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title: The Basis Cash Stability Mechanism (One Pager)

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# The Basis Cash Stability Mechanism (One Pager)

The Basis Cash protocol aims to ensure price stability of Basis Cash (cash) tokens. Here, we outline inner workings of Basis Cash's stability mechanism.

## Tokens
The Basis Cash protocol consists of three tokens, with each token designed to maintain price stability of Basis Cash.

**Basis Cash** --- Basis Cash tokens aim to be used as a medium of exchange. Cash tokens are built to maintain their peg to the **Multi-Collateral Dai** token.

**Basis Bonds** ---Basis Bonds (bonds) are issued and redeemed to adjust Basis Cash supply. Bonds do not have interest payouts, nor do they have maturity / expiration dates. Instead, they are one-to-one redeemable at the Treasury, as long as preconditions are met (explained below).

**Basis Shares** --- Basis Shares (shares) represent the value of the Basis Cash system. Increased demand for Basis Cash results in new Basis Cash tokens to be minted and distributed to Basis Share holders, provided that the Treasury holds sufficient funds.

## The Treasury
The Treasury manages core functions of Basis Cash's stability mechanism. It is responsible for sale & redemption of bonds, and generation of new seigniorage.

### Bond Sales
At any point in time, new bonds can be purchased from the Treasury in exchange for cash. Cash tokens used in bond purchases are burnt, reducing cash supply. The sale price of bonds is determined by the current value of Basis Cash, in a way that if the price of _**1 Cash = P DAI**_, bonds are sold at a price of _**1 Bond = P Cash**_, the effective price being _**1 Bond = P² DAI**_.

This pricing mechanism is to incentivize bond purchases when P<1 and discourage purchases when P>1. For example, if the Basis Cash oracle price is at 0.9 DAI, then each bond is sold at 0.9 cash (worth 0.81 DAI). This yields the purchaser a premium of 0.19 DAI when redeemed.

### Bond Redemptions
Purchased bonds can be redeemed one-to-one to cash via the Treasury, where a pool of cash is kept for bond redemptions. Redemptions only occur when the Treasury pool is not empty. Every redemption introduces new cash into circulation, thereby increasing their supply.

Redemptions are allowed only when the oracle price of cash is above 1 DAI. This is to prevent bond holders from cutting their losses on redemptions and creating unneccessary supply increases.

### Seigniorage Generation
If the cash price rises above 1.05 DAI, the Treasury mints _**(P-1)$\times$totalSupply**_ units of new cash tokens. Minted cash is either given to the Treasury pool or the Boardroom pool (to be distributed to share holders), depending on current cash balance of the Treasury pool.

When there's a high demand for bond redemptions, the Treasury pool is likely to have a low cash balance. Thus, if the Treasury pool's cash balance is below 1,000 cash, then minted seigniorage is used to refill the Treasury pool.

However, if there's not enough demand to redeem bonds, then the Treasury pool is expected to have sufficient cash balance. This can happen when all bonds have been redeemed, or if bond holders are not willing to make redemptions. Therefore, if the Treasury pool has a balance above 1,000 cash, then minted seigniorage is given to the Boardroom.

## The Boardroom
The Boardroom is used to distribute excess cash seigniorage to holders of Basis Shares. Share token holders can claim a pro-rata share of cash accumulated to the Boardroom contract.

## Mechanism Recap

### Contractionary
If Basis Cash is trading below the price of DAI stablecoin on Uniswap, then cash supply is reduced via new bond purchases.Cash holders can purchase bonds at a discount, expecting future profits upon redemption. Cash used in purchases are burnt, reducing circulating cash supply.

### Expansionary
On the other hand, if Basis Cash is trading above 1 DAI, the Treasury responds by allowing bond redemptions. Cash in the Treasury pool is released to bond redeemers, increasing the supply of cash.

In cases where the Basis Cash oracle price rises above 1.05 DAI, the Treasury mints new cash seigniorage into existence. This seigniorage is given to the Treasury pool if its balance is below 1,000 cash, used up by bond redeemers. Otherwise, if the Treasury's balance is above 1,000 cash, seigniorage is given to the Boardroom, distributed to share token holders.