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How the peg works
Understanding on how the USDP secures its peg
USDP is pegged against the US dollar. It's a free-floating peg, meaning that the value of USDP may still experience slight fluctuations in value explained by the economics of supply and demand.
USDP maintains its stability through a combination of external (market) and internal forces, and incentives used by DUCK token holders & the Unit Protocol team.
The moment a user pays off their loan, the deposited collateral is unblocked and the returned USDP tokens are burned.
If the user has been liquidated, the collateral is sold by auction and paid-up by auction participants with USDP tokens, which are burned in the same way.
The collateral serves as backing to allow USDP tokens to have real value in the market.
The amount of USDP tokens circulating in the market depends on the amount of collateral that is currently deposited.

Concept

Every USDP issued is over-collateralized. This means that the value of the provided collateral is higher than the value of USDP in circulation at any given point of time. This principle is based on ICR (Initial collateral ratio). (reference to the glossary)
Unit Protocol operates on the understanding that the market is self-regulated and this can ensure that the price of stablecoin reaches its peg. Instead of focusing on the stablecoin's value, it focuses on the value of USDP to ensure that it reaches the peg over time. This is the mechanism that will ensure that Unit Protocol can scale in the long term.

What if the value of a collateral drops?

If we rule out a recovery, there are only three possible outcomes:
  1. 1.
    Users deposit more collateral and restore the peg;
  2. 2.
    Users repay USDP loan fully or partially and restore the peg;
  3. 3.
    Users take no action and let the liquidation ratio be reached, which eventually restores the peg.

Last modified 1mo ago