Protocol USDN Overview
Last updated
Last updated
To help you visualize what the USDN token and the delta-neutral USDN protocol that supports it are, imagine it as a game between two sides:
The vault side: for those who prefer exposure to the US dollar with added potential yield through the USDN token.
The long side: for those who prefer exposure to the underlying asset with leverage.
These two groups pursue different goals, but their interactions maintain the protocol’s balance and ensure the stability of the USDN token around $1.
The left side includes users who wish to obtain the USDN token. They deposit an amount of the underlying asset into the protocol, specifically into the vault, which allows the protocol to mint an equivalent amount in value of the USDN token. The opposite operation can be performed: returning their USDN token in exchange for the corresponding amount of the asset, with the returned USDN token being burned. The vault side therefore consists of the vault, where users deposit their asset, and the circulating supply of the USDN token, which corresponds to the amount of USDN issued in exchange for the deposited asset.
On the opposite side, there are those who want exposure to the underlying asset with leverage. They use our long-only perpetual, deposit collateral, and choose the leverage they want to apply. Their position consists of the collateral in the underlying asset and the trading exposure, which corresponds to the increase in their exposure due to leverage. Together, these two elements form the total exposure. For example, if the underlying asset is ETH and a user deposits 1 ETH as collateral with 5x leverage, they will have 1 ETH as collateral and 4 ETH as trading exposure, giving a total exposure of 5 ETH.
These two sides form the USDN protocol, which is delta-neutral and enables the creation of the USDN token, a yield-generating synthetic dollar. We will now see how all of this works.
The value of the USDN token is directly linked to the dollar value of the assets held in the vault. Every time a user deposits assets into the vault, USDN tokens are created (minted) based on the value of those assets. The total amount of USDN tokens in circulation is therefore backed by the assets held in the vault.
For example, if the underlying asset is ETH, and it's worth $1,000:
If the vault contains 1 ETH, valued at $1,000, and 1,000 USDN tokens in circulation, then 1 USDN token = 1 USD.
If the vault contains 1.5 ETH, valued at $1,500, and 1,000 USDN tokens in circulation, then 1 USDN token = 1.5 USD.
In the latter example, the price of 1 USDN token is very far from the 1 USD target. To make sure the value of 1 USDN token is always around this target, the USDN token can inflate the holders' balance so that it keeps its value as close as possible to it.
Example, a user possesses 1 USDN:
If 1 USDN token is valued at 1 USD, then their balance will stay at 1 USDN token.
If 1 USDN token is valued at 1.5 USD, then their balance will change to 1.5 USDN tokens, bringing back the value of 1 USDN token to 1 USD.
This mechanism is called a rebase.
The USDN token will only rebase if its price is above 1 USD, if the price falls below, nothing will happen and the balance of holders will not decrease.
