# What Happens if USDC Loses its Peg?

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Funding payments, Profit & Loss and trading fees are all settled in USDC on Perp and the DEX will continue to operate as normal if the token loses its peg. This guide will outline some key points about trading on Perp if USDC loses parity with the US Dollar (USD).

USDC is a centralized stablecoin operated by Circle that is fully backed by bank deposits and treasury holdings, allowing the token to be minted or redeemed at a 1:1 ratio with USD. As the most popular stablecoin with the largest market share and the deepest liquidity on Optimism, USDC is used as the settlement token on Perp.

Although Circle is regularly audited and USDC is fully backed by dollar deposits, since it's a centralized entity and due to irrationality of the markets, there is a very low risk of losing the peg under certain extreme scenarios.

In the case of a USDC de-pegging incident, the Net USD Value will only show the value of your account in USDC terms, not USD. The settlement token (which is USDC at the moment ) is hard coded to equal $1, not the actual USDC token itself. ## Notional Value of Positions The notional value of all positions are also measured in USDC. In the event that the peg breaks and the value of USDC falls below$1, then notional positions, funding payments, PnL and trading fees will become worth less in USD terms.

Since USDC is the only collateral type with a 100% weight, this means that a 1 USDC deposit enables traders to mint up to 10 virtual USD (vUSD) to take a long position or, 10 vUSD worth of vETH to take a short position.

With a position size of 1 ETH and an entry price of 1700, the notional position is expressed in USDC as the amount of the base asset bought or sold multiplied by the price in vUSD. In this case, it's 1700 USDC. However, if the value of USDC falls to say $0.90, then the notional position remains as 1700 USDC, but in terms of USD equals 1530 USD (= 1700 x 0.9). If the position was opened at 1700 where USDC = USD, and the price of the perpetual futures contract increased to 2000, then the notional position value becomes 2000 USDC. However, if USDC lost its peg and traded at$0.90, the notional position value remains as 2000 USDC but in USD terms, it is lower at 1800 USD.

Given that USDC is the only collateral type that has a weight of 100% and is the settlement currency on Perp, all positions (both maker and taker) are denominated in this stablecoin rather than USD. The USD value shown on the app (for example, the buying power, position size, price, and so on) refers strictly to the USDC value.

As a result, the USDC-USD exchange rate plays no role in Perp's architecture and the DEX operates independently of this exchange rate. Leverage and liquidation prices are not reliant on a USDC-USD feed and are also independent of this exchange rate.

If the 1 ETH position in the example above was opened with 5x leverage, then at least 300 USDC would have been required as collateral. But when USDC is trading at a price of $0.90, the value of the collateral falls to from 300 USD to 270 USD and the notional position value falls from 1700 USD to 1530 USD. Since the value of both the collateral and notional position have fallen by the same amount (10%), the amount of leverage for this position remains the same. ## Oracle Prices The oracle prices used to calculate the index price are for an asset's USD price (not USDC). As a result, the index price will be unaffected during a de-pegging incident for USDC. ## Funding Rate The funding rate mechanism ensures that the price of a perpetual futures contract remains in line with the price of the underlying asset. While funding payments are debited or credited in USDC, the calculations are independent of the USDC-USD exchange rate. In the event where USDC loses its peg, the funding rate will adjust to the prices on Perp's markets and the index price. By encouraging traders to go long or short when the price of the perpetual diverges from the index price (which is calculated from the oracle price in USD), funding rate payments incentivise more traders to open long or short positions. As more traders go long or short, this acts to bring the perpetual contract price back in line with the price of the underlying asset. The greater the deviation between the price of the perpetual contract and the index price, the larger the funding payments between traders will be. Also, the funding payments traders can earn (or pay) are determined by the size of their notional position. A larger long position will earn more in funding payments when the rate is negative, as compared to a smaller position that's also long. For instance, markets may exhibit a negative funding rate, which encourages traders to buy perpetuals to earn funding payments and help to push the price higher, back in line with the USD value of an asset. ## Liquidation Price Liquidation prices are a function of the index price, your account value, position value and position size of token. • If the USDC no longer trades at parity with USD, your account value and position value are unaffected since they are denominated in terms of USDC. • The position size of token is totally independent of the USDC-USD exchange rate. • Finally, the index price is in USD terms, so it is also unchanged by USDC losing its peg. #long liqPrice = indexPrice - ((accountValue - totalPositionValue * mmRatio) / ((1 - mmRatio) * positionSizeOfTokenX)) #short liqPrice = indexPrice - ((accountValue - totalPositionValue * mmRatio) / ((1 + mmRatio) * positionSizeOfTokenX)) As a result, your liquidation price will remain the same, as nothing in the equation shown above changes if USDC trades below (or above) USD. ## Non-USDC Collateral Types The buying power for non-USDC collateral types is calculated as the USD price (not the USDC price). For example, if ETH is worth 1000 USD but the USDC stablecoin is trading below peg at$0.50, then the notional value of the collateral is equal to 1000 instead of 2000.

When USDC = USD

If you deposit 1 ETH and it's worth 1000 USD (= 1000 USDC), then collateral value is collateral weight multiplied by the amount and USD price = 0.825 for ETH * 1 * 1000 = 825 USD. With a position of 5 ETH, the margin ratio is calculated as 825 / 5000 = 16.5%.

When USDC USD

Consider the same scenario above, but where ETH's USD price is 1000 and the USDC price is 2000. In this case, the collateral value remains the same at 825 USD. However, the position value of 5 ETH is now 10,000 USDC, since on Perp it's denominated in USDC and not USD. As a result, the margin ratio in this example is much lower (825 / 10000) = 8.25%.

If you are using non-USDC collateral types and USDC loses its peg, you should closely monitor your margin ratio.