The $1 USD peg mechanism — self-sovereign minting against stETH, overcollateralization, and how yield accrues without rebasing.

How the $1 Peg Works

You Are the Minter

UPD has no issuer. When you mint UPD, you are not buying it from a company or being issued it by a regulated entity — you are depositing stETH into a smart contract and the contract mints UPD to you in return. The protocol is your counterparty.

This is the mechanism that makes UPD censorship-resistant. There is no issuer to compel. There is no corporation holding reserves that can be seized. The collateral is locked in a smart contract and governed entirely by code.

Minting and transfers are public

Minting, burning, and transferring UPD are standard ERC20 operations — fully visible on-chain. UPD has no built-in transaction privacy. For private transfers, shield UPD into UPP.

Non-Rebasing Design

UPD is non-rebasing — 1 UPD is always worth exactly $1 USD. stETH yield does NOT increase the token supply. Instead, yield accrues as collateral, increasing the collateralization ratio over time.

Day 0: 1 ETH deposited, worth $3,000 → 3,000 UPD minted
       Collateralization: 100%

Day 365: stETH yield = 4% → collateral worth $3,120
         UPD supply unchanged: still 3,000 UPD
         Collateralization: 104%

This eliminates the complexity of rebasing tokens. Every wallet, DEX, lending protocol, and bridge handles UPD as a standard fixed-supply ERC20.

Mint Mechanism

To mint UPD, a user deposits ETH:

ETH is converted to stETH via Lido
The PriceOracle fetches the current ETH/USD price
StabilizerNFT calculates how much UPD to mint: updAmount = ethAmount × ethPrice
UPDToken mints the UPD to the user
stETH is held in PositionEscrow as backing

mint(1 ETH) at $3,000/ETH
→ receives 3,000 UPD
→ 1 stETH locked as collateral

Burn Mechanism

To redeem UPD, a user burns their tokens:

UPD is burned
Proportional stETH is released from PositionEscrow
stETH is sent to the user (or unstaked to ETH)

burn(3,000 UPD) at $3,000/ETH
→ receives 1 stETH (~1 ETH equivalent)

Price Oracle

The PriceOracle provides the ETH/USD price used for mint and burn calculations. It validates signed price attestations from Chainlink and Uniswap V3:

Multi-source validation: Requires agreement between multiple price sources
Freshness check: Rejects stale attestations (> 5 minutes old)
UUPS upgradeable: Can be upgraded to support new price sources

Overcollateralization

The system maintains a collateralization ratio above 100% through:

Accumulating yield: stETH rebase increases collateral value over time
Liquidation: Undercollateralized positions are liquidated via the StabilizerNFT priority system

The OvercollateralizationReporter tracks the system-wide ratio on-chain, allowing anyone to verify the reserve backing.

Price Peg Stability

Unlike algorithmic stablecoins, UPD's peg is maintained by:

Hard 1:1 collateral at mint: You can always get $1 of stETH per UPD burned (at oracle price)
Arbitrage: If UPD trades below $1, arbitrageurs buy UPD and burn it for $1 of stETH
No algorithmic supply adjustment: No death spiral risk

Collateral Risk

If stETH experiences a severe depeg (stETH << ETH) and the system is simultaneously undercollateralized, UPD holders could receive less than $1 on burn. The InsuranceEscrow provides a buffer for this scenario.

How the Peg Works