pUSD: No Counterparty, No Ceiling

Stablecoin yield today is largely borrowed from offchain sources: T-bills, CEX lending, custodial strategies. That means counterparty risk, opaque mechanics, and yields that don't scale with on-chain activity. pUSD is built differently.

This article offers a deep dive into pUSD's yield mechanics: where the yield comes from, why it scales with adoption, and how the emerging ecosystem multiplies the opportunities available to holders. Let’s get right to it!

#What sets pUSD apart?

pUSD is free of counterparty dependency, an extremely rare feature for a stablecoin, since only two others achieve it: LUSD and BOLD. Counterparty risk is not to be underestimated: it can result in partial to total loss of funds for holders, and its occurrence rate is sizable, although hard to assess. Some examples from DeFi history:

• March 2023 SVB failing ⇒ USDC depegged ~8% for a whole weekend
• There are countless examples of CEX failure, for various reasons: QuadrigaCX, FTX, BlockFi, etc.
• Custodial counterparty failure affecting protocols: Ronin Bridge (March 2022), Multichain (July 2023), etc.

While counterparty risk and peg stability are detailed elsewhere, we can now focus on our topic of the day: pUSD’s yield.

#pUSD self-scaling yield

pUSD uses a Stability Pool, which shares some similarities with Liquity’s model, but with key differences as well. We will unpack and walk you through the whole concept, starting with the billion pUSD question…

#Where does the yield come from?

The main source of yield for pUSD is the primary interest rate paid by borrowers, a share of which is redirected to Stability Pool depositors. Functionally, the Stability Pool is a reserve of liquidity for the Polaris CDP protocol, enabling the timely processing of liquidations, since the entity triggering liquidations does not need to supply capital as is usually the case in other models.

The Stability Pool serves as the primary yield venue for pUSD, delivering two uncorrelated sources of returns:

1. pUSD yield, regular and non-spiky: Stability Pool depositors earn a share of the interest rate charged on the CDP loans, paid continuously (in pUSD).
2. pETH liquidation gains: Stability Pool depositors also earn gains from liquidations, in pETH. This one is not strictly a “yield” per se, as the capital is actively deployed, it’s more of a favorable conversion of the deposited pUSD to pETH, as the exchange happens when liquidations are triggered. Liquidations reliably result in a net gain for depositors due to the liquidation penalty - the value of the pETH received exceeds that of the pUSD burned.

As you can see, the yield is directly linked to the activity on the CDP protocol, and totally independent of external sources: this enables it to scale with the protocol adoption, guaranteeing that there will be yield whether there are 10M pUSD in existence or 50B.

With the Stability Pool now properly introduced, we can go back to the overall system diagram presented before to better understand how it fits within the whole CDP protocol:

View full size

The Stability Pool is a core part of the CDP protocol(s): each CDP fork outputting a different debt asset (pGold, pCHF, etc.) will have its own. It is the primary yield venue for pAssets, and a diverse tokenized product offering will be built on top.

#What if I don’t want pETH exposure?

We find your lack of faith disturbing, but we understand and don’t blame you: several solutions will be available at launch / shortly after to cater for this specific demand."In practice, vaults will supply the Stability Pool with an additional logic layer that promptly converts liquidation-obtained pETH back to pUSD, minimising price exposure for depositors.

So from a depositor perspective it will be the same as a pure pUSD exposure, in a similar fashion to what yBOLD (Yearn) and sBOLD (K3) deliver on top of Liquity’s v2 BOLD Stability Pool.

These vaults, being ERC-4626 compliant, will enable a further layer of composability for pUSD that is not possible at the base Stability Pool layer. Most notable at this point is the integration of ypUSD/others into yield tokenization solutions such as Pendle we will detail below, but first, let’s deep dive into the interest rate model, another key component of pUSD earning potential.

#pUSD’s Interest Rate Edge

pETH is compelling on its own, but even more so when used as collateral in a Polaris CDP. Its ever-rising floor translates into self-recollateralizing loans for borrowers, and there is more. Once mobilized as collateral, pETH also earns a yield, stemming from the release of ETH from the bonding curve when a pETH burn occurs, weighted by the amount borrowed.

Because of this double earning potential, our simulations suggest that borrowers on Polaris would be willing to pay, on average, higher interest rates than on other venues: their net effective costs still remain lower, once the collateral yield component is factored in.

For pUSD holders depositing in the Stability Pool, this translates into a higher base earning rate than the average market benchmark, without even factoring in the gains from liquidations.

The share of the interest rate paid out to Stability Pool depositors is stewarded — it can be defined by vePOLAR, within two hardcoded bounds:

1. A minimal value, to ensure the Stability Pool is sufficiently supplied at all times, so that the protocol can still process liquidations even in adverse market conditions.
2. A maximal value,, to ensure the Stability Pool does not capture a disproportionate amount of the pUSD supply, and to enable pUSD to have a rich network of integrations in DeFi.

With the interest rate model now covered, let's look at the broader ecosystem amplifying pUSD's earning potential.

#pUSD ecosystem

#pUSD on Pendle

Note 1 - a primer on Pendle: Pendle takes a yield-bearing token and splits it into two novel primitives: a Principal Token (PT), representing the principal, and a Yield Token (YT) representing the yield collected over the given duration. Pendle's architecture is designed to support any token following the tokenized vault standard, ERC-4626.

Note 2 - Simplification below: pUSD deposits in Stability Pools are not tokenized, and thus do not adhere to the ERC-4626 standard. However, any vault-wrapper, like the spUSD or ypUSD built on top, can and will. For the sake of simplicity, we will use ypUSD as our example, but any other ERC-4626 pUSD Stability Pool vault could work as well.

pUSD deposited into the Stability Pool are prime Pendle material, as they combine a stable, predictable yield from interest rates with spiky, volatile yield from liquidations. The yield volatility added by the second component leads to an interesting dynamic once integrated on Pendle, picture for instance the following scenario:

ETH’s price shows signs of weakness, savvy users are anticipating increased liquidations. Their thesis is validated by observing a downtrend in the protocol’s Total Collateralization Ratio. They can bet on their thesis by buying FYT_ypUSD which is poised to increase in value as/if their thesis materializes and the ypUSD yield spikes up with liquidations.

View full size

The Pendle ypUSD integration creates a market for liquidation speculation: a novel DeFi primitive enabled by pUSD's dual yield structure, a dynamic that has been underexplored so far in DeFi, and that pUSD's scale ambitions are designed to unlock.

All the necessary efforts are already underway to ensure a timely addition of relevant pUSD vaults to Pendle and other yield tokenization solutions such as Spectra when relevant.

#pUSD Liquidity Pools

Another reliable way to earn yield on pUSD will of course be providing liquidity. On top of the external sources (Uniswap, Curve, etc.) that will likely be quick to appear, the StablecoinOS also incorporates its own DEX, PolarEX, which will be detailed in future content.

As the StablecoinOS develops, pUSD will also be used as the base pairing asset for all pAssets, offering a range of Forex-correlated yield-earning opportunities to pUSD liquidity providers looking to diversify their exposure.

The pUSD ecosystem will be dense, and we focused here on the headliners only. Discussions have already started with several L2 foundations, which have expressed interest in pUSD following the initial public announcement. Several paths are being explored to make pUSD available on leading L2s, while keeping the core protocol and the pUSD minting on mainnet. We will share more as the solutions are specified.

#Scalable yield is owned, not rented

pUSD's yield isn't subsidized, bridged in, or governance-voted; it emerges directly from the protocol's own activity. More CDPs opened means more interest flowing to Stability Pool depositors. More volatility means more liquidation gains. The system doesn't need external conditions to be favorable; it generates yield from its own usage.

That self-reinforcing loop is what makes pUSD's scaling story fundamentally different from stablecoins that rely on offchain yield sources destined to compress or disappear. Since pGold has been a top topic of interest in the community, our next article will give it the spotlight; but everything explained here about the Stability Pool and yield mechanics applies to all pAssets built on the Polaris CDP.

There is so much more to reveal and detail, but until then, make sure to stay connected to not miss the next blog post drop: follow Polaris on Twitter, join the Telegram announcement channel, or subscribe to this blog’s brand new RSS feed if that is your thing.