UXD OTC

We are excited to release a new primitive, UXD OTC(Over-the-Counter)!
Read below for more details.

What is UXD OTC

UXD OTC is a DEX function for SOL <-> USDC.
The mint and redeem functions of UXD Protocol can be regarded as a DEX for SOL <-> UXD, and by connecting to the USDC/UXD pool of Saber, users will be able to swap SOL for USDC and vice versa through this connected route, which will enable users to get better rates in certain situations.

How it works

What does it mean that the mint and redeem functions of the UXD protocol can be regarded as SOL <-> UXD DEX?
Let’s go through an example to get a better understanding of how it works.

UXD mint
The user deposits SOL and receives UXD equivalent to its market price. For example, if the price of 1 SOL is 30 USD, the user receives 30 UXD for each SOL deposited.

UXD redeem
The user redeems UXD and receives SOL equal to its market price. For example, if the price of 1 SOL is 30 USD, the user will receive 1 SOL for redeeming 30 UXD.

From the above example, you can see that minting UXD is equivalent to selling SOL at the market price, and redeeming UXD is equivalent to buying SOL at the market price. In other words, the mint and redeem functions of the UXD protocol can be regarded as SOL <-> UXD exchange.

Advantages

When market conditions are favorable, the advantage is that you can trade at better prices and/or liquidity than in other markets.
So under what conditions do the above advantages hold? The clue lies in the market price that UXD refers to.
Due to its characteristics, UXD Protocol mints and redeems UXD by referring to the perpetual futures market (currently the perpetual futures of Mango Markets) instead of the spot market. In other words, if the price of the perpetual futures market is better than the spot market, the offered price of UXD OTC will also be better, and if the liquidity is better than that of the spot market, the liquidity of UXD OTC will also be better.

So, how does the perpetual futures market compare to the physical market in terms of price and liquidity?
In most exchanges, the liquidity advantage of the perpetual futures market is satisfied because the liquidity of the perpetual futures market is better than that of the physical market.
The futures price is higher or lower than that of the spot market, and the measure of the price difference between the spot market and the perpetual future market is the funding rate (FR), which is well-known to everyone. When perpetual futures > spot, FR is positive, and when perpetual futures < spot, FR is negative. Conversely, when the FR is positive, the UXD OTC price is higher (favoring selling), and when the FR is negative, the UXD OTC price is lower (favoring buying).

Conclusions

Given the above advantages, SOL is exchanged for USDC at UXD OTC when FR is positive and USDC is exchanged for SOL at UXD OTC when FR is negative. This means that when the FR is positive, the market trades to lower the FR by accumulating sell positions, and when the FR is negative, the market trades to raise the FR by unwinding sell positions in the perpetual future market. We think that the UXD OTC could be regarded as an FR stabilizer or as an arbitrage transaction between the perpetual futures market and the spot market.

Try out the OTC function here!