This article is a continuation of the How USDO works article referenced above.

While the above article describes some of the mechanics of how the peg will be achieved for USDO, there is an inherently simple mechanism by which a hard peg will be established.

But first a primer on stable coins. While there are a variety of them we will for our purposes only review 2: sUSD (Synthetix) and DAI.

These are both synthetics, you lock in one asset and mint a new token that traces the price of something else (in this case the US Dollar).

The minted token is essentially a debt, and each minter is creating a Collateralized Debt Position.

The difference between DAI and sUSD is that the Debt position for DAI is distinct per minter while for sUSD it is a common debt pool.

There are several reasons why sUSD does a common debt pool. But one of the side effects it has is that it allows for a very hard peg (in theory superior to DAI).

If person A mints DAI by locking ETH and then onsells it to person B, then B cannot claim $1 worth of collateral. The CDP is owned by A and only A can unlock the collateral (while he remains overcollateralized).

On the other hand if A mints sUSD and sends it to B. B can redeem sUSD for $1 worth of SNX collateral.

This means that sUSD can be redeemed on demand, while DAI cannot, thus making sUSD a simpler and more effective solution.

DAI however historically has more volumes and often a better peg. There are operational reasons for this discrepancy which are beyond the scope of this article.

But at a very high level if your stable coin can always be redeemed for $1 worth of some other liquid asset, you have a very hard peg.

The USDO model is a bit similar to Maker with separate CDPs per user.

But there is still a way to achieve a hard peg.

On the minter module of OCP, USDO always is priced at $1. Regardless of what the market going rate may be.

At any given point in time, there is generally always a substantial amount of positions that are underwater.

This means you can acquire the collateral backing them by paying back the USDO. And you need not be the person who created the CDP.

So a simple bot that always buys USDO when it is below peg and liquidates underwater positions using it would be very profitable and always bring back the peg to where it should be.

This would lead to a hard peg.

It is plausible that there are no underwater positions and the peg is off. In that case the interest rates can be adjusted to bring it in sync.

But invariably there will always enough opportunities there to buy cheaper on market USDO and redeem it for $1 worth of collateral and thus pushing the peg to where it should be.