Introduce vUSD: a Synthetic Stablecoin

[yehia67]

What we do

We propose an over-collateralised synthetic stablecoin, minted via loans against Bifrost vTokens (and optionally BNC), featuring:

• Robust peg stability is maintained through dynamic collateral ratios, liquidation auctions, and stability fees
• Core yield derived from vToken staking (LST yield), directly fulfilling the requirement for vToken-based yield composition
• Modular architecture designed for long-term scalability, enabling surplus and reserves to be diversified into Real-World Assets (RWA), delta-neutral perpetual strategies, and other stablecoin liquidity pools

How Does It Work

vUSD is minted by borrowers through the stablecoin borrowing module. vToken holders (for example, vDOT holders) lock their vTokens as collateral in this module and mint vUSD based on a predetermined collateralization ratio. The minted vUSD receives a portion of the underlying vToken staking yield (see the yield section below), ensuring that the newly minted vUSD remains useful and in demand.

Once minted, users can take their vUSD and swap it for DOT, other vTokens, external stablecoins, or any other assets available on DEXs that integrate with the Bifrost ecosystem. This makes vUSD a liquid, composable asset that can be used across DeFi.

This process is how new vUSD supply enters the marketplace. Because of the over-collateralized design of the borrowing protocol, vUSD is always backed by more value in staked assets than the value of the vUSD debt. For example, 100 vUSD could be backed by $150 worth of DOT via vDOT collateral (corresponding to a 150% collateralization ratio).

Example Life Cycle

Alice converts 100 DOT into 98.62 vDOT (assuming, for example, that 1 vDOT = 1.014 DOT because it embeds accrued staking rewards). Alice then deposits the 98.62 vDOT into the borrowing module as collateral. With DOT priced at $100, Alice’s collateral is worth $10,000.

Alice mints 5,000 vUSD, creating a debt position with a 50% Loan-to-Value (LTV). Alice’s position has a good safety margin, given that the liquidation LTV is 66.6% (corresponding to 150% over-collateralization).

Depending on how governance configures the system, Alice can pay zero or minimal fees and base interest to mint vUSD. In all cases, the staking yield from the vDOT continues to benefit Alice: part of the yield remains embedded in the vDOT collateral, and part can be distributed to vUSD holders or Alice’s position via the protocol’s yield-sharing mechanisms.

vUSD Earnning Mechanism

vUSD is a yield-backed stablecoin, not an interest-bearing loan token. Its yield is derived directly from the staking yield of the vTokens (such as vDOT) used as collateral in the borrowing system.
for more details please check below 👇
https://lumbar-diplodocus-5cf.notion.site/How-Is-vUSD-Yield-Generated-2c95e552992780f3888fc29d5a04e03d?source=copy_link

How is vUSD burned/destroyed?

When a user wants to close or reduce their loan, they repay their outstanding vUSD debt to the borrowing module. The returned vUSD is burned by the protocol, reducing the total vUSD supply. Once the debt is fully repaid and the vault is healthy, the user can withdraw their vToken collateral (e.g., vDOT) back to their wallet.

sequenceDiagram
    participant Alice as User (Alice)
    participant Bifrost as Bifrost Protocol
    participant vDOT as vDOT Token
    participant Vault as Borrowing Vault
    participant vUSD as vUSD Stablecoin
    participant DeFi as DeFi Protocols
    participant Yield as Yield Router

    Note over Alice,Yield: Phase 1: Stake & Mint
    Alice->>Bifrost: Stake DOT
    Bifrost->>Alice: Receive vDOT
    Alice->>Vault: Lock vDOT as collateral
    Vault->>vUSD: Mint vUSD (based on collateral ratio)
    Vault->>Alice: Send vUSD

    Note over Alice,Yield: Phase 2: Use & Earn
    Alice->>DeFi: Swap vUSD for other assets
    vDOT->>Yield: Generate staking yield
    Yield->>Alice: Distribute yield share

    Note over Alice,Yield: Phase 3: Repay & Unlock
    Alice->>DeFi: Acquire vUSD
    Alice->>Vault: Repay vUSD debt
    Vault->>vUSD: Burn vUSD
    Note over vUSD: Supply decreases
    Vault->>Alice: Return vDOT collateral
    Alice->>Alice: Unstake or hold vDOT

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Deliverable Milestones

Milestone 1: Core vUSD Loan Protocol

Goal:
Deliver a working vUSD mint/burn system based on over-collateralised loans using vTokens, including correct debt accounting and lifecycle management.

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Sprint 1 (Weeks 1–2)

Focus: Core borrowing mechanics

• Implement vUSD minting against vToken collateral (vDOT, vKSM)
• Enforce minimum collateralization ratio (e.g. 150%)
• Implement loan positions (vaults): collateral, debt, LTV tracking
• Implement vUSD burn on repayment

Sprint 2 (Weeks 3–4)

Focus: Safety & lifecycle completeness

• Liquidation logic for under-collateralised positions
• Internal accounting invariants & sanity checks
• Simple UI to monitor loans and vUSD supply

Deliverables

• On-chain vUSD borrowing pallet/module
• Mint/burn lifecycle fully implemented
• Basic tests covering mint, repay, withdraw, liquidation
• UI for loan and vUSD monitoring

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Milestone 2 – Yield Rebalancing

Goal:
Implement staking-yield-backed vUSD mechanics, including rebalancing logic so that staking yield is correctly distributed between vUSD supply and collateral positions.

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Sprint 1 (Weeks 5–6)
Focus: Yield model & accounting design

• Implement system-wide yield accounting based on:
  • Total vUSD debt
  • Total vToken collateral value
• Encode yield-sharing ratios (e.g. 40% vUSD / 60% collateral at 150% CR)
• Track accumulated staking yield from vTokens
• Define rebasing vs index-based accounting model for vUSD

Sprint 2 (Weeks 7–8)

Focus: Rebalancing & user impact

• Implement vUSD supply rebasing or equivalent value adjustment
• Ensure yield actually happens without user action
• Handle multiple loan positions with different LTVs
• Compute effective vUSD yield as weighted average across positions
• Ensure no yield leakage or “wasted yield” in system accounting

Deliverables

• vUSD yield generation logic backed by vToken staking rewards
• Automated rebalancing mechanism
• Basic tests covering rebalancing
• Documentation explaining yield math and lifecycle

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Milestone 3 – Integration & Launch Support

Goal:
Enable vUSD liquidity and usage within the Bifrost ecosystem while keeping integrations flexible and non-blocking.

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Sprint 1 (Weeks 1–2)

Focus: Liquidity primitives & readiness

• Define canonical vUSD pool types (vUSD–USDT, vUSD–vDOT)
• Implement hooks/interfaces required for Bifrost-managed LPs
• Ensure vUSD is compatible with:
  • DEX swaps
  • Farming contracts
• Validate behavior of rebasing vUSD inside LP positions

Sprint 2 (Weeks 3–4)

Focus: Ecosystem use cases & polish

• Enable vUSD usage as:
  • LP asset
  • Borrowed asset for loop staking
• Parameter tuning (caps, incentives placeholders)
• End-to-end testing:
  • Mint → LP → yield accrual → repay → burn
• Final documentation & diagrams

Deliverables

• vUSD liquidity-ready token
• Verified behavior inside LPs and farms
• Clear integration guidelines for Bifrost-managed products
• Final technical documentation and system diagrams

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Milestone 4 - Spend vUSD on RWA (Mainnet v2)

Goal:
Enable vUSD to be used for compliant, privacy-preserving access to Real-World Assets (RWA) through ZK-enabled liquidity and settlement mechanisms.

This milestone is intentionally scoped post-mainnet, once the core vUSD mint/burn, yield rebalancing, and ecosystem integrations are live and stable.

The objective is to extend vUSD beyond DeFi primitives and allow it to be spent or settled against real-world financial instruments, such as:

• Tokenized gold
• Tokenized equities
• Real-estate income or dividend streams
• Other regulated, yield-bearing RWAs

To achieve this, vUSD will interact with compliant RWA liquidity pools that incorporate zero-knowledge verification. ZK proofs allow participants to satisfy regulatory or eligibility requirements (e.g., jurisdictional or investor constraints) without revealing sensitive user data on-chain.

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Deliverables Table

Delivery Date	Milestone	Deliverable
16 February 2026	Milestone 1: Core Loan Protocol (Mint/Burn/Liquidation)	• vUSD yield generation logic backed by vToken staking rewards • Automated rebalancing mechanism • Basic tests covering rebalancing • Documentation explaining yield math and lifecycle
16 March 2026	Milestone 2: Yield & Rebalancing	• vUSD yield generation logic backed by vToken staking rewards • Automated rebalancing mechanism • Basic tests covering rebalancing • Documentation explaining yield math and lifecycle
13 April 2026	Milestone 3: Integration & Launch	• vUSD liquidity-ready token • Verified behavior inside LPs and farms • Clear integration guidelines for Bifrost-managed products • Final technical documentation and system diagrams
TBD	Milestone 4: Spend vUSD on RWA (Mainnet v2)	• Compliant liquidity pools supported by ZK (TBD)

gantt
    title vUSD Protocol Development Timeline
    dateFormat YYYY-MM-DD
    
    section Milestone 1: Core vUSD Loan Protocol
    Milestone 1 Delivery           :milestone, m1, 2026-02-16, 0d
    
    section M1 Sprints
    Sprint 1 - Core Borrowing      :s1, 2026-01-19, 14d
    Sprint 2 - Safety & Lifecycle  :s2, 2026-02-02, 14d
    
    section Milestone 2: Yield Rebalancing
    Milestone 2 Delivery           :milestone, m2, 2026-03-16, 0d
    
    section M2 Sprints
    Sprint 3 - Yield Model         :s3, 2026-02-16, 14d
    Sprint 4 - Rebalancing Logic   :s4, 2026-03-02, 14d
    
    section Milestone 3: Integration & Launch
    Milestone 3 Delivery           :milestone, m3, 2026-04-13, 0d
    
    section M3 Sprints
    Sprint 5 - Liquidity Primitives :s5, 2026-03-16, 14d
    Sprint 6 - Ecosystem Use Cases  :s6, 2026-03-30, 14d

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Team Members

@PATH242
@yehia67

Bounty Reference: https://page.bifrost.io/Open-Bounties-Requests-for-Proposals-RFPs-3a06e610a5724c448ad805094b4c3352?p=1fcbc3b88a848078aa69d1c6041e8046&pm=s

[zxstim]

Hey sorry. I changed the repo contents recently and the template disappeared so i didn't get any notification.

Anyway, this sounds good. Can we focus on 2 assets vETH and vDOT for now? We are looking for more use cases natively on Ethereum, Arbitrum, Base and BSC in conjunction with defisingularity.com incentives for vDOT and our recent vETH launch to create supply sink on those ecosystems

Let me know if you are keen to utilize an existing design like Liquity.

I marked this proposal Approved to proceed, but please elaborate more on milestone 1 and give me some ideas on your protocol design so I can make judgement and let you know a potential grant amount for your effort. We prefer small milestone so expectations are easy to manage for both sides.

We typically grant $200 - $300 per proposal submission as you can see on the Closed issues. You can keep upgrading the same project and receive more grants to grow multiple times. We could grant more per submission (up to $1000) but maybe once your project is getting into shape. This is mostly to manage our grant budget appropriately.

[yehia67]

Hey @zxstim,
We can definitely make the deliverable smaller. I’ll reach out on Telegram so we can align on expectations per milestone, then I’ll update this issue or split it into new ones accordingly

[yehia67]

Hey @zxstim,

Thanks for the clarification and for approving the proposal to proceed.

Understood on focusing on vDOT and vETH only for now.
I agree that Milestone 1 should be much smaller and clearly scoped so expectations are easy to manage.

Below is a revised and more concrete breakdown of Milestone 1, intentionally limited to fit an initial grant submission.

Revised Milestone 1: Core vUSD Mint/Burn Prototype

Objective:

Implement a minimal vUSD loan prototype using vDOT and vETH as collateral, focused purely on correct accounting and lifecycle (mint → repay → burn), without yield rebalancing or advanced features.

Scope (intentionally limited)

Protocol design (high level):

• Over-collateralised vault model (Liquity-inspired semantics)
• One vault per position, holding either vDOT or vETH
• Fixed minimum collateralisation ratio (e.g. 150%)
• Price input assumed via existing oracle interface (no oracle work in scope)

Core functionality:

• Deposit vDOT / vETH as collateral
• Mint vUSD up to allowed LTV
• Track vault state: collateral, debt, LTV
• Repay vUSD and burn on repayment
• Withdraw collateral once vault is healthy

Safety / lifecycle:

• Basic liquidation trigger when vault drops below minimum CR
• Simple liquidation path (no advanced auctions, no stability pool yet)
• Internal accounting checks and invariants

Explicitly out of scope for Milestone 1

• Yield redistribution or rebasing
• UI beyond basic testing helpers
• Incentive mechanisms

Deliverables

• Minimal on-chain borrowing module / pallet
• Unit tests covering:
  • mint
  • repay
  • withdraw
  • liquidation trigger
• Short design note documenting assumptions and limitations

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This milestone is meant to serve as a foundation, suitable for a small initial grant, upon which we can iteratively build:

• Yield-backed mechanics
• Incentivised usage
• Broader ecosystem integrations

Happy to further adjust the scope if you’d like this broken down even smaller. Will start working on it after 15 Jan because of the holidays

[zxstim]

Sounds good. I think $300 - $500 range for the first grant upon delivery. As you can see with other grantees, our requirement is that everything is open source (contracts and frontend).

Just one testnet deployment is ok, Arbitrum/Base sepolia. For price oracle, you can mock it with an admin function for now. i will have something set up later for you.

[yehia67]

okay 🙌

1. Will be open source with MIT license
2. Deploy on Base Sepolia
3. The Token will be an ERC20 standard using the OpenZeppelin library
4. Framework Foundry

If you are happy with all the above, we start and share with you once ready

[zxstim]

sounds good. Let's do it.

[yehia67]

Hey @zxstim !
We’ve finished the first iteration of the grant. You’ll find all smart contracts deployed and verified, including vUSD with mock vETH and vDOT.
https://github.com/yehia67/vUSD

Looking forward to your feedback.
CC: @PATH242

[yehia67]

For the next iteration, I see three possible paths and wanted to align with you:

• Introduce Liquity-style borrowing positions (Troves) to manage collateral and debt with clearer separation of concerns.
• Integrate real price feeds using Chainlink, replacing the current placeholder oracle and handling vETH/vDOT listings if needed.
• Prepare the protocol for cross-chain usage by adding bridge ready interfaces and clearly documenting cross-chain assumptions.

We’re also open to any other direction you’d recommend.

We're happy to proceed with whichever path you prefer, and we’ll, of course, address any comments on the current iteration’s implementation as well.