# What Happens if USDC Loses its Peg?

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## What will happen to Hot Tub if USDC ≠ $1  USDC goes below$1 USDC goes above $1 USDC Vault no arb opportunity. users won’t get an extra loss when withdrawing 100% utilization ratio. users will get an extra loss when withdrawing ETH Vault 100% utilization ratio. users will get an extra loss when withdrawing no arb opportunity. users won’t get an extra loss when withdrawing ### How ETH Vault user will get an extra loss when USDC goes down? 1. 1 ETH =$1000 = 1000 USDC
2. Alice deposited 1 ETH and get 1 share. Vault has 1 ETH.
3. Assume there’s a negligible 1 wei profit, arb swapped 1000 USDC for 1 ETH. Now vault has 1000 USDC + 1 ETH long + 0 ETH
4. USDC depeg: 1 ETH = $1000 = 2000 USDC. ( 1 USDC =$0.5 )
5. Alice withdraw 1 share
1. Vault close 1 ETH long, 0 pnl, withdraw 1000 USDC
2. Swap 1000 USDC for 0.5 ETH from Uniswap
3. Alice got 0.5 ETH

1. 1 ETH = $1000 = 1000 USDC 2. Alice deposited 2000 USDC and get 2000 shares. Vault has 2000 USDC 3. Assume there’s a neglectable 1 wei profit, arb swapped 1 ETH for 1000 USDC. Now vault has 1000 USDC, 1 ETH spot and 1 ETH short 4. USDC depeg: 1 ETH =$1000 = 500 USDC. ( 1 USDC = $2 ) 5. Alice withdraw 2000 shares 1. Vault close 1 ETH short, 0 pnl, withdraw 1000 USDC 2. Vault sell 1 ETH for 500 USDC 3. Alice got 1500 USDC ## How we mitigate this? USDC vault will stop arbitraging when USDC:USD oracle (Chainlink) is higher than 1.01. ETH vault will stop arbitraging when USDC:USD oracle (Chainlink) is lower than 0.99. Which means the potential loss is capped. ### How ETH Vault user will get an extra loss when USDC goes down? 1. 1 ETH =$1000 = 1000 USDC
2. Alice deposited 1 ETH and get 1 share. Vault has 1 ETH.
3. Assume there’s a negligible 1 wei profit, arb swapped 1000 USDC for 1 ETH. Now vault has 1000 USDC + 1 ETH long + 0 ETH
4. USDC depeg: 1 ETH = $1000 = 2000 USDC. ( 1 USDC =$0.5 )
5. Alice withdraw 1 share
1. Vault close 1 ETH long, 0 pnl, withdraw 1000 USDC
2. Swap 1000 USDC for 0.5 ETH from Uniswap
3. Alice got 0.5 ETH $500 ### How ETH Vault user will get an extra loss when USDC goes up? 1. 1 ETH =$1000 = 1000 USDC
2. Alice deposited 1 ETH and get 1 share. Vault has 1 ETH.
3. Assume there’s a negligible 1 wei profit, arb swapped 1000 USDC for 1 ETH. Now vault has 1000 USDC + 1 ETH long + 0 ETH
4. USDC depeg: 1 ETH = $1000 = 500 USDC. ( 1 USDC =$2 )
5. Alice withdraw 1 share
1. Vault close 1 ETH long, 0 pnl, withdraw 1000 USDC
2. Swap 1000 USDC for 2 ETH from Uniswap
3. Alice got 2 ETH = $1000 ### How USDC Vault user will get an extra loss when USDC goes up? 1. 1 ETH =$1000 = 1000 USDC
2. Alice deposited 2000 USDC and get 2000 shares. Vault has 2000 USDC
3. Assume there’s a negligible 1 wei profit, arb swapped 1 ETH for 1000 USDC. Now vault has 1000 USDC, 1 ETH spot and 1 ETH short
4. USDC depeg: 1 ETH = $1000 = 500 USDC. ( 1 USDC =$2 )
5. Alice withdraw 2000 shares
1. Vault close 1 ETH short, 0 pnl, withdraw 1000 USDC
2. Vault sell 1 ETH for 500 USDC
3. Alice got 1500 USDC = $3000 ### How USDC Vault user will get an extra loss when USDC goes down? 1. 1 ETH =$1000 = 1000 USDC
2. Alice deposited 2000 USDC and get 2000 shares. Vault has 2000 USDC
3. Assume there’s a negligible 1 wei profit, arb swapped 1 ETH for 1000 USDC. Now vault has 1000 USDC, 1 ETH spot and 1 ETH short
4. USDC depeg: 1 ETH = $1000 = 2000 USDC. ( 1 USDC =$0.5 )
5. Alice withdraw 2000 shares
1. Vault close 1 ETH short, 0 pnl, withdraw 1000 USDC
2. Vault sell 1 ETH for 2000 USDC
3. Alice got 3000 USDC = \$1500