> For the complete documentation index, see [llms.txt](https://usdu.gitbook.io/docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://usdu.gitbook.io/docs/economics-and-incentives/yield-mechanism.md).

# Yield Mechanism

$USDu is a yield-collateralized stablecoin where real on-chain lending income powers the system. The entire yield flow is transparent, sustainable, and does not rely on token emissions or external subsidies.

**How It Works:**

* Users acquire $USDu on open markets and deposit it into the official $USDu Lending Vault.
* Upon deposit, users receive **$sUSDu**, a non-rebasing vault token that automatically accrues yield.
* Yield comes from **interest paid by borrowers** who borrow $USDu from the vault for trading, looping, or liquidity purposes.
* The vault token value (exchange rate) increases over time as yield is earned.
* No staking or lockups are required. Users simply hold $sUSDu and see the value grow.

**Yield Distribution:**

* The USDU Finance protocol itself does not charge a fee.
* The protocol participates as a liquidity provider in lending markets and major pools (via approved minting modules), earning interest on its positions.
* The protocol earns **net revenue** from its participation and uses this income to:
  * Provide incentives for $USDu adoption (e.g. Curve gauges, trading pools)
  * Potentially subsidize borrowing rates in key markets
  * Further deepen liquidity and strengthen the utility of $USDu

**Key Points:**

* Yield is **organic and lending-based**, not based on token emissions
* All $USDu and $sUSDu are **fully backed** and redeemable
* The system remains highly capital efficient, with dynamic rates adapting to market demand