# Theory of Operation

## Overview

VUSD is self-backed, self-sustaining and self-pegging through stablecoin yield generated by its own internal treasury.  Every 1.0 VUSD is backed by at least 1.0 of another stablecoin (e.g. USDT), which is maintained at a yield source (e.g. Compound USDT lending market).

VUSD mint and redeem operations input (during minting) and output (during redemption) collateral assets directly with the VUSD treasury.  The treasury ensures that output assets are always immediately  and readily available to fully satisfy all redemptions.

## Peg Macroeconomics

The peg with USD is maintained through arbitragers' 1:1 swapping with other stablecoins.

If VUSD falls below $1.00 on the spot market, there becomes an incentive to buy VUSD, and then redeem for $1.00 via the VUSD treasury swapping redemption for an arbitrage profit.

If VUSD rises above $1.00 on the spot market, there becomes an incentive to mint VUSD via VUSD treasury swapping mint, and then immediately sell VUSD on the spot market for an arbitrage profit.

The VUSD treasury always maintains *at least* 1:1 backing of every VUSD, which ensures that redemption demand can be met sufficient to maintain the peg.

## Token Supply Management

When VUSD is minted, the general VUSD treasury is on the other side of the swap, receiving the input assets.  When VUSD is redeemed, the VUSD treasury swaps its internal assets for received VUSD. The VUSD received during redemption is burned, ensuring automatic management and accuracy of the total VUSD token supply. This ensures the token supply reflects the backing available in the VUSD treasury for any redemption at any time.

## Answering Misconceptions

* VUSD *is not* a deposit/withdraw system, where users have a claim to treasury assets.
* VUSD *does not* contain auctions, liquidations, or debt obligations to users.
* VUSD *is not* an algorithmic stablecoin.


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