Peg Mechanism
Understanding how spBNB maintains its 1:1 peg to BNB is crucial for evaluating risk and opportunity in SPAI Finance.
Time-Weighted Average Price (TWAP)
The protocol uses TWAP to measure spBNB's price relative to BNB over 6-hour periods called epochs.
Why TWAP?
TWAP provides several advantages over spot price:
Manipulation resistance - Single large trades can't trigger protocol actions
Smoothed volatility - Temporary spikes don't cause overreactions
Predictability - Users know roughly when expansion/contraction will occur
Fair distribution - Rewards allocated based on sustained price, not flash pumps
How TWAP is Calculated
Every 6 hours (one epoch), the protocol samples spBNB:BNB price at regular intervals.
The protocol calculates the average across all samples.
This TWAP is used to determine the protocol state.
Appropriate actions (expand, contract, or maintain) are executed based on the TWAP.
Example: If spBNB traded at 1.03 BNB for most of an epoch but briefly spiked to 1.10, the TWAP might be 1.04. Protocol responds to 1.04, not 1.10.
The Three Protocol States
Based on TWAP, the protocol operates in one of three states:
Above Peg (TWAP > 1.01)
Protocol Action: Expansion
When spBNB is trading above 1.01 BNB:
New spBNB tokens are minted
SPAI stakers receive the newly minted spBNB
Increased supply pushes price back toward peg
Expansion rate depends on:
How far above peg (1.02 vs 1.10)
Treasury backing level
AI-optimized parameters
User Impact:
SPAI stakers earn rewards (spBNB tokens)
spBNB/BNB LPs might experience slight IL if peg corrects
Arbitrageurs can profit by selling spBNB above peg
Example:
TWAP = 1.04 (4% above peg)
Protocol backing = 102%
Expansion rate = 0.08% of total supply
If 1,000,000 spBNB exist, 800 new spBNB minted
Distributed to SPAI stakers proportionally
At Peg (0.99 < TWAP < 1.01)
Protocol Action: Maintain
When spBNB trades within the peg range:
No new spBNB minted
No expansion rewards for stakers
Existing LP farms continue distributing SPAI
Protocol parameters remain stable
AI monitors for optimization opportunities
User Impact:
Stakers earn nothing (must wait for expansion)
LPs continue earning SPAI from farms
Position values remain stable
Lowest risk environment for farming
This is the ideal state — peg is healthy, and farmers can harvest yields without worrying about rapid IL or depegging events.
Below Peg (TWAP < 0.99)
Protocol Action: Contraction
When spBNB falls below 0.99 BNB:
All expansion halts immediately
SPAI stakers earn zero rewards
PSM activates more aggressively
AI may adjust parameters to support peg
Protocol focuses on peg restoration
User Impact:
Stakers earn nothing until peg recovers
LPs still earn SPAI but at higher IL risk
spBNB holders might panic sell (exacerbating depeg)
Opportunity for contrarian arbitrageurs
Depth of Depeg Matters:
0.95-0.99: Minor, likely recovers quickly
0.85-0.95: Significant, requires attention
Below 0.85: Critical, potential death spiral risk
Peg Maintenance Mechanisms
Several forces work to maintain the peg:
Arbitrage
The primary mechanism is arbitrage profit incentive.
When spBNB > 1 BNB:
Trader acquires spBNB (minting or buying)
Sells it for >1 BNB
Pockets the difference
Selling pressure pushes price toward 1
When spBNB < 1 BNB:
Trader buys discounted spBNB
Uses it in farms or waits for recovery
Buys more as others panic sell
Buy pressure pushes price toward 1
Confidence & Expectations
Psychological component:
Users believe peg will hold → more willing to provide liquidity
Strong TVL → harder to break peg → reinforces confidence
Track record matters → successful peg maintenance builds trust
This is why early protocol health is critical—establishing credibility makes future peg maintenance easier.
Peg Stability vs Peg Defense
Understanding the difference:
Peg Stability (Normal Times)
Small deviations (0.98-1.02)
Arbitrageurs naturally restore peg
Low risk, predictable behavior
Minimal protocol intervention needed
Peg Defense (Stress Times)
Significant deviations (below 0.95 or above 1.10)
Requires active management
AI adjusts multiple parameters
Higher risk, unpredictable outcomes
The goal is to spend 95%+ of time in "peg stability" mode where natural market forces maintain equilibrium.
Historical Patterns
From Tomb Finance and other algorithmic synthetics:
Launch Phase
Often trade above peg (1.05-1.15) due to hype
High expansion rewards attract capital
Eventually corrects toward peg
Stable Growth
Peg holds 0.98-1.02 most of time
Occasional expansions create yield opportunities
TVL grows steadily
Market Stress
External events can break peg
Below 0.90 requires significant effort to recover
Death spiral risk if confidence lost
Key Insight: Peg health during market stress is the real test. Maintaining peg when broader crypto markets crash separates sustainable protocols from failed experiments.
Monitoring Peg Health
Track these indicators:
Primary Metric: TWAP
Check every 6 hours (each epoch)
1.01-1.05: Healthy expansion
0.99-1.01: Perfect stability
Below 0.99: Warning zone
Secondary Metrics
Liquidity Depth:
Deeper pools = harder to break peg
Monitor total liquidity in spBNB/BNB
Trading Volume:
Higher volume = more arbitrage activity
Low volume can allow manipulation
Treasury Backing:
Higher backing = more confidence
Below 100% raises sustainability questions
SPAI Price:
Rising SPAI = protocol confidence
Falling SPAI = potential issues ahead
What Breaks Pegs?
Market panic — Broader crypto crash creates fear
Large sells — Whales or protocols dumping
Exploit/hack — Smart contract vulnerability
Competing forks — Fragmenting liquidity
Emission concerns — Unsustainable tokenomics realized
Confidence loss — Death spiral expectations become self-fulfilling
The AI management system aims to detect early warning signs and respond before small deviations become catastrophic breaks.
Best Practices for Users
When Peg is Strong (0.99-1.05):
Safe to farm spBNB/BNB pool
Consider entering new positions
Compound rewards confidently
When Peg is Elevated (1.05-1.10):
Expansion rewards attractive but IL risk rising
Consider taking profits on spBNB above peg
Monitor for correction
When Peg is Weak (0.95-0.99):
Reduce position size or exit
Avoid new entries
Watch for recovery or further decline
When Peg is Broken (<0.95):
Exit most/all positions
Only contrarian plays appropriate
Reassess if/when peg recovers above 0.98
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