Peg-Responsive Interest Rate Model (PRM): A deep dive
General Overview
Over-collateralized stablecoins with fixed borrow rates have a structural weakness in stress. Although trading below peg lets borrowers buy the stablecoin at a discount to repay debt more cheaply, flat borrow rates add no ongoing cost to keeping a position open, and new minting continues at the rate that applied before the depeg.
This article covers the release of the Peg-Responsive Interest Rate Model (PRM), the new depeg-protection mechanism for DUSD. It replaces the fixed-rate interest rate models on Alto's Mint Markets with a rate driven by DUSD's price against frxUSD. At or above the recovery price, a market charges its normal base rate. As the price falls, the rate rises: first linearly, then exponentially, doubling for each additional step below the stress threshold until it reaches a per-market cap.
Two properties define the design.
- Depth, not duration: The rate responds to how far DUSD has fallen, not how long it has been there. A shallow depeg produces a modest surcharge. A deep one produces a large surcharge.
- Per-market caps: Each cap is sized so a borrower at the maximum borrowing LTV still has roughly three days to repay or add collateral before interest alone carries the position to its liquidation threshold.
Scope covers all Mint Markets: WETH, wstETH, rETH, sUSDe, syrupUSDC and frxUSD. Each market gets its own IRM instance with its own rates and cap.
Key Components
Peg Responsive Exponential Interest Rate Module
The per-market controller binds to exactly one Mint Market. It reads a peg price from an oracle, keeps two pieces of state (the stored rate and the stress/recovery status), and updates both when the market checkpoints. There are eight key values to consider:
| Parameter | What it controls | Value |
|---|---|---|
| Recovery price | The price at or above which the peg counts as recovered. Stress mode only ends after the price holds here through the recovery delay. | 0.999 |
| Stress price | The price at or below which stress mode begins. Below it, the rate starts doubling. | 0.995 |
| Base rate | The annual rate charged in normal conditions, when the price is at or above the recovery price. | Set per market |
| Stress rate | The rate reached at the stress price. While in stress mode, the rate cannot fall below this level. | 7.00% (WETH) to 10.05% (rETH), set per market |
| Maximum rate | The ceiling the rate can reach during a deep depeg. Set per market to fit its liquidation geometry. | Set per market |
| Doubling distance | The further drop below the stress price that doubles the rate. The doubling repeats until the maximum rate is reached. | 0.0025 |
| Recovery delay | How long the price must stay at the recovery price before stress mode is released. The countdown restarts if the price slips again. | 6 hours |
| Maximum oracle age | The oldest price reading the controller will accept. If a check finds the reading older than this or invalid, the controller keeps the current rate and stress status, and any recovery countdown starts over. | 12 hours |
Parameters per Market
The recovery price, stress price, doubling distance, recovery delay and maximum oracle age are shared across the six markets. Rates are set per market. Each stress rate is double the market's base rate, except on frxUSD, which launches with a 0% base rate. Caps come from the liquidation geometry below.
Times are measured from a position sitting at the maximum borrowing LTV. Existing positions already above their limit have less room.
Each market has its own maximum rate, set to fit that market's risk rather than using one number for everything. The goal is simple: a borrower who has borrowed the most the market allows should have about three days to repay or add collateral before interest alone pushes their position toward liquidation. Three days gives borrowers a full weekend to act.
This holds as long as the value of their collateral stays within a small buffer: 0.5% for stablecoins and 2% for WETH and liquid staking tokens. If collateral falls further, borrowers have less time. If it falls far enough, the position can be liquidated even without any interest.
| Market | Base APR | Stress APR | Maximum APR | Time to liquidation at the cap |
|---|---|---|---|---|
| WETH | 3.50% | 7.00% | 520% | 4.5 days, 3.1 days with a 2% collateral decline |
| wstETH | 4.15% | 8.30% | 230% | 6.2 days, 3.0 days with a 2% decline |
| rETH | 5.03% | 10.05% | 230% | 6.2 days, 3.0 days with a 2% decline |
| sUSDe | 4.25% | 8.50% | 280% | 3.7 days, 3.0 days with a 0.5% decline |
| syrupUSDC | 4.45% | 8.90% | 110% | 4.7 days, 3.0 days with a 0.5% decline |
| frxUSD | 0% | 8.94% | 90% | 5.0 days, 3.0 days with a 0.5% decline |
How the Rate Responds
Three zones
The rate depends on how far DUSD's price falls below its target value.
- Normal zone: At or above the recovery level (DUSD ≥ 0.999), the market charges its standard base rate unless stress mode is still active.
- Gradual zone: As the price falls toward the stress level (DUSD between 0.995 and 0.999), the rate rises steadily from the base rate to a higher stress rate.
- Steep zone: Below the stress level (DUSD < 0.995), the rate doubles for each further 0.0025 drop in price, until it reaches the market's maximum.
For example, on the WETH market, a DUSD price of 0.990 raises the rate to about 28% a year, and a price of 0.985 raises it to about 112%. The syrupUSDC and frxUSD markets reach their caps sooner, near 0.9859 (110%) and 0.9867 (90%). The deeper the drop, the faster the cost climbs.
Stress mode and recovery
The system enters "stress mode" when the price reaches the stress level. While in stress mode, the rate can't fall below the stress rate, even if the normal curve would suggest a lower one.
Stress mode doesn’t end as soon as the price bounces back. A valid price at or above the recovery level starts a six-hour waiting period. At a later check, the price must still be valid and at or above that level for stress mode to end. If a check finds the price below the recovery level, or finds the reading invalid (including more than 12 hours old), the countdown is cleared and must start again. During stress mode, the rate can fall, but not below the stress rate.
Checkpoints do not happen at regular intervals. They happen on user actions and when the keeper decides one is needed. A confirmed recovery reflects the price at those checkpoints rather than at every moment in between, so the checks do not prove the price stayed healthy between them.
DUSD Peg Curve Oracle
The price source. It reads Curve's smoothed price for DUSD against frxUSD, checks that the pool still matches its approved shape and settings, and returns the price, the source timestamp and a validity flag. Moving to a different pool means deploying a new adapter.
What Changes for Borrowers
- Rates float with the peg. In normal conditions a market charges its base rate. During a depeg the rate escalates on the schedule above.
- Repaying becomes the cheaper option. The escalation is meant to make buying DUSD and closing debt more attractive than carrying it, and to make new DUSD borrowing expensive while the peg is under pressure.
- Caps preserve an exit window. Every market's maximum rate is set so a position at the maximum LTV has about three days before interest alone reaches its liquidation threshold, assuming collateral value holds within a stated allowance.
- Elevated rates can outlast the depeg. Stress is released only after the recovery price is observed and held across a confirmation window, so there is a lag between the price recovering and the rate returning to base.
Final Thoughts
The Peg-Responsive Interest Rate Model (PRM) replaces static borrow rates with an automated defense mechanism that makes holding debt expensive and repurchasing DUSD attractive whenever the peg slips.
- Depth-driven escalation: Rates scale exponentially with price deviation rather than time.
- Protected exit windows: Tailored rate caps are set to give borrowers roughly three days to manage collateral before interest alone triggers liquidation.
- Confirmed recovery: Stress mode ends only after two checks at least six hours apart both find the price at the recovery level.
- Audited: The PRM has completed both an internal and an external audit.
By tying interest rates directly to peg stability across all Mint Markets, the PRM gives Alto a self-correcting defense against depeg risk while maintaining clear, predictable parameters for borrowers.
