How TOR Works
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TOR is a new ERC20 token which can only be minted when a user burns HEC. TOR can be exchanged for newly minted HEC (redeemed) using the HEC price oracle, implemented with Time Weighted Average Price (TWAP). Oracles are a fundamental component to any stablecoin’s base functionality. An oracle, in relation to blockchain technology, is a system built to feed data to smart contracts.
Generally, a Stablecoin is only used and trusted if it maintains its price peg. TOR is pegged to $1. How is it ‘backed’? There are two layers of TOR’s backing:
  1. 1.
    Smart-contract models and the HEC/stable LP
  2. 2.
    Over-collateralized via the Hector Network Treasury

Layer 1: Smart-contract models and the HEC/stable LP

The underlying protocol uses the basic market forces of supply and demand to maintain the price of TOR. Everybody understands that when the demand for TOR is high and the supply is limited, the price of TOR would increase. When the demand for TOR is low and the supply is too large, the price of TOR would in principle decrease. The protocol ensures that the supply and demand of TOR is always balanced, leading to a stable price.
How does this work? Expansion and contraction! To maintain the price of TOR, the HEC supply curve pool adds to or subtracts from TOR’s supply. Users burn HEC to mint TOR and burn TOR to mint HEC, all incentivized by the protocol’s model-market module. Here's a video which explains the ecosystem:
Hector (HEC) is the counterpart to the TOR Stablecoin. Let’s zoom in on the elements Expansion and Contraction:
  • Expansion: The percentage of TOR in the curve pool decreases, so it means that the demand for TOR is high. The price of TOR against USDC/DAI also increases slightly, so minting TOR can be slightly profitable. Users will take advantage of this profit margin by minting TOR and rebalancing the percentage of TOR in the curve pool.
  • Contraction: The percentage of TOR in the curve pool increases meaning that the demand for TOR is low. The price of TOR against USDC/DAI also decreases slightly, so redeeming TOR can be slightly profitable. Users will take this profit by redeeming TOR and rebalancing the percentage of TOR in the curve pool
Expansion and contraction can be considered the prime mechanism for maintaining peg (layer 1). TOR maintains stability through a simple swap mechanism: 1 TOR can be exchanged for 1 dollar’s worth of HEC at any time. If TOR becomes less valuable than $1.00, buyers can buy it up and use the mechanism to redeem it for $1.00. As buyers do this, demand for TOR causes the price to go up again until it reaches $1 USD. These economic incentives act rapidly to maintain TOR’s stability.

HEC/stable LP

As HEC/DAI, HEC/USDC and HEC/frax are mostly owned by the protocol, sufficient liquidity is guaranteed when a TOR redeem action takes place. All protocol controlled HEC/stable LP is there to make sure the redeeming process will be successful.

Layer 2: Hector Network Treasury.

Although there is the curve pool as “Layer 0” for swapping TOR back and forth, we still need to do mint/redeem from time to time in a much lower frequency. The mint/redeem at Layer 1 will cause the price of HEC to (slightly) increase or decrease. Although the price of HEC has little impact on mint/redeem for TOR in Layer 1, in case the HEC price decreases more than expected/wanted, the Hector Network treasury will be used to stabilize the value of HEC by buy backs and burns.