> 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/how-usdusdu-works/yield-generation-and-distribution.md).

# Yield Generation & Distribution

* **How yield is generated**
  * $USDu is backed by real, on-chain lending positions on credit-rated markets.
  * The protocol manages these positions using vaults that supply liquidity to lending markets such as Morpho or Euler.
  * Borrowers pay interest to access the $USDu liquidity, creating a continuous yield stream.
  * Yield is sourced exclusively from this real economic activity, not through inflation or token emissions.
* **How users earn yield**
  * Users acquire $USDu and deposit it into a $USDu Lending Vault.
  * In return, they receive $sUSDu, a non-rebasing token that accrues yield automatically.
  * As the vault earns interest from borrowers, the value of $sUSDu increases versus $USDu.
  * No staking or lockups are required. Holding $sUSDu is sufficient to earn yield.
* **Yield distribution flow**
  * Interest from borrowers flows directly to $sUSDu holders via vault accounting.
  * The protocol mints its own $USDu and deposits it into the vault as additional lending liquidity.
  * As this protocol-owned $USDu is borrowed, it also generates yield for the protocol.
  * This yield revenue is used to fund incentives, not deducted from user returns.
* **Protocol income usage**
  * Protocol revenue (from its own $USDu lending positions) is used to fund ecosystem incentives such as:
    * Curve LP bribes to deepen liquidity.
    * Partnerships with other stablecoins and protocols.
    * Targeted incentives for borrowing, potentially achieving negative-interest rates on select positions.
    * Backstop reserves for added system safety.
* **Dynamic rate model**

  * Interest rates adjust dynamically based on vault utilization:
    * Higher utilization = higher rates, higher yield.
    * Lower utilization = lower rates, more liquidity availability.

  This mechanism helps maintain stable and attractive returns across market conditions.