The Docs explain each part of Polaris on its own page, and they are the best place to look up how a single mechanism works. But this protocol is a system that needs to be understood holistically to make the most of it.
A fee paid by someone swapping pETH ends up raising the floor of every pETH holder, and someone borrowing ETH against their fpETH ends up lowering the cost of minting assets, because the fee goes through the Fee Router and comes out as pETH paid to minters.
All of it shapes what you can do with your positions, and the Academy is the place where you can learn more about these connections.
The easiest way to understand Polaris is to follow a single deposit around the system. So let's take 10 ETH, see where it goes and how the value it helps create finds its way back.
In the examples ETH trades at $3,000 and pETH at 1 ETH. All figures are illustrative.
Starting with the bonding curve
The 10 ETH goes into the bonding curve and comes out as roughly 10 pETH. The ETH stays in the reserve of the bonding curve, which is why every pETH can always be swapped back to ETH, with no need for outside liquidity. That reserve also sets the floor, the minimum amount of ETH behind each pETH. Every fee paid in pETH is burned at the floor, so the floor slowly rises in ETH terms and can never go down, whatever happens to the market price.
The deposit also pushes the pETH price slightly up the curve, and it pays a small swap fee on the way in. Keep an eye on that fee, because it is the first piece of protocol revenue in this story and we'll meet it again later.
Then it backs a dollar
Now the 10 pETH, worth about $30,000, goes into the USDp market and mints 15,000 USDp. The position starts at a 200% collateral ratio, well above the 115% minimum, and the pETH inside it keeps earning for as long as it stays there.
From here on, the USDp can go anywhere on Ethereum, and part of it will end up in the USDp Earn Pool, where other users deposit it to earn yield and to cover liquidations for the whole market.
One user’s interest is someone else’s yield
The position pays interest on its 15,000 USDp. That interest is added to its debt and periodically minted as new USDp, which then goes as reward to the Earn Pool and to sPOLAR stakers.
So the cost paid by one minter turns into income for people who put USDp and GOLDp to work in their respective Earn Pools and to the ones who staked POLAR, so that none of it leaves the market.
What goes around comes around
At the same time, other users are swapping through the bonding curve, borrowing ETH against fpETH and converting pETH into POLAR. Each of these actions pays a fee in pETH, and all of them go through the Fee Router.
The Fee Router does three things in a fixed order, and each one benefits a different group of users.
Step
What happens
Who benefits
Burn
The pETH collected as fees is burned at the floor
Every pETH holder, because the floor rises
Buy
The ETH released by the burn buys newly minted pETH
Every pETH holder, because the spot price rises
Distribute
That new pETH goes out through pETH flows
pAsset markets, where minters share it in proportion to their debt, and approved integrations
Back where we started
Let's look at the position again. The pETH inside it now has a higher floor behind it, and the position has received new pETH from the flows. Over the same period, our 10 ETH has backed a USDP mint whose interest became yield for other users, and it has also collected its share of the value created by everyone else using Polaris.
Activity creates fees and interest, and those strengthen pETH. A stronger pETH makes better collateral, which leaves room for more activity, and the cycle can expand again.
Every yield in Polaris is paid by someone doing something inside the protocol. There are no token emissions behind it, so once you know who is paying, you also know when a position is likely to earn more and when it will earn less.
Two pipes
Value moves through Polaris in two separate pipes, so it helps to keep them apart from the start.
The first one carries everything paid in pETH, like swap fees on the bonding curve or fees on ETH loans against fpETH. Before paying anyone, it passes through the Fee Router, which burns that pETH at the floor and uses the released ETH to buy new pETH. So this pipe makes pETH stronger first and only then hands out rewards.
The second one carries the interest minters pay in each pAsset market. It never touches the Fee Router and goes straight to the people around that market, starting with its own Earn Pool.
Pipe
Filled by
Paid in
Goes to
pETH flows
Bonding curve swaps, ETH loans against fpETH, conversions into POLAR
pETH, after raising the floor
pAsset markets and approved integrations
pAsset flows
Interest paid by minters
USDp, GOLDp and future pAssets
The market's Earn Pool, sPOLAR stakers and approved integrations
Who pays whom
With the two pipes in mind, every position in Polaris can be traced back to the activity that pays it.
Position
What it earns
Who pays for it
pETH
Floor growth, plus any change in the premium
Everyone paying fees in pETH
fpETH
Floor growth
Everyone paying fees in pETH
Mint position
pETH flows, peg fees and Protocol Safety Rate (when its leverage is low)
The Fee Router, peg buyers and redeemers, higher-leverage positions
Collateral-only positions
Peg fees, Protocol Safety Rate
Peg buyers and redeemers, higher-leverage positions
Earn Pool
Minter interest in the pAsset, liquidation gains in pETH
Minters and liquidated positions
sPOLAR
A share of minter interest
Minters
Most costs are someone else's income
Look at the table again and you'll notice that inside a market, almost every cost ends up in another user's pocket. The interest a minter pays becomes yield for the Earn Pool and sPOLAR, and the Protocol Safety Rate paid by a high-leverage position goes to the positions with lower leverage in the same market. Even peg fees, paid by arbitrageurs, end up spread across every open position.
This is also why the cost of minting can be much lower than its headline rate, and in some conditions even negative. A minter pays interest in the pAsset, but receives pETH flows and peg fees in return, and if they also hold sPOLAR, part of their own interest comes back to them.
Yields that peak at different times
Since every yield comes from a different kind of activity, they don't all grow at the same moment. Some are strongest in calm and busy markets, others show up when prices move sharply or when a market's collateral gets weaker.
Market conditions
Who earns the most
Calm and busy
pETH and fpETH from fees, sPOLAR and the Earn Pool from minter interest
Growing demand for pETH
vpETH, as the premium expands
Active peg arbitrage
Mint and collateral-only positions, from peg fees
Sharp price drops
The Earn Pool, from liquidation gains
Weakening collateral health
Collateral-only and low-leverage positions, from the Protocol Safety Rate
Holding more than one position means earning across more than one of these conditions, which makes the overall yield steadier over time.
Nothing leaks out directly to the team
There is one more thing worth noticing. No fee in Polaris goes to the team or the treasury through a separate stream.
The treasury earns only by staking POLAR, like any other holder.
Every way to use Polaris is also a strategy you can follow step by step. Pick one to see who it is for, how it works with real numbers and everything that can change it once it is open.
Hold pETH
The simplest way to use Polaris is to swap ETH into pETH and hold it. This way, you own both parts of pETH as one asset, the floor that only ever-rises in ETH terms and the volatile premium, and you can swap back to ETH through the bonding curve whenever you want.
Swapping in
Let's keep in mind that whatever may happen, 1 pETH will always be equal to 1 fpETH + 1 vpETH.
Now, Alice swaps 10 ETH through the bonding curve and receives about 10 pETH. Each pETH is backed by 0.75 ETH of floor, and the other 0.25 ETH is the premium the market pays above it.
Alice’s 10 pETH
Value
Floor fpETH
7.5 ETH
Premium vpETH
2.5 ETH
Total pETH
10 ETH
What makes it grow
Every fee paid in pETH goes through the Fee Router, which burns it at the floor and uses the released ETH to buy pETH back on the curve. So protocol activity raises the floor, which can never go down in ETH terms, and adds demand to the market price. The premium also grows when more ETH enters the bonding curve.
Scenario
One pETH
Alice’s 10 pETH
Change in ETH
Polaris grows, floor 0.85 and premium 0.40
1.25 ETH
12.5 ETH
+25%
ETH leaves the curve, premium down to 0.15
0.90 ETH
9 ETH
−10%
Worst case, the premium disappears
0.75 ETH
7.5 ETH
−25%
In ETH terms the downside is limited to the premium, and that limit gets smaller as fees keep raising the floor. In dollars, pETH also follows ETH, and it can move a bit more than ETH in a sharp drop, because ETH leaving the curve pushes the price down on top of the ETH move. The more liquidity sits in the curve, the smaller that extra move becomes.
Splitting and swapping out
If Alice wants the floor without the premium, or the premium without the floor, she can split her pETH into fpETH and vpETH at any time and merge them back later, without any fees.
Also, Alice can swap back to ETH through the bonding curve whenever she wants, with no external liquidity needed. The swap pays a fee, and that fee goes through the Fee Router like every other pETH-based one, so even an exit slightly raises the floor for the holders who stay.
Holding and borrowing with fpETH
Splitting pETH gives you fpETH, the floor component whose value in ETH can only go up. You can hold it as a steady source of ETH yield, and use it to borrow more ETH from the bonding curve reserve without ever being liquidated.
Splitting pETH
Bob splits 10 pETH into 10 fpETH and 10 vpETH. With the floor at 0.75 ETH, his fpETH is worth 7.5 ETH and grows every time fees are burned. The vpETH carries the premium, and he can keep it, sell it or use it as a volatility hedge.
Holding fpETH like an LST
A liquid staking token
fpETH
Where the yield comes from
Validator rewards
Activity inside Polaris
As more ETH joins
Rewards are shared by more stakers
More activity speeds up floor growth
Value in ETH
Can lose ETH to slashing and trade at a discount to ETH
Backed by a floor that never goes down in ETH, and discounts can be arbitraged
Borrowing ETH against it
Below 100% of its value, with liquidation risk
Up to 100% of the floor value, never liquidated
Getting back to ETH
A withdrawal queue, or selling on the market
No queue, ETH comes straight from the bonding curve reserve
fpETH also trades on secondary markets, where its price can sit above or below the floor. Buying above the floor means paying upfront for future floor growth, and discounts below it can be arbitraged through Reserve Loans.
Borrowing ETH against it
Bob opens a Reserve Loan with his 10 fpETH and borrows the full floor value. The 0.05% opening fee is deducted from what he receives.
Reserve Loan
Value
Collateral fpETH
7.5 ETH
Borrowed ETH
7.5 ETH
Opening fee
0.00375 ETH
Bob receives
7.49625 ETH
That ETH is his to use anywhere in DeFi, and his fpETH keeps earning inside the loan. He can also use it to buy more pETH, which is how looping starts.
Why it can never be liquidated
Reserve Loans are not a lending market. The ETH comes straight from the bonding curve reserve, so there are no lenders to pay and no borrow rate that has to move to keep the market balanced. The loan only pays a 0.05% opening fee and a share of the floor growth produced while it stays open, so the fee can never be bigger than the growth and never eats into the collateral.
So no liquidations, ever. Collateral and debt are both in ETH, and the floor behind fpETH can only rise, so the loan can never end up worth less than what was borrowed.
Reserve Loans also sit outside the rules of pAsset markets, so stress in the USDp or GOLDp market never touches them.
If the floor rises to 0.825 ETH
Value
Collateral
8.25 ETH
Debt
7.5 ETH
Growth produced while the loan is open
0.75 ETH
Split of that growth
Bob keeps most of it, the loan fee takes a cut
What sets the fee
The share of growth that goes to the fee depends on utilization, meaning how much of the reserve is borrowed. When few people borrow, the share is small and borrowing is cheap. When many people borrow, the share grows and extra borrowing slows down, which keeps part of the reserve available. Fees are collected from every borrower whenever anyone opens, increases, repays or closes a loan, and they go through the Fee Router.
Closing the loan
Bob repays the ETH and gets his fpETH back, now worth more ETH than when he started. He can keep holding it, borrow again, or merge it with vpETH and swap the pETH back to ETH.
Using vpETH
vpETH is the premium part of pETH, the volatile value above its floor. Since the floor doesn’t move with the market, every move in the pETH price lands on vpETH. That makes it a bet on the growth of Polaris, a way to trade the volatility of pETH, and a hedging tool.
A bet on growth
Bob splits 10 pETH and keeps the 10 vpETH, worth 2.5 ETH with the premium at 0.25 ETH. When more ETH enters the bonding curve and demand grows, the premium expands faster than the floor.
Over six months
Start
End
Change
Floor fpETH
0.75 ETH
0.85 ETH
+13%
Premium vpETH
0.25 ETH
0.40 ETH
+60%
Bob’s 10 vpETH
2.5 ETH
4 ETH
+1.5 ETH
If Polaris grows less than expected or ETH leaves the curve, the premium shrinks and vpETH takes the hit, and the floor stays untouched.
Trading the volatility of pETH
A 0.05 ETH move in the pETH price is a 5% move for pETH, but a 20% move for vpETH at 0.25 ETH. All the volatility of pETH is concentrated in vpETH, with no liquidation risk for holding it. Traders who expect the premium to shrink can short it on secondary markets.
Hedging pETH and mint positions
If Bob holds pETH and wants less volatility, he can split it and sell the vpETH, keeping only the floor.
Alice has a USDp mint position, and her collateral has to stay in pETH. She can short vpETH on a secondary market instead, so a drop in the premium is offset by the short and her collateral behaves like the floor in ETH terms.
The ETH/USD hedge on an external venue brings the position close to delta-neutral, earning floor growth and the yield of the position. It needs rebalancing and carries the risks of that venue.
Lending vpETH
On the other side of these trades, vpETH holders can lend their tokens to short sellers and earn from it. vpETH also trades on secondary markets, where its price can sit above or below the premium on the bonding curve, depending on what traders expect from it.
Looping pETH with Reserve Loans
Splitting pETH and borrowing against fpETH lets you build a larger pETH position from the same ETH. The larger position has more exposure to the pETH price against ETH and earns more of the yield that builds up in fpETH.
The strategy is a loop. You buy pETH, split it into fpETH and vpETH, borrow ETH against the fpETH, and use that ETH to buy more pETH. You keep the vpETH from every round.
Why loop pETH
Bob expects more ETH to enter Polaris as demand for pETH and pAssets grows. If those inflows push the pETH price up against ETH, a larger position benefits more, and the loan stays in ETH. Keeping the vpETH from each round keeps his exposure to the premium across the whole position.
Bob also wants more fpETH yield. More fpETH from the same capital means more floor growth, and this part of the strategy works even if the premium never rises.
As explained in Reserve Loans, price moves never liquidate these loans. Bob can hold through swings in the premium, which still change his equity and the value he gets when he exits.
Building the position
Bob starts with 10 ETH. Each pETH costs 1 ETH and its floor is 0.75 ETH. The example keeps prices constant and leaves out fees and gas, to show how the loop works.
Step
ETH used to buy pETH
Total fpETH
Total vpETH
Total ETH debt
ETH for the next round
Buy and borrow
10
10
10
7.5
7.5
Loop 1
7.5
17.5
17.5
13.125
5.625
Loop 2
5.625
23.125
23.125
17.344
4.219
After two loops Bob holds 23.125 fpETH, 23.125 vpETH and 4.219 ETH, and he owes 17.344 ETH. At unchanged prices his net position is still worth 10 ETH. Looping makes the position bigger, it doesn’t create an instant profit. Each round adds less than the one before, and the position gets closer to 40 fpETH and 40 vpETH against 30 ETH of debt.
What the larger position earns
The two examples below start from the theoretical 40 fpETH and 40 vpETH position, close to what Bob reaches after many loops, with pETH at 1 ETH and the floor at 0.75 ETH, and compare it with simply buying and splitting 10 pETH.
Outcome
What changes
NO LOOP
Looped position
pETH price rises to 1.1 ETH
The premium goes from 0.25 to 0.35 ETH, and the floor doesn't move
+1 ETH
+4 ETH
The floor rises to 0.825 ETH
Each fpETH gains 0.075 ETH, and the premium doesn't move
+0.75 ETH
+3 ETH, before the loan fee
In the first case the looped position is now worth 44 ETH, and after the 30 ETH loan Bob has 14 ETH of equity: a 4 ETH gain on his 10 ETH. Without looping, his position would have gained a 1 ETH gain.
In the second, his equity grows to 13 ETH before the loan fee, compared with 10.75 ETH without looping. The floor growth also gives him more borrowing capacity. He can use it to keep looping, deploy it elsewhere in Polaris or use it anywhere in DeFi, and the fpETH stays in the loan earning as the floor rises. Part of that growth goes to the utilization-based Reserve Loan fee, and each new borrow pays the opening fee.
The role of the floor ratio
The closer the floor is to the pETH price, the more ETH you can borrow and reuse after each purchase. Under the same simplified assumptions, the theoretical limit equals to initial ETH/(1 - floor ratio), where the floor ratio is the floor of one pETH divided by its price.
Floor ratio
Theoretical position from 10 ETH
50%
20 ETH
75%
40 ETH
80%
50 ETH
90%
100 ETH
In practice purchase fees, the opening fee on each borrow, the liquidity available in the reserve and changing prices all affect the result. At some point another round adds too little exposure to justify its cost.
Utilization keeps looping in balance
The share of floor growth taken by the Reserve Loan fee depends on utilization, meaning how much of the reserve is borrowed. When the reserve is lightly used, each extra round is cheap and looping is attractive. When many users loop at once, the fee takes a larger share and extra rounds make less sense.
Every round also brings ETH into the bonding curve and pays fees to the Fee Router, so looping feeds the same floor it earns from.
Holding and closing the position
Bob now earns more fpETH yield, and he also holds more vpETH, so moves in the premium have a bigger effect on his equity.
But the loan is never liquidated, so Bob can hold through the drop.
IF THE PREMIUM FALLS FROM 0.25 TO 0.125 ETH
Value
40 fpETH at 0.75 ETH
30 ETH
40 vpETH at 0.125 ETH
5 ETH
Debt
−30 ETH
Equity before costs
5 ETH
Closing the position works like the loop in reverse. Bob repays part of the debt to release some fpETH, merges it with the same amount of vpETH into pETH and swaps it back to ETH on the curve. That ETH repays the next part of the debt, and so on until the loan is closed. He only needs enough ETH to start the first repayment, and each swap pays a fee.
Bob keeps the vpETH from every round, so the loop also multiplies his exposure to the premium. Someone who only wants the floor side can sell the vpETH along the way and loop fpETH alone. That version gives up any premium upside and relies on vpETH liquidity on secondary markets.
Minting and managing a position
Minting USDp or GOLDp gives you a pAsset to use anywhere, with your pETH kept as collateral. Unlike a Reserve Loan, the debt is in the pAsset you mint, so the position has to stay within that market’s collateral requirements.
But the position also takes part in the activity of its market. It receives pETH yield in proportion to its debt, earns fees from peg buys and redemptions, and pays or receives the Protocol Safety Rate. In exchange, the Peg Stability Rate adds interest to the debt. When what the position earns outweighs that interest, the net rate can turn negative, and minting can end up paying the minter.
So managing this strategy means following everything that flows through the position, and comparing the loan rate with what you could earn elsewhere is only part of the picture.
Opening a USDp position
Alice holds 10 pETH, worth $3,000 each. She deposits them into the USDp market and opens a position with 10,000 USDp of debt. In this example USDp is valued at its $1 target, and fees and other adjustments are left out of the opening.
Position
Value
Collateral
10 pETH
Collateral value
$30,000
Debt
10,000 USDp
Collateral ratio
300%
Alice can hold, spend or deploy the 10,000 USDp anywhere, and her pETH stays in the position, so she keeps its exposure. Using the USDp doesn’t reduce her debt, so she keeps managing the position and needs USDp available when she wants to repay.
Receiving pETH yield for minting
Polaris rewards minters with a share of the pETH yield the protocol generates. It comes from bonding curve swaps, Reserve Loans and pETH to POLAR conversions. The Fee Router burns those fees at the floor and uses the released ETH to buy pETH on the curve, which raises both the floor and the market price, and then sends that pETH out through pETH flows. In each market, minters share it in proportion to their eligible debt, not to the collateral they deposit.
Step
Illustrative value
Alice’s share of eligible USDp debt
1%
pETH sent to USDp minters in the period
10 pETH
Alice receives
0.1 pETH
Value at $3,000 per pETH
$300
These rewards come on top of any appreciation of the pETH she already holds as collateral. Minting more would raise her share, together with her interest cost and her risk.
Protocol Safety Rate
Alice can also receive Protocol Safety Rate payments if her leverage is lower than the rest of the market. Higher-leverage positions fund these payments. Her 300% ratio alone doesn’t decide whether she receives or pays, because what matters is how her position compares with the wider market.
How arbitrage changes the position
When USDp trades above $1, an arbitrageur can send ETH through the bonding curve, receive pETH and use it to buy newly issued USDp at $1, then sell it above $1. The incoming ETH also pushes the pETH price up the bonding curve, which raises the value of the pETH Alice already holds.
The collateral and debt behind that new USDp are spread across all existing positions, together with the peg-buy fee. So Alice’s position grows with the market. The fees follow spike-and-decay pricing, rising with activity and falling when things calm down, so a busy peg means more fee income. The overall result depends on both the fees earned and the change in collateral and debt.
If USDp then trades below $1, an arbitrageur can buy it on the market and redeem it for pETH. Redemptions remove collateral and debt across the affected positions, and the redemption fees go to all positions. Alice may end up with a smaller position and more fee income.
When
Collateral
Debt
Fees
USDp above $1, peg buys
Grows
Grows
Alice receives a share
USDp below $1, redemptions
Shrinks
Shrinks
Alice receives a share
Through Adaptive Peg Defense, the position takes part in both the expansion and the contraction of USDp supply and earns fees in both directions. Managing it means following these flows together with its collateral value and debt.
Comparing yield and interest
Here is what Alice might see over a holding period, with pETH at $3,000 and USDp at $1. To keep yield and interest clear, the example assumes that peg buys and redemptions cancel each other out on her collateral and debt, apart from the fees.
Flow
Effect
Value
Minter yield
Alice receives 0.1 pETH
+$300
Protocol Safety Rate
Alice is on the receiving side
+$60
Peg-buy and redemption fees
Her share of arbitrage activity
+$90
Peg Stability Rate
400 USDp added to her debt
−$400
Net of these flows
Before other costs
+$50
In this example the flows Alice receives are larger than the interest she pays, so she is getting paid to mint. This is most likely when Polaris is busy and her leverage is low, because pETH flows, peg fees and the Protocol Safety Rate all grow in those conditions.
Alice receives $450 of yield and fees against $400 of interest. In practice the result also depends on the pETH price and on how peg activity changes her balances. The two rates have different jobs, since the Peg Stability Rate adds to the debt and the Protocol Safety Rate redistributes value between positions. See Interest Rates.
Managing collateral health
Alice follows two things, her collateral ratio and the amount of USDp she needs to repay. Neither depends only on her original deposit. Peg buys add both collateral and debt, so if her debt grows faster than her collateral, the ratio falls even though she earns fees and holds more pETH.
Moment
Collateral
Debt
Ratio
At opening
$30,000
10,000 USDp
300%
After a period of peg buys
$36,000
15,000 USDp
240%
Then ETH falls 20% in dollars
$28,800
15,000 USDp
192%
Even after a 20% drop in the ETH price, her position stays well above the 115% minimum. But she would now need 15,000 USDp to close, although she only minted 10,000 herself. Redemptions can bring the debt down, but they also remove collateral, and USDp returning to $1 doesn’t restore her original position. To raise her ratio she can add pETH or repay part of the debt, and she keeps earning while she adjusts. The thresholds are in Liquidations.
Using GOLDp instead
The same approach works with GOLDp, with one more variable. The debt follows the oracle price of gold, so Alice watches the value of pETH against gold, and the pETH price alone is not enough.
Start
pETH +10%, GOLDp +25%
Collateral
$30,000
$33,000
Debt value
$10,000
$12,500
Collateral ratio
300%
264%
The position is less collateralized even though pETH went up, because the gold debt grew faster. Holding the minted GOLDp keeps an asset she can repay with. Selling it creates a different exposure, since she may need to buy GOLDp back at a higher price later.
Minting is not the same as going short
A debt in USDp or GOLDp follows the dollar or gold. If Alice keeps the pAsset she minted, her debt and her balance move together and cancel out, so her only exposure is still the pETH in the position. She takes on a short exposure only when she sells the pAsset, for example to buy more ETH with her USDp or to swap her GOLDp into other assets. Minting GOLDp doesn’t make you short gold unless you sell the GOLDp.
Holding the pAsset protects her net exposure, but not the position itself. If the ratio falls below 115%, the position can be liquidated even if she still holds every USDp or GOLDp she minted. In that case she loses the pETH collateral and keeps the pAsset. If the backing of the whole market falls below 110%, Defensive Mode lets her add collateral or repay, and any other change needs a ratio of 150% or more.
Making the most of the minted pAsset
Option
What it does for Alice
Deposit it in the Earn Pool
Earns back part of the interest paid by every minter, her own included
Stake POLAR as sPOLAR
Returns another part of minter interest to her
Short vpETH on a secondary market
Hedges the premium of her collateral, as shown in the vpETH option
Mint when the effective cost is negative
The Peg Stability Rate falls toward its 0.05% minimum when the pAsset trades above target, and if the position earns more than it pays, minting ends up paying her
In the unlikely possibility of a liquidation too big for the Earn Pool to cover, the liquidated position’s collateral and debt are shared across all positions in the market. Alice would receive a small slice of pETH with a slightly smaller slice of debt, because liquidated positions still hold more collateral than debt.
Closing the position
Alice closes by repaying the current debt in the pAsset and withdrawing her collateral. If the pAsset is deployed elsewhere, she brings it back first. Waiting until the position is close to its liquidation threshold leaves less room for price moves, delays and repayment costs.
Backing USDp with collateral only
You can support the USDp market by depositing pETH without minting any USDp. This opens a collateral-only position, which earns fees from peg activity and can receive Protocol Safety Rate payments for adding to the market’s collateral health.
You can think of it as being a decentralized market maker for USDp and GOLDp.
Why back USDp
Bob already wants to hold pETH. By depositing it into the USDp market, he keeps his pETH exposure and puts the same collateral to work behind a decentralized stablecoin. Peg-buy and redemption fees give him extra income, and higher-leverage positions pay safety payments to lower-leverage and collateral-only positions like his.
In return, his position takes part in changes to the market’s collateral and debt, so it needs more attention than pETH sitting in a wallet. Collateral-only describes how the position opens, though it can't promise that its debt stays at exactly zero forever.
Opening the position
Bob owns 10 pETH worth $3,000 each. He deposits them into the USDp market without minting. He has no USDp to spend, and his capital stays committed as pETH collateral. The examples keep pETH at $3,000 and USDp at $1 to isolate what happens to the position.
Position
Value
Collateral
10 pETH, $30,000
Debt
0 USDp
Net value
$30,000
Earning fees and safety payments
Arbitrageurs pay a protocol fee when they buy USDp at peg or redeem it for pETH. These fees are shared across existing USDp positions, collateral-only ones included. They follow spike-and-decay pricing, so sustained activity brings more fee income as the market expands or contracts.
Bob can also receive Protocol Safety Rate payments from higher-leverage positions. How much depends on his relative leverage and on the market’s collateral health, and they can grow when that health weakens. See Interest Rates.
Income
Illustrative value
Peg-buy and redemption fees
+$90
Protocol Safety Rate payments
+$60
Total over the period
+$150
How peg activity changes the position
When USDp trades above $1, an arbitrageur can buy newly minted USDp from the protocol and sell it above peg. The pETH collateral and USDp debt behind it are spread across existing positions, together with the fee. So Bob can pick up a small amount of debt without minting USDp himself, and it always arrives together with his share of the fee. When USDp trades below $1, arbitrageurs redeem it for pETH, which removes collateral and reduces debt across positions.
When debt turns into a credit
Since the reductions follow protocol accounting, Bob’s debt can go below zero. In that case the protocol owes him USDp instead, and mints it to him when he closes the position. So redemptions can end up paying him, on top of the fees he already earns.
Snapshot
Collateral
Debt
Net value
At opening
10 pETH
0 USDp
$30,000
During an expansion
11 pETH
3,000 USDp
$30,000
At closing, after redemptions
Remaining pETH
−150 USDp
Bob also receives 150 USDp
Each row is a separate snapshot, so the numbers don’t follow from one another. A redemption doesn’t simply undo an earlier peg buy, and USDp returning to $1 doesn’t put Bob’s balances back where they started. The −150 USDp in the last row is a credit from redemptions, and it comes on top of the $150 of fee income shown earlier. These adjustments are explained in Adaptive Peg Defense.
What changes once the position has debt
If the position has positive debt
Effect
pETH flows to minters
It receives a share in proportion to its debt
Peg Stability Rate
Interest is added to the debt
Protocol Safety Rate
Based on its current leverage, not on how it opened
If peg buys add debt to Bob’s position, that debt follows the same rules as any mint position. Bob then keeps an eye on his collateral ratio, though with so little debt it is very unlikely to get anywhere near the limit. In return, his position now gets what only mint positions receive, a share of pETH flows, and like every minter he now pays the Peg Stability Rate on that debt.
How safe the position is
Debt only reaches a collateral-only position together with at least as much value in pETH, through peg buys and redistributions, so Bob’s net value never drops because of it. His ratio starts very high and only drifts down slowly as debt grows, so it stays far above the 115% minimum and liquidation is highly unlikely. A quick look at the ratio from time to time is still a good habit.
The weaker the market’s collateral health gets, the more the Protocol Safety Rate pays positions like Bob’s, which makes them the ones that earn the most exactly when the market needs support.
Closing the position
To close, Bob repays any positive debt and withdraws his collateral. If the balance is negative, the protocol mints the corresponding USDp to him. The underlying mechanics are in pAsset Minting.
Earning positive carry with GOLDp
You can mint GOLDp against pETH and put it to work in the GOLDp Earn Pool, or in a liquidity pool that pairs it with XAUT or PAXG. The strategy has positive carry when what the combined position earns is more than what it costs to borrow and maintain.
Why mint GOLDp for carry
Two separate conditions make the carry attractive. When GOLDp trades above its gold target, arbitrageurs buy new supply at peg, and sustained net minting pushes the Peg Stability Rate down, which lowers the main cost of borrowing. Redemptions push it the other way.
Separately, the market can receive pETH flows, shared among minters by eligible debt.
Condition
What drives it
Effect on the carry
A low Peg Stability Rate
Demand for GOLDp above its target
Borrowing costs less
Meaningful pETH flows to GOLDp
The flows allocated to the market and the debt sharing them
Minting earns more
If the rewards are worth more than the borrowing cost, minting has a negative effective cost.
On top of this, it's important to notice that low borrowing costs and high pETH incentives are separate conditions. And above-peg demand can support the first condition but doesn’t guarantee the second. See Interest Rates and Flows.
When GOLDp keeps trading above its target, the Peg Stability Rate falls toward its 0.05% minimum, and the pETH flows and fees received by the position can make the net cost of minting negative. In that case, minting GOLDp and swapping it into other onchain gold like PAXG or XAUT can potentially become a carry strategy on its own.
Opening the position
Alice deposits 10 pETH worth $3,000 each and mints $10,000 of GOLDp at its oracle target, a starting ratio of 300%. She keeps her pETH exposure through the collateral and chooses where the GOLDp goes to be a productive asset.
Route
What it earns
What to watch
GOLDp Earn Pool
A share of GOLDp minter interest and pETH from liquidations
Liquidations turn part of the deposit into pETH
GOLDp / XAUT or PAXG pool
Swap fees and any incentives
The prices of GOLDp and the other gold token can diverge
Depositing into the GOLDp Earn Pool
The deposit receives a share of minter interest and pETH from liquidations, and Alice’s position keeps receiving its own minter yield. The pool’s return depends on total interest and on the deposits sharing it, and a low borrowing rate also means less interest for the pool. When a liquidation happens, part of the deposited GOLDp cancels debt and the deposit receives pETH, so Alice may need to turn some pETH back into GOLDp to repay. See Earn Pools.
Providing liquidity with XAUT or PAXG
Alice needs both tokens in the pool’s proportions. She can buy the other gold token with part of her GOLDp or bring separate capital, which then counts in her return. The position earns swap fees and any available incentives. Both tokens track gold, but their market prices can drift apart, so what she withdraws may differ from what she put in.
Comparing income and borrowing costs
Alice takes the Earn Pool route. For this example, her share of Earn Pool income exceeds the interest accruing on her own debt, and the amounts below are assumed for an illustrative period and are not expected returns.
Flow
Illustrative amount
Minter yield on her position
+0.1 pETH
Earn Pool interest received
+0.06 GOLDp
Peg Stability Rate interest added to her debt
−0.04 GOLDp
Net carry from these flows
+0.1 pETH and +0.02 GOLDp
In this case, her GOLDp income covers the interest and leaves 0.02 GOLDp, plus 0.1 pETH of minter yield, so she doesn’t need to sell pETH to pay interest. The example assumes no liquidations and no net changes from peg activity, and leaves out the Protocol Safety Rate and peg fees. A real calculation could include every flow over the same period, and a return in pETH and GOLDp still changes in dollars as their prices move.
Managing the combined position
What changes
Effect on the strategy
The Protocol Safety Rate
Alice pays or receives it depending on her leverage against the market
Peg buys add debt
Her Earn Pool or LP position may no longer cover what she owes
Gold rises faster than pETH
Her ratio falls even if both rise in dollars
Borrowing costs rise or pETH flows fall
The carry gets thinner
LP income weakens or Earn Pool balances shift
Less income against the same debt
So Alice watches both the carry and her collateral health. The position mechanics are on the page about minting and managing a position.
Closing the position
Alice withdraws from the Earn Pool or the liquidity pool, collects her rewards and gets enough GOLDp to repay the current debt. Any shortfall has to be covered before her pETH is released. Positive carry describes income against the cost of holding the position, and the total return also includes the price changes of the collateral and the assets she deployed.
Holding USDp or GOLDp
You don’t need to mint to use USDp and GOLDp. Both can be bought on the market like any other token, and holding them carries no debt and no liquidation risk. Holding GOLDp means being long gold, the same way you would be with PAXG or XAUT, and holding USDp gives you a dollar stablecoin.
Putting it to work
Most onchain gold and dollars just sit in a wallet waiting for the price to move. Bob buys GOLDp and chooses where to keep it.
Where Bob keeps it
What it earns
What to watch
In his wallet
Nothing, it follows gold
Only the gold price
GOLDp Earn Pool
A share of minter interest, and pETH from liquidations
Liquidations slowly turn part of it into pETH
GOLDp/ETH pool
Trading fees
Part of the position sits in ETH, with potential impermanent loss
USDp works the same way. Bob can keep it in his wallet, deposit it in the USDp Earn Pool for a share of minter interest and pETH from liquidations, or add it to a USDp liquidity pool for trading fees.
What keeps it close to its target
Every USDp and GOLDp in circulation was minted by someone against pETH, so what keeps it near its target is the collateral behind every mint position and the peg defense of its market. When it trades away from its target, arbitrageurs bring it back with peg buys and redemptions, as the Peg arbitrage option shows.
Depositing in an Earn Pool
If you hold USDp or GOLDp, you can deposit it in that market’s Earn Pool. The pool receives a protocol-defined share of the interest paid by every minter, in the same pAsset, plus the pETH collected from liquidations, which normally comes at a gain.
Depositing
Bob deposits 20,000 USDp in the USDp Earn Pool. His deposit is an NFT he can transfer or sell without withdrawing, and his rewards need to be claimed. Every period, part of the interest paid by USDp minters is minted as new USDp and shared among depositors.
When positions are liquidated
The Earn Pool is the first line of defense of its market. When a position falls below 115%, the pool uses its USDp to cancel the debt and takes the position’s pETH. Liquidations happen while a position still holds more collateral than debt, so depositors normally receive more value than they give up.
Bob’s 20,000 USDp deposit
Before
After a 20% ETH drop
USDp in the pool
20,000
16,000
pETH received
None
About $4,500
Liquidation gain
None
About $500
His deposit now holds part of its value in pETH, so it has more ETH exposure than before. He can keep that pETH or swap it back. In a very fast crash, or if the pETH he received loses value afterward, a deposit can end up with less than it started with.
What changes the yield
If this happens
Bob’s deposit
Minting grows
More interest flows into the pool
Other depositors leave
His share of interest and of each liquidation grows
Prices drop sharply
More liquidations, more pETH at a gain
The Peg Stability Rate falls
Less minter interest for the pool
The rate that matters for the pool is the Peg Stability Rate, the interest minters pay in the pAsset. The net rate minters see in the app also includes pETH flows, peg fees and the Protocol Safety Rate, but those go to the minters’ positions, not to the Earn Pool.
For minters
A minter can deposit the USDp they minted and earn back part of the interest they pay. Liquidations will slowly turn part of that deposit into pETH, so over time they hold less USDp against the same debt.
Arbitraging peg deviations
Sometimes a pAsset trades a little above or below its target on external markets. Peg buys and redemptions let anyone profit from that gap, and every trade pushes the price back toward the target.
In practice most of these trades are expected to be run by bots. They don’t need a collateralized position in Polaris, but they compare quotes against external markets and jump in whenever the gap is big enough to cover the whole route.
Buying above peg
USDp trades at $1.02. An arbitrageur sends ETH through the bonding curve into pETH, uses the pETH to buy newly minted USDp at $1 and sells it on the market. Before fees, $1 of ETH buys 1 USDp through this route.
Item
Illustrative value
Starting cost before fees
$10,000
Sale of 10,000 USDp at an average $1.02
$10,200
Difference before costs
$200
Fees for pETH and USDp, market swap and gas
−$80
Net result
$120
As more arbitrageurs do the same, the market premium narrows and the peg-buy fee rises, until the trade stops being attractive. In volatile moments USDp can stay slightly above $1 because the remaining premium doesn’t cover the higher fee. When activity slows, the fee decays and the trade can work again. The fee shapes when arbitrageurs act, and it doesn’t cap how far USDp can move from its target.
Redeeming below peg
USDp trades at $0.98. An arbitrageur buys 10,000 USDp for $9,800 and redeems it for pETH at its $1 target, minus the redemption fee, then swaps the pETH back to ETH.
Item
Illustrative value
Starting cost before fees
$9,800
Redemption value before costs
$10,000
Difference before costs
$200
Redemption fee, pETH to ETH swap, trading costs and gas
−$90
Net result
$110
Keeping the pETH instead of swapping it leaves exposure to its price. As more arbitrageurs redeem, the redemption fee rises, and USDp can stay a little below $1 until the fee decays. As with peg buys, the fee does not set a hard limit on the market price deviation. Both directions are described in Adaptive Peg Defense.
Checking whether a trade is profitable
For either route, the net result is the final proceeds minus the starting capital and any cost not already in the quotes. The arbitrageur needs quotes for the full size and for every step, including the effect of its own trade on prices and fees, since a large trade can use up most of the opportunity. Where the route allows it, all steps can go in one atomic transaction that either completes or reverts.
The other side of the trade
Action
Effect on USDp positions
Peg buy
Adds collateral and debt across positions, and pays them peg fees
Redemption
Removes collateral and reduces debt across positions, and pays them peg fees
Only the protocol’s peg fee goes to positions, collateral-only ones included. How this feels from the side of a position is covered on the pages about minting and managing a position and about backing USDp with collateral only.
Applying the strategy to GOLDp
The same comparison works for GOLDp, using its oracle-defined gold target. The bot also has to account for changes in that reference price, on top of the market price, the protocol fee, price impact and gas.
Staking POLAR
POLAR becomes productive when you stake it as sPOLAR. sPOLAR receives a share of the interest paid by USDp and GOLDp minters, paid directly in USDp and GOLDp, and gives you a voice in the parts of Polaris that are stewarded.
Staking
Alice buys POLAR on the market and stakes it for a period she chooses, between 2 weeks and 4 years. She receives an sPOLAR position as an NFT. The POLAR stays staked until the end of its term, but she can transfer or sell the position at any time. Whoever receives it also receives its stewardship weight.
What it earns
Every pAsset market sends a minimum share of its interest to its Earn Pool, and part of the rest goes to sPOLAR. The share sent to sPOLAR is set through stewardship, up to a maximum of 25%. Future markets may choose to share part of their revenue as well. None of this depends on new POLAR being emitted, because it comes from minting activity, and the treasury earns in exactly the same way by staking its own POLAR.
A way for minters to lower their cost
Alice also has a USDp mint position. Part of the interest she pays as a minter comes back to her through sPOLAR, which lowers her effective cost of minting.
Stewardship
sPOLAR can adjust
sPOLAR can never change
Flow weights and incentives toward markets
The bonding curve
Interest rate splits
The liquidation rules
POLAR conversion parameters
The collateral behind pAssets
Replacement of faulty oracle feeds
The immutable core contracts
Converting pETH into POLAR
Beyond its initial supply, the only way new POLAR can come into existence is by converting pETH into it. The pETH is burned for good, new POLAR is minted to the user, and the ETH released by the burn strengthens pETH for everyone else.
What happens in a conversion
Step
What happens
Burn
Bob’s pETH is burned and the ETH behind it is released
Mint
New POLAR is minted to Bob
Rebate
Part of the released ETH can come back to Bob, set through stewardship
Fee Router
The rest raises the floor and buys pETH back on the curve
How the price is set
The price comes from a Dutch auction. Every conversion pushes the price up, then it slowly decays until converting becomes attractive again, and a conversion that mints a larger share of the supply pushes it up much more. This favors small, frequent conversions over large ones.
When converting makes sense
Situation
Better choice
Auction price plus rebate is below the market price
Converting
POLAR is cheaper on the market
Buying, until the auction price decays
A large amount is needed
Several small conversions over time
In practice most users buy POLAR on the market and leave conversions to arbitrageurs. But every conversion, whoever makes it, works for the whole system, because POLAR supply can only grow when someone burns pETH and strengthens the floor in the process.
Here are all the strategies side by side, so you can see at a glance what each one gives you, what it earns and what it costs.
Strategy
What you get
What you earn
What you pay
Liquidation
pETH
Polaris' yield-bearing collateral
Floor growth, plus premium volatility
No cost to hold it
No
fpETH and Reserve Loans
Ever-rising ETH, plus non-liquidatable ETH loans
Floor growth
No cost to hold it. Loans pay a 0.05% opening fee and a share of floor growth
No
vpETH
Exposure to the premium
Premium volatility and hedging solution
No cost to hold it
No
pETH looping
A larger pETH position
Floor growth on all of it, plus premium volatility
0.05% opening fee and a share of floor growth
No
Mint USDp or GOLDp
USDp or GOLDp to use anywhere in DeFi
Floor growth on the collateral, pETH flows, peg fees and Protocol Safety Rate when leverage is low
Minting interest, and Protocol Safety Rate when leverage is high. Net cost can go negative.
Below 115%
Collateral-only
Yield on pETH you already hold
Floor growth on the collateral, peg fees, Protocol Safety Rate
Interest only on debt it potentially picks up. Debt can go negative.
Very unlikely
GOLDp carry
GOLDp working in the Earn Pool or an LP
Floor growth on the collateral, pETH flows, peg fees and Protocol Safety Rate when leverage is low, plus Earn Pool income or LP fees
Minting interest, and Protocol Safety Rate when leverage is high. If earnings cover these costs, the carry is positive.
Below 115%
Hold USDp or GOLDp
Dollar or gold exposure, without any debt
Nothing on its own, yield if deposited in the Earn Pool or an LP
No cost to hold it
No
Earn Pools
A yield-bearing deposit
Minter interest, liquidation gains
Nothing, but liquidations turn part of the deposit into pETH
No
Peg arbitrage
A one-off trade, no actual position
The gap between market price and target
Peg fees and swap fees
No
Stake POLAR
A transferable sPOLAR position
A share of minter interest
Nothing, but the POLAR stays staked for its term
No
pETH to POLAR conversions
New POLAR, plus a possible rebate
Nothing directly
The converted pETH, burned in the bonding curve
No
Choosing a side of each flow
Every strategy puts you on one side of a flow, and someone else is usually on the other. A minter pays interest that the Earn Pool and sPOLAR receive, and a high-leverage position pays the Protocol Safety Rate to collateral-only and conservative positions.
None of these strategies rules out the others. Part of your pETH can sit in a collateral-only position and another part can back a mint position, and fpETH can back a Reserve Loan with the vpETH kept for upside or used as a hedge. A minter can deposit the USDp they minted into the Earn Pool and get back part of the interest they pay, and a minter who stakes POLAR gets back another part through sPOLAR.
Each strategy earns most in a particular kind of market, and a mix gives you a steadier result across all of them.
When USDp trades away from $1, Polaris doesn't wait for any external actor to step in. The market changes its own size until the price comes back, and every position in it takes part. Following a single peg trade from start to finish is a good way to see how many parts of the system move together.
The example uses USDp, but GOLDp works exactly the same way, with the price of gold as its target instead of $1.
Above $1, the market grows
Say USDp trades at $1.004 because demand for it is rising. An arbitrageur deposits ETH into the bonding curve, receives pETH and uses it to buy newly minted USDp at $1. Then they sell it on the market at $1.004 and keep the difference. The extra supply pushes the price back toward $1.
What makes this interesting is where that new USDp comes from, as nobody had to open a position to create new supply. The protocol adds the pETH paid by the arbitrageur and the matching debt to every open position in the market, in proportion, so the whole market grows by a little. Each position also earns a share of the fee the arbitrageur paid for the trade.
For our position, a peg buy worth 1% of the market looks like this.
Before
After a 1% peg buy
pETH collateral
$16,000
$16,100
USDp debt
10,000
10,100
Collateral ratio
160%
159.4%
Fees
none
Its share of the peg fee
The ratio moves by a little over half a point, and the position gets paid for providing the supply.
The effects reach beyond the market
The trade doesn't stop at the USDp market. The arbitrageur started by depositing ETH into the bonding curve, which pushed the pETH spot price up and made the premium a bit bigger. That deposit also paid a swap fee, which went through the Fee Router, raised the floor for every pETH holder and bought pETH back on the curve, in every market.
Meanwhile, the Peg Stability Rate notices that more USDp is being minted than redeemed and starts falling toward its 0.05% minimum. Minting becomes cheaper, so supply can keep growing as long as demand is there. The Earn Pool and sPOLAR now earn interest on more USDp, each unit at a slightly lower rate.
Below $1, the market shrinks
The opposite happens when USDp trades below $1. An arbitrageur buys cheap USDp on the market and redeems it at $1 for pETH. The protocol removes collateral and debt from every open position in the same proportion, and again each one earns a share of the fee.
This time ratios go up. The same position, after a redemption worth 1% of the market, holds $15,900 of pETH against 9,900 USDp of debt, which is 160.6%. The Peg Stability Rate rises as redemptions outpace minting, making new USDp more expensive until the price recovers, and the Earn Pool and sPOLAR earn a higher rate on a smaller supply. If the arbitrageur then swaps the pETH they received back to ETH, the pETH spot price slides a little down the curve.
USDp above $1
USDp below $1
Mint positions
Grow a little, ratio slightly lower, earn fees
Shrink a little, ratio slightly higher, earn fees
Collateral-only positions
Pick up a small amount of debt, earn fees
Debt can go below zero, earn fees
Peg Stability Rate
Falls, minting gets cheaper
Rises, minting gets more expensive
Earn Pool and sPOLAR
More USDp paying a lower rate
Less USDp paying a higher rate
pETH
ETH enters the curve, spot and floor go up
pETH may be swapped back, spot can go down
Why every position is involved
The positions in a market hold the pETH that backs every USDp, so they are the natural counterpart for the peg. You can think of the whole market as a market maker's book, where open positions provide the inventory and arbitrageurs pay a fee every time they trade against it.
Because each trade is split across all the positions in the market, every single one sees only a small change, and it is paid for it. The pETH a position receives is worth at least as much as the debt it takes on, so its value doesn’t go down, and the fee makes it grow a little. What can change is the ratio between collateral and debt. A peg buy pulls it slightly toward 100%, and a collateral-only position goes from an infinite ratio, since it has no debt, to a finite one.
The positions that notice it most are the ones already sitting close to 115%, which is one more reason to keep some room above the minimum. And if the overall market's backing ever drops below 110%, buying at peg is paused, so peg activity can't add debt to a market that is already under pressure.
To keep the numbers simple, pETH is assumed to move with ETH in dollar terms. All figures are illustrative.
The first move hits collateral
Every pAsset is backed by pETH, so when ETH falls 20% in dollar terms, every mint position loses 20% of its collateral value at the same moment. A position with $16,000 of pETH and 10,000 USDp of debt goes from 160% to 128%. It has less room than before, but it is still far from the 115% minimum.
In practice pETH can move a bit more than ETH. A sharp drop usually brings some ETH out of the bonding curve, and that pushes the pETH price down the curve on top of the ETH move. How much depends on how much ETH sits in the curve. With a small reserve the same outflow moves the price more, and as liquidity grows the extra move gets smaller, until pETH behaves almost like ETH. The extra move also has a limit, since pETH can never trade below its floor in ETH.
Positions that started with less room are a different story. Any position that was below about 144% before the drop now sits under 115%, and anyone can liquidate it onchain.
Two groups are untouched by this first move. Loans against fpETH are counted in ETH on both sides, so a fall in the dollar price of ETH makes no difference to them and they can't be liquidated. Collateral-only positions with no debt also have nothing to liquidate, even if their pETH is now worth less in dollars.
The Earn Pool steps in
When a position is liquidated, the market's Earn Pool uses its USDp to cancel the debt and takes the position's pETH. Liquidations happen when a position still holds more collateral than debt, so depositors normally receive more value in pETH than they gave up in USDp, which makes a sharp drop the moment when the Earn Pool earns the most.
A 20,000 USDp deposit
Before the drop
After the liquidations
USDp in the pool
$20,000
$16,000
pETH received
none
about $4,500
Total value
$20,000
about $20,500
The deposit is now worth about $500 more than before, and part of that value is held in pETH. This gives it more ETH exposure, so if pETH keeps falling and the depositor holds on to it, the gain can shrink or turn into a loss.
What happens to that pETH reaches every market
The next step is the one that connects different markets. Depositors who received pETH can keep it, or swap it back to ETH through the bonding curve. If many of them sell at once, the pETH spot price slides down the curve, and that lower price applies to every market at the same time.
USDp and GOLDp keep separate debt and separate Earn Pools, but they share the same collateral. So a wave of liquidations in the GOLDp market, followed by depositors selling their pETH, can lower the collateral value of positions in the USDp market, and the other way around. The effect is shared across every pETH holder, so each one feels a small part of it, but it is the reason a position in one market can be moved by events in another.
vpETH is the part of pETH that absorbs this move, because it carries the premium above the floor. The floor itself doesn't move, so fpETH holders keep the same amount of ETH behind every token.
The forces that push back
At the same time, several parts of the system start working in the opposite direction, without anyone having to act.
Every swap made during the sell-off pays a fee, and those fees go through the Fee Router, which burns pETH at the floor and uses the released ETH to buy pETH back on the curve. So even a rough week keeps the floor rising and brings new buying into the market price. The Protocol Safety Rate also gets stronger as the market's collateral health weakens, charging more to high-leverage positions and paying more to conservative and collateral-only ones. That makes it more attractive to add collateral, and less attractive to stay close to the limit.
Interest doesn't stop either. Minters keep paying it through the drop, so the Earn Pool and sPOLAR keep receiving their share. And if the market's backing ever falls under 110%, Defensive Mode pauses the actions that would weaken it further, which the page on market stress covers in detail.
What pushes down
What pushes back
Collateral loses dollar value
Liquidations clear the weakest positions, and the Earn Pool takes their pETH at a gain
Depositors selling pETH lower the spot price
Their swap fees go through the Fee Router, raise the floor and buy pETH back
Some positions sit close to the limit
The Protocol Safety Rate charges them more and pays safer positions more
Market backing gets thinner
Defensive Mode pauses actions that would weaken it further
If the Earn Pool runs short
In a very large drop, the Earn Pool may not hold enough USDp to repay every failed position. In that case the rest is shared across the other positions in the same market, in proportion to their size. Each one receives a small slice of pETH and a slightly smaller slice of debt, because a liquidated position still holds more collateral than debt.
The size of the Earn Pool is what keeps this rare. The more USDp sits in the pool, the more liquidations it can absorb before anything reaches other positions, which is also why depositors leaving the pool in the middle of a sharp drop make redistribution more likely for everyone else in the market.
For our 128% position, its share might add $460 of pETH and 400 USDp of debt. Its ratio moves from 128% to 127.5%, and it ends up with a bit more collateral than debt added. This only works as long as the market is fully backed, which is why Recovery Mode switches it off below 100%.
Who needs to do something
After all of this, most users don't need to do anything. The ones who should look at their positions are those who started with little room, and those who now hold assets they may want to rebalance.
Position
After a 20% drop
Mint position that started well above 144%
Nothing urgent
Mint position that started close to 144%
Add pETH or repay part of the debt
Earn Pool deposit
Decide whether to keep or sell the pETH received
vpETH
Decide whether to hold, hedge or merge back into pETH
The amount of ETH inside Polaris changes all the time, as new users arrive and others leave. Those movements change the value of pETH, but only one part of it, so knowing which part is the key to reading what happens to every position.
Two kinds of growth
pETH grows in two different ways. The floor rises every time fees are burned at the floor through the Fee Router, and once it has risen it stays there, whatever happens to deposits afterward. This is the part fpETH carries.
The premium depends on the bonding curve. When ETH comes in, pETH moves up the curve and the premium gets bigger. When ETH leaves, pETH moves back down and the premium gets smaller. This is the part vpETH carries.
One detail that ties the two together is that deposits and withdrawals both go through the bonding curve and both pay swap fees, so ETH leaving the protocol still adds a little to the floor on its way out.
Six months, two directions
Let's start with pETH at 1.00 ETH, made of a 0.75 ETH floor and a 0.25 ETH premium, and look at two possible six months. In both, the protocol stays busy, so the floor keeps rising. What changes is the premium.
If deposits keep arriving, more activity lifts the floor to 0.85 ETH and stronger demand lifts the premium to 0.40 ETH, so pETH ends at 1.25 ETH. If deposits leave instead, activity still lifts the floor to 0.82 ETH, but the premium shrinks to 0.23 ETH. pETH ends at 1.05 ETH, still above where it started, because the floor grew more than the premium shrank.
How it spreads to every position
A change in the pETH price doesn't stay with pETH holders. Every pAsset market uses pETH as collateral, so when deposits arrive and pETH rises, collateral ratios go up across all markets at once and minters have more room to mint. More minting means more interest for the Earn Pools and sPOLAR, and more activity paying fees into the Fee Router.
When deposits leave, the same chain runs the other way. pETH slides down the curve, collateral ratios go down a little in every market, and minters have less room. Reserve loans against fpETH feel it in a different way, because a smaller reserve with the same amount of ETH borrowed means higher utilization, and higher utilization means a bigger share of the floor growth goes to fees. Those fees end up raising the floor, which helps offset part of the premium that was lost.
Position
Deposits arrive
Deposits leave
fpETH
Floor keeps growing
Floor keeps growing
vpETH
Premium grows
Premium shrinks
pETH
Gains on both parts
Floor growth offsets part of the smaller premium
Mint positions
Ratios go up in every market
Ratios go down a little in every market
Reserve Loans withfpETH
Lower utilization, smaller fee share
Higher utilization, larger fee share
Every action feeds the next one
Up to here we looked at deposits as something that happens to the protocol from the outside. But most of what moves pETH comes from people using Polaris, and every action they take sets off the next one. Let's follow one of these chains, starting from the floor.
When the floor grows, every fpETH is worth more ETH, so fpETH holders can borrow more through Reserve Loans. Part of that floor growth is paid as fees, which go through the Fee Router and raise the floor again. The borrowed ETH often goes straight back into the bonding curve, to loop or to buy pETH for a mint position, which lifts the spot price and pays more swap fees.
A more valuable pETH gives every market more collateral room, so more USDp and GOLDp can be minted. More minting means more interest for the Earn Pools and sPOLAR, and growing demand for pAssets brings more peg buys, which add ETH to the curve and pay fees to every open position. Along the way, every swap and every loan feeds the Fee Router, and the floor rises once more.
Action
Leads to
Which then
The floor grows
More ETH can be borrowed against fpETH, and Reserve Loans pay more fees
Fees are burned at the floor, which grows further, and the released ETH buys pETH back
Borrowed ETH comes back into the curve
A higher spot price and more swap fees
A larger premium and a higher floor
pETH is worth more
Collateral ratios go up in every market
More room to mint pAssets
More pAssets are minted
More interest for the Earn Pools and sPOLAR
Higher yield for pAsset holders, which supports demand
Demand for pAssets grows
Peg buys bring new ETH into the curve
Positions earn peg fees and the floor rises again
The same path has its own brakes. If borrowing grows too fast, utilization rises and Reserve Loans become more expensive, which slows looping down. If minting outpaces demand, USDp drifts below $1 and the Peg Stability Rate goes up until supply matches demand again. And when activity slows, the chain turns more slowly, but the floor keeps everything it has gained, because it can never go down.
Reading a pETH gain
Early growth along the curve is good news for anyone already holding pETH, and it is also the part that can reverse if deposits leave. The floor is the part that builds up over time and stays. Looking at the two separately tells you how much of a pETH gain comes from people using Polaris, and how much comes from new ETH entering it.
Polaris is built to run indefinitely, so every pAsset market has rules for every situation it could end up in, including the rare one where its collateral no longer covers its debt. Nobody needs to pause the market or decide what to do, because each stage is already written into the contracts.
Defenses that stack up
A market doesn't jump into an emergency state from one day to the next. Its protections kick in one after the other, and each stage only starts if the previous ones weren't enough. Everything depends on the market's backing, meaning the total value of its collateral compared with its total debt.
Market backing
Stage
What changes
Healthy
Normal
Everything is open. The Protocol Safety Rate charges high leverage more as health weakens, and liquidations clear positions below 115%
Below 110%
Defensive Mode
Actions that would weaken the market are restricted
Below 100%
Recovery Mode
Redemptions become proportional and redistribution is switched off
Most of the time a market never gets past the first row. The Protocol Safety Rate makes leverage more expensive long before the 110% line, and liquidations keep removing the weakest positions, so Defensive Mode is meant to be rare and Recovery Mode even more so.
Defensive Mode
The goal here is to stop the market from getting weaker when there is still plenty of room to recover. During Defensive Mode the bar for risky changes moves from the usual 115% minimum to 150%, so a position needs a much larger buffer before it can take on more debt or withdraw collateral. So users can always add collateral and repay debt, because both improve the market. Withdrawing collateral or taking on more debt is still possible, but only if the position stays at 150% or above and its ratio doesn't go down. Closing a position and buying at peg are paused, since both would lower the market's backing.
Recovery Mode
To get here, a collateral crash would need to be fast and deep enough to overrun Defensive Mode, the Protocol Safety Rate and liquidations at the same time. If it ever happens, the market keeps all the restrictions of Defensive Mode and adds two rules designed to keep it fair.
The first is about redemptions. Below full backing, paying every redemption at face value would let the first people out take everything, leaving nothing for those who come later. So each redemption is paid in proportion to the backing left. With 80% backing, everyone redeems at 80% of face value, and there is no advantage in rushing to exit.
The second is about liquidations. Redistribution is switched off, because pushing debt onto positions that are themselves under-backed would only weaken all of them. A liquidation goes ahead only if it holds or improves the market's backing.
The way back
A market leaves Recovery Mode when its backing goes back above 100%, and returns to normal operation once it's above 110%. Usually the biggest push comes from the collateral price recovering, since that is what caused the stress in the first place. Next to that, minters can always add collateral or repay debt, and the protocol's yield keeps flowing into positions. Weak positions keep being liquidated only when that improves things, and the Protocol Safety Rate keeps rewarding the safest positions until the market is healthy again.
Stress is limited to each market
Each market has its own thresholds, so a GOLDp market in Defensive Mode doesn't put the USDp market in the same state. The link between markets is the shared pETH price, which is explained in the page on ETH drops. A price move is felt everywhere, but the rules triggered by stress only apply where the stress is.
Some parts of Polaris are outside these stages altogether. For instance, the bonding curve keeps working normally, so anyone can still swap between ETH and pETH, and loans against fpETH are not affected by the state of any pAsset market.
Position
Normal
Defensive Mode
Recovery Mode
Mint position
Everything
Add collateral, repay, or adjust if it stays at 150% or above
Add collateral, repay
Collateral-only
Everything
Add collateral, earn more from the Protocol Safety Rate
Add collateral, earn more from the Protocol Safety Rate
USDp holder
Hold or redeem at $1
Hold or redeem at $1
Redeem at the current backing, or hold until it recovers
Every page so far has followed one event through the system. This last one steps back and looks at the patterns they all share, because once you see them, you can work out on your own how almost anything in Polaris will play out.
One collateral for many markets
Everything in Polaris is built on pETH. That is what gives every new market deep liquidity and access to the same yield engine from day one, without needing a separate collateral system. It also means that every market shares one price. A move in pETH, whatever caused it, is felt by every position in every market at the same time.
At the same time, each market keeps its own debt, its own Earn Pool and its own stress thresholds, so a price move travels across markets, but a liquidation, a redistribution or a switch to Defensive Mode stays inside the market where it happened.
Shared by every market
Separate for each market
pETH as collateral and its price
Debt and collateral ratios
The bonding curve and its liquidity
The Earn Pool and its liquidation gains
The Fee Router and pETH flows
Interest, peg activity and their fees
Floor growth
Defensive and Recovery Mode
Every flow ends with a user
Polaris works as a closed economy. Fees are paid by users and end up with users, after passing through pETH or a market's flows. Interest paid by minters becomes yield for depositors and stakers. The Protocol Safety Rate moves value from riskier positions to safer ones inside the same market. Nothing goes to a company in the middle, and the treasury only earns through sPOLAR like any other holder.
Forces that balance each other
The most important pattern across all the scenarios is that almost every change in Polaris triggers a response in the opposite direction. None of these responses needs a vote or a manual decision, as they are built into the protocol and start on their own.
When this happens
The protocol responds
So that
USDp trades above $1
Peg buys add supply and the Peg Stability Rate falls
Minting gets cheaper until the price returns to $1
USDp trades below $1
Redemptions remove supply and the Peg Stability Rate rises
Minting gets more expensive until the price recovers
Collateral health weakens
The Protocol Safety Rate charges high leverage more and pays safer positions more
The market moves back toward safer ratios
Positions fall below 115%
The Earn Pool liquidates them and takes their pETH at a gain
Bad debt is cleared and depositors are paid for it
Users sell pETH in a downturn
Their swap fees are burned at the floor and buy pETH back
The floor keeps rising and the price gets fresh demand, even in bad weeks
More ETH is borrowed against fpETH
A larger share of floor growth goes to fees
Borrowing costs more and the fees strengthen the floor
Market backing falls below 110%
Defensive Mode pauses actions that would weaken it
The market stops losing ground and has time to recover
Effects that spread, and what keeps them small
Some effects do travel from one user to another, and it's better to know them in advance. A peg buy adds a little debt to every position, and a liquidation the Earn Pool can't cover is shared across the market. On top of that, a wave of pETH selling lowers collateral value everywhere.
What these effects have in common is how they are spread in proportion across many positions, so each one sees only a small change, and they usually come with something in return, like a fee or more collateral than debt. They also have clear limits, such as buying at peg stops in Defensive Mode and redistribution stops in Recovery Mode.
Effect
Who it reaches
What comes with it
Where it stops
Peg buys
Every position in the market
A share of the peg fee
Paused below 110% backing
Redistribution
Every position in the market
More collateral than debt
Only if the Earn Pool runs short, and off below 100%
pETH
fpETH
sPOLAR
vpETH
ETH
