31:T13d2,md`

Float Protocol › How We Stabilise

# How We Stabilise We stabilise the price of FLOAT by controlling the supply of FLOAT on the market. Every period, initially set to 24 hours, we calculate the FLOAT TWAP (time-weighted average price) on the market. If it differs from the Target Price, we do an expansion/contraction of the FLOAT supply as necessary. This is achieved through the Protocol holding a Dutch auction (in an expansion) and a reverse Dutch auction (in a contraction), respectively. In these auctions, arbitrageurs will be given the opportunity to buy new FLOAT below market price (in an expansion) or sell FLOAT above market price (in a contraction) to make a profit. Arbitrageurs evaluate profitability and only buy/sell FLOAT when they expect a positive return. This means that they have to take into account a few cost factors: 1. Exchange Slippage Cost - The aggregated transaction fees a potential arbitrager has to pay to complete their trade by selling recently acquired assets on an exchange 2. Gas Fee - The transaction cost (this is the only cost not proportional to asset flow). 3. Cost of Capital - The opportunity cost for a bid (negligible in Float Protocol) compared to yield for lending. 4. Time value - Exposure to negative price movements in bid quantity (negligible in Float Protocol) ## Introducing Dutch Auctions Dutch Auctions, as used in [Set Protocol](https://www.setprotocol.com/) for rebalancing and [MakerDAO's Liquidation 2.0](https://forum.makerdao.com/t/mip45-liquidations-2-0-liq-2-0-liquidation-system-redesign) is a market validated and proven efficient technique. Unlike traditional English auctions, in which bids are placed with the participant's capital remaining locked until they are outbid or the auction terminates, our Dutch Auctions settle instantly. This lack of a lock-up period mitigates much of the price volatility risk for auction participants. Dutch Auctions commence at a high starting price and decrease deterministically over time. This provides: - **Single Block Composability** - **Decentralised Exchange (DEX) Compatibility** - Since Dutch Auctions settle instantly, Arbitragers can use their liquidity to cycle back to their original stake through a DEX or DEX aggregator. - **Automatic auction bidding with DEX Aggregators** - Instant settlement also allows open auctions to be utilised as a on-ramp / off-ramp to FLOAT to allow regular users to buy directly from active auctions. - **Flash Loan Compatibility** - The instant settlement also enables the use of flash loans as assets can be returned in a single block. - **Partial Bids** - Even without the necessary capital to cause the full market movement, people can participate in the auction, this greatly reduces the *Cost of Capital* mentioned above. - **Elimination of "Time Value"** - Due to the instant settlement, capital doesn't have to be locked up as is the case with traditional English auctions (e.g. MakerDAO's liquidation). - **Protection from Low Bids** - Since Dutch auction prices start high and decrease deterministically, extremely low bids are generally not possible unless sufficient time passes. - **Mitigates Oracle Attacks** - As the auctions always start in a position that is substantially favourable to the Protocol, it means that stale prices do not cause severe issues. The length of each Dutch auction is 150 sequential blocks. In an expansion, the Protocol offers to mint FLOAT to sell at the starting price of the TWAP plus a 10% buffer to arbitrageurs. The Protocol offers FLOAT at decreasing price increments, between the TWAP (plus a 10% buffer) and the target price, each block of the auction. This is done until either all the FLOAT offered is purchased (i.e. a significant arbitrage opportunity was available) or, there is no more demand to buy FLOAT, the arbitrage opportunity has been exhausted. In a contraction, the Protocol holds a reverse Dutch Auction. The Protocol offers to buy FLOAT from arbitrageurs starting at the TWAP minus a 10% buffer, and burns it, removing it from circulation. The Protocol offers to buy FLOAT at increasing price increments between the TWAP (minus a 10% buffer) and the target price, each block of the auction. This is done until either all the FLOAT the Protocol is willing to purchase is bought, or there is no more FLOAT willing to be sold by sellers. The aim of the auctions, whether an expansion or a contraction is the market supply of FLOAT should have been sufficiently changed to move the market price back to the target. The 10% buffer added to the TWAP protects the Protocol from stale price data due to potential Oracle attacks. Over the long term, the Protocol aims to tune the frequency of Dutch Auctions held, such that they occur more regularly and eventually can be held on demand by market participants. `32:[] 2f:{"title":"How We Stabilise / Float Protocol ","cells":[{"id":0,"value":"$31","pinned":false,"hidden":false,"mode":"ojs"},{"id":51,"value":"md`Next, we simulate how an auction works.\n\nNext`","pinned":false,"hidden":false,"mode":"ojs"}],"files":"$W32","stdlib":"1","titling":"auto"}