USDL Crypto: How Stablecoins are Meant To Be Designed

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By Connor
Estimated reading: 6mins
USDL Crypto

More than 23 different stablecoins have failed and gone to zero, or near zero.

And with around 200 stablecoins on the market, that’s an astonishing 10% failure rate.

But this is generous.

See, some stablecoins have not technically failed, but they have censored individuals who have interacted with code that the central issuer did not like.

Others have not failed yet, but are ticking time bombs due to uncertainty in the underlying collateral.

Truth is, if ‘we’ want truly decentralized financial solutions, we must have trustless, censorship resistant, and reliable stablecoins.

USDL fits the bill.

What is USDL Crypto?

USDL is an algorithmic stablecoin designed to maintain a constant value of one US dollar, at all times.

And, unlike other stablecoins that rely on fiat currency held in bank accounts, USDL coin is created by users depositing PLS (PulseChain coin) as collateral.

This collateral is locked in individual smart contracts called Vaults, ensuring that all USDL within the Liquid Loans ecosystem is supported by a surplus of collateral.

USDL serves as a means to pay off loans on the protocol and can be redeemed at any time against PLS at its face value.

USDL is different from most stablecoins in that:

  1. It is not backed by dollars, but rather one USD worth of PLS
  2. It is generated by an immutable protocol which does not have admin keys or governance via DAO
  3. Is fully-backed (overcollateralized) at all times, which can be verified on-chain
  4. Is not censorable, such as USDC or DAI
  5. Allows for yield farming while self-custodying your own keys 

This means that USDL is resistant to:

  1. Censorship / Blacklisting. Since USDL does not have a governing body with admin keys, like Circle’s USDC, no holders of USDL can have their coins invalidated or frozen for ‘bad behavior’.
  2. BankRun-induced collapses. Since USDL is overcollateralized, even if every USDL redeemed all at once, the system would not collapse. 

How Does USDL Crypto Work?

USDL crypto is a coin (on PulseChain) that works just like any other token that trades on the free market of centralized and decentralized exchanges.

When an individual sells it, the price goes down. When they buy it, the price goes up.

The dilemma for all stablecoins is what happens when lots and lots of USDL is sold.

The fundamental solution is to have a robust redemption mechanism that incentivizes users to buy USDL and redeem it for the underlying collateral at a profit. 

How is USDL Stablecoin Created?

USDL Stablecoin PulseChain

USDL crypto is minted (or created) when users elect to lock their PLS in smart contracts called Vaults within the Liquid Loans Protocol.

The value of PLS must be 110% the value of the USDL when the loan is created to ensure overcollateralization and system-state solvency.

What Maintains the Price of USDL?

The design of USDL maintains its price stability by both hard and soft peg mechanisms. 

Hard Peg of USDL

The "hard peg mechanisms" involve the ability to redeem the USDL coin for PLS at a value equivalent to $1. This creates a price floor. If the price falls below $1, any user can buy USDL off market (pushing the price up) and redeem it for $1 worth of PLS. 

Additionally, a minimum collateral ratio of 110% establishes a price ceiling, preventing the value from exceeding its intended peg. This means that if the price of USDL exceeds $1.10, users can collateralize their PLS and immediately sell their USDL on the market for profit. 

Soft Peg of USDL

The "soft peg mechanisms" operate indirectly to ensure USD parity. One such mechanism is the concept of parity as a Schelling point, which promotes cooperation and equilibrium without direct communication. Liquid Loans treats USDL as equal to the USD value of an asset, implying that parity between the two is an inherent state within the protocol.

Another soft peg mechanism is the implementation of borrowing fees on new debts. As the number of redemptions increases, indicating that USDL is below its $1 value in PLS, the baseRate also rises. This discourages borrowing and reduces the influx of new USDL into the market, preventing its price from falling below the value of $1 worth of PLS.

How To Redeem USDL Stablecoin

Redeeming USDL stablecoin for PLS is a simple process. Holders will:

  1. Obtain USDL
  2. Go to the Liquid Loans dApp
  3. Connect Wallet
  4. Find the Redeem Function
  5. Select the amount to redeem
  6. Agree to the Redemption Fee
  7. Execute the order

The USDL will be taken out of existence and PLS will be removed from the lowest collateralized vault (i.e. one with a collateral ratio of 111%) and placed in the redeemer's wallet address. 

What Can I Do With USDL Crypto?

Holders of USDL have a variety of options:

  1. Stability Pool. USDL stablecoin holders have the option to park their coins in the Stability Pool. Stability Providers will earn yield in the form of PLS from liquidated vaults as well as rewards in the form of LOAN tokens.
  2. Redeem. If the price of USDL drops below $1, holders are incentivized to buy USDL off the open market and redeem it for PLS within the Liquid Loans Protocol. This form of crypto arbitrage not only can turn a profit for the users, but it helps maintain the price peg of USDL.
  3. Liquidity Providing. More advanced technical users may elect to provide liquidity on PulseX or UniSwap on pairs such as LOAN:USDL, PLS:USDL, or USDL:eUSDC.
  4. Convert to Fiat. Users may also take their USDL to a fiat off-ramp and use it to transact in the physical world. That is, of course, only necessary until merchants around the world begin to accept USDL as payment. 

The Bottom Line

Cryptocurrencies are volatile, which is a large reason why merchants are hesitant to use it for payments. 

But the vast majority of stablecoins are unreliable.

USDL provides a much needed solution to the problem.

It is fully-backed, redeemable, censorship resistant, trustless, and comes from a decentralized network of vaults in a protocol which is admin key and governance free. 

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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.

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Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.

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