Mutuum’s Stablecoin Implementation

Mutuum’s stablecoin is minted and burned on demand whenever a user borrows or repays through the protocol. Unlike other crypto assets, it does not need to be deposited beforehand; there is no separate reserve of the stablecoin within Mutuum’s lending pools. Typically, if someone wants to borrow a token like LINK, another user must have supplied LINK to the pool. This requirement does not apply to Mutuum’s stablecoin, which is created directly via the smart contracts when needed.

When the user repays their stablecoin debt (or is liquidated), the repaid stablecoin is burned, rather than returning to liquidity providers. This unique mechanism grants additional flexibility compared to conventional lending pools, where a borrow must rely on the availability of that specific asset. Because the stablecoin is minted on demand, a user who deposits USDC, for example, can borrow the stablecoin without waiting for it to be supplied by others.

The protocol values the stablecoin at 1 USD regardless of market conditions. This fixed on-chain price anchors the stablecoin at one dollar, driving borrowers and arbitrageurs to align its market price around this peg. For example, if the stablecoin trades above $1, market participants can generate more of it for exactly $1 worth of debt, sell it at a premium, and later repay that debt at $1 - thus expanding the supply and normalizing the price. Conversely, if the stablecoin falls below $1 in the open market, users can acquire it for less than $1 to repay their loans, reducing supply and pushing the price back up.

Every unit of Mutuum’s stablecoin is backed by collateral exceeding its notional value—an approach with a proven track record of resilience in DeFi. If a user’s collateral dips below a safe threshold due to price shifts, their position may be liquidated, similar to how other tokens in Mutuum’s ecosystem are safeguarded.

In a typical borrowing scenario, the interest rate for an asset depends on how heavily that asset is utilized in the pool: the higher the utilization, the higher the rate. By contrast, the stablecoin’s interest rate is decoupled from the supply-demand dynamics of a traditional reserve. Instead, the protocol periodically adjusts the stablecoin’s rate, guided by internal governance or maintainers, to sustain price stability. If the stablecoin’s market price rises significantly above $1, the rate may be lowered to incentivize new borrowing (which increases supply). Conversely, if the stablecoin’s market price dips below $1, the interest rate may be raised, compelling users to repay their loans and shrink supply - helping restore the peg.

Because there is no separate pool of stablecoin suppliers, no external party is entitled to receive interest on stablecoin borrow positions. Instead, all interest generated by stablecoin loans flows to Mutuum’s treasury. This mechanism bolsters the protocol’s overall reserves, potentially funding security modules or development initiatives. By capturing 100% of the interest proceeds, the protocol can strengthen its capital base over time.

Any asset enabled as collateral within Mutuum’s ecosystem can secure the stablecoin, exactly as with other borrowed tokens. When market conditions cause collateral value to decline, a user’s stability factor can drop too low, triggering liquidation. This ensures that the stablecoin - although minted on demand - maintains firm overcollateralization. Users may also bridge the stablecoin across different chains if third-party bridges integrate it, but the specifics of such bridging will rely on external services.

Mutuum places strong emphasis on security in the planned development of its stablecoin, aiming to follow best practices long before any official release. Although no code has been finalized or deployed at this stage, the intended approach involves extensive internal checks, external audits, and active bug bounty incentives. By engaging third-party auditors and community contributors for code reviews, the protocol seeks to identify and address vulnerabilities ahead of launch. While it is impossible to eliminate smart contract risk entirely, Mutuum believes that rigorous scrutiny, responsible development processes, and transparent verification can reduce it significantly. Once development milestones are met, the audit reports and formal verification details for Mutuum’s stablecoin are expected to be made publicly available, allowing prospective users and partners to assess the protocol’s commitment to robust security standards.