Risks
This section describes the risks associated with USP, and the actions taken to mitigate such risks.
Stablecoin related risk
The use of stablecoins such as USDC or USDS introduces additional risks associated with fiat-backed stablecoins. Risks associated with these stablecoins are generally disclosed by the issuer of the token (see USDC terms and USDS risks).
Centralized stablecoins provide stability and capital efficiency, but they introduce:
Unhedgeable custodial risk with bond reserves in regulated bank or trust accounts, which are prone to censorship.
A critical reliance upon the existing traditional banking infrastructure and country-specific evolving regulations.
Represent an unsecured credit position to both the issuer and underlying bank holding the reserve assets while mixing these assets with other bank lending activities.
Counterparty risk
USP generates yield from Credit Vaults that lend funds to TradFi institutions. This introduces a counterparty risk for USP holders given there is a chance that a party fails to meet its obligations, potentially leading to financial losses.
To mitigate this risk, USP relies on:
Stability fund: 5% of the fees generated by USP are saved in a fund that should cover potential CVs' losses
Stakers' deposits: sUSP holders should cover additional losses by having their conversion price to USP reduced to keep the peg for USP stable
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