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The Valve plays a critical role in maintaining the stability of the zETH/ETH peg. The Valve is a protocol-native swap mechanism that enables any user (with or without an outstanding loan position) to swap zETH for ETH at a 1:1 ratio.
This ensures that the zETH/ETH peg is maintained, as any time it diverges an arbitrageur can acquire zETH at a discount to exchange 1:1 for ETH on the ZeroLiquid protocol.
At regular intervals, yield generated from the LSD tokens users have deposited (minus the protocol fee of 5%) is directed to the Valve, where it is distributed proportionally to all zETH submitted for swap. When users claim/swap their ETH from the Valve pool, a matching quantity of zETH is burned. While this arbitrage removes yield from the Valve, it also reduces the overall debt burden (via the burning of zETH) of all users by the same proportion. Therefore, there is no impact on users' remaining loan duration.
To further aid peg stability, the ZeroLiquid team is pursuing a multi-faceted approach. This includes implementing LP incentives and integrating zETH with various DeFi protocols to ensure strong liquidity so that users can enter and exit zETH positions as they wish. Read more on this in Peg Protection.