EURO3 Strategies

Is the price of EURO3 always 1 EUR?

No. The price of EURO3 depends on the supply and demand of EURO3. Deviations from EUR price creates profitable opportunities for arbitrageurs. In this blog post, we will discuss those strategies.

TL;DR: Borrow EURO3 when it’s over-pegged and repay the debt in your vault when EURO3 is under-pegged.

Price EURO3 > 1 EUR

When the price of EURO3 is above 1 EUR, arbitrageurs are incentivized to mint EURO3 in their vaults at EURO3 price = 1 EUR and sell EURO3 at a profit.

• Profit = EURO3sold*(EURO3 price -1-mintingFee-exchangeFee).

mintingFee=0.5%,
exchangeFee = 0.1%

• Profit is >0 when the price of EURO3>1.006 EUR

Additionally, arbitrageurs can expect the price of EURO3 to go towards 1.006, so they can sell EURO3 above 1.006 planning on repurchasing it when the price is at or below 1.006.

Price EURO3 < 1 EUR

When EURO3 price is lower than 1 EUR, arbitrageurs are incentivized to buy EURO3 on DEXs and repay their EURO3 debt at EURO3 price of 1 EUR. Users can also sell a portion of the collateral in their Vault to repay some of the debt at a discount or redeem EURO3 for collateral from risker vaults with low Health Factor. Arbitrageurs who buy EURO3<1 on the market and repay their debt realize a profit right away.

• Profit = EURO3repaid*(1-EURO3 price-exchangeFee)

When exchangeFee=0.1%, arbitrageurs who repay their own debt realize a profit when EURO3 price < 0.999EUR. Arbitrageurs who redeem EURO3<1 for collateral and repay someone else debt realize a profit as well.

• Profit = EURO3Redeemed * (1-EURO3 price-redemptionFee -exchangeFee)

RedemptionFee depends on the Health Factor of the specific vault that is redeemed. The lower the Health Factor of the vault, the lower the redemption fee. Additionally, arbitrageurs can expect EURO3 price to go back to 1, so they can buy EURO3 below 1 planning on reselling it when the price is at or above 1.

Conclusion

Under normal market conditions the price of EURO3 should oscillate between 0.999 EUR and 1.006 EUR. This means that EURO3 should be expected to keep its peg within 0.007 EUR, or 0.7% margin. Any deviations more than 0.7% range should create immediate profits for arbitrageurs.

Disclaimer: The information provided in this post is intended for educational purposes only. It is not intended to serve as financial advice, and any actions taken based on the content of this post are at the sole discretion of the reader. The views and opinions expressed herein are those of the author and do not necessarily reflect the official policy or position of any organization. Readers are encouraged to conduct their own research and seek professional financial advice before making any investment decisions.