs who spot this opportunity buy tokens under $1, repay their loans, and save the gap between the discount price and the protocol’s $1 reference.