# How does USDaf generate yield?

## How does USDaf generate yield?

Yield is generated from:

* Interest payments: Each borrow-market automatically funnels 75% of the of its revenue to its Stability Pool depositors (Earners). This is paid out in USDaf.
* Liquidation gains: USDaf will be used to liquidate under-collaterized loans, effectively buying their collateral with a \~5% discount. This is paid out in the respective collateral type for each Stability Pool.

Users may also use USDaf in incentivized liquidity pools across leading DEX’s, allowing both liquidity providers (LPs), Stability Pool depositors to benefit from enhanced yield options under the two-token model.<br>

All the yield is fully sustainable, scalable and “real”, with no governance token emissions and lockups.

## What is the estimated yield on Earn?

The yield is a representation of the rates borrowers are paying. Since 75% of the borrowers’ interest payments go to Earn, the effective yield can exceed the average interest rate paid in a borrow market if less than 75% of the USDaf supply is deposited to the respective Stability Pool. This yield amplification sets Liquity V2 apart from competitors and money markets where lending rates cannot be higher than borrow rates.

This two-token model offers flexibility, but also creates a healthy tension between staking and liquidity provision, ensuring that both pools remain attractive by rewarding users based on their choices and the overall participation in each pool.

<br>

## Why are there multiple Stability Pools?

The goals are to:

Establish separate borrow markets for different collateral assets with their own market driven interest rates, using the Stability Pool backing to dynamically split redemptions across the available collaterals (link to “Redemption”).&#x20;

Compartmentalize the risks as much as possible when depositing to the respective Stability Pools (Earn) by giving the depositors control over which collateral assets they want exposure to in case of liquidations.

<br>

## How do risks differ for the different Stability Pools?

Users can deposit their stablecoins into the Stability Pool of their choice, aligning with their risk preference and the types of collateral they're comfortable being exposed to. By selecting pools associated with specific BTC variants or Stables, participants can tailor their risk exposure and potential reward profile.

By offering separate pools for different collateral types, the system allows users to choose their exposure based on the perceived risk and potential returns of each BTC or Stable. This compartmentalization helps manage systemic risk, ensuring that impacts from liquidations in one asset class don't disproportionately affect the entire ecosystem.

It is important to note that all USDaf holders including depositors still remain dependent on USDaf to keep its peg.


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