$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.
$USDP maintains its stability through a combination of external (market) and internal forces, and incentives used by $DUCK token holders & the Unit Protocol team.
Every $USDP issued is over-collateralised. This means that the value of the provided collateral is higher than the value of $USDP in circulation at any given point of time.
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:
Users deposit more collateral and restore the peg;
Users repay $USDP loan fully or partially and restore the peg;
Users take no action and let the liquidation ratio be reached, which eventually restores the peg.
In Unit Protocol, every USDP is fully backed by the collateral provided. If the debt/collateral ratio exceeds the liquidation ratio (LR) for a CDP, it will be subject to liquidation. Anyone can trigger liquidation by sending a trigger transaction. There are liquidation bots that consistently monitor CDPs and trigger liquidations if the stated condition is met.
After a CDP is triggered for liquidation, a Dutch auction starts for underlying collateral with a linear decrease in price. (the price decremental step can be different for various assets, but for the most assets it's a ~0.09% decrease per block).
Every participant can buy out part of the collateral for the current price by paying off the USDP debt for the liquidated CDP. USDP debt is equal to the amount of USDP borrowed plus the liquidation fee as a % of this amount.
Once the collateral has been realised, the remainder is returned to the borrower's address. After that, the USDP debt is burned, and the liquidation fee goes straight into the pool to be distributed to stakers later.