mUSD Stablecoin: Bitcoin-Backed Stablecoin

mUSD is a Bitcoin-backed stablecoin that allows Bitcoin holders to access working capital at fixed interest rates ranging from 1% to 5%.

Unlike traditional lending markets, which involve unpredictable rates and centralized custody, mUSD offers permissionless and decentralized Bitcoin-collateralized loans.

This review explores the key features of mUSD, its economic mechanics, security framework, and how it compares to other stablecoins.

Why mUSD Fixes Bitcoin’s Liquidity Problem

Bitcoin is often hailed as “digital gold”—a valuable store of wealth—but historically, Bitcoin holders have faced challenges when trying to utilize their assets without selling them. The current lending landscape presents issues such as:

• Limited access to liquidity: No seamless way to borrow against Bitcoin for everyday expenses or large purchases.
• Centralized custody risks: Many existing solutions require users to trust a third party to hold their Bitcoin collateral.
• Unpredictable borrowing costs: Variable interest rates, often fluctuating between 4% and 20%, make financial planning difficult.

mUSD eliminates these problems by enabling Bitcoin holders to borrow stablecoins while keeping full exposure to their BTC holdings.

How mUSD Works

mUSD is a fully Bitcoin-backed stablecoin that operates through a collateralized debt position (CDP) model. Users deposit BTC into the Mezo protocol to mint mUSD, which they can use as a stable currency or deploy in DeFi applications. To close their loan position, users simply return the borrowed mUSD plus accrued interest to redeem their Bitcoin collateral.

Key Features of mUSD

• Fixed-Rate Loans: Interest rates start as low as 1% APR and remain fixed for the life of the loan.
• No Minimum Payments: Borrowers can choose when to repay their loan as long as their collateral ratio stays above the liquidation threshold.
• Onchain Transparency: All loans are publicly verifiable onchain, ensuring full visibility and security.
• Low Collateralization Requirement: The minimum collateralization ratio is 110%, allowing borrowers to access up to 90% of their BTC equity.

Maintaining the mUSD Peg

mUSD is designed to maintain a $1 peg through a combination of arbitrage mechanisms and collateral backing:

• If mUSD trades below $1: Users can buy mUSD at a discount and redeem it for $1 worth of BTC, restoring the peg.
• If mUSD trades above $1: Users can mint new mUSD by depositing BTC, then sell mUSD for a profit, bringing the price back to $1.

These mechanisms ensure stability, even during volatile market conditions.

Liquidations and Risk Mitigation

To prevent undercollateralization, mUSD implements multiple safeguards:

• Stability Pool: A liquidity reserve that absorbs liquidations first, protecting other borrowers.
• Redistribution Mechanics: If liquidations exceed the Stability Pool’s capacity, debt and collateral are redistributed proportionally among borrowers.
• Economic Incentives: Liquidators earn gas compensation, and Stability Pool providers receive rewards for maintaining system health.

Borrowers must maintain a collateralization ratio above 110% to avoid liquidation.

mUSD vs. Other Stablecoins

Unlike fiat-backed stablecoins (e.g., USDT, USDC) or synthetic stablecoins (e.g., USDe), mUSD is 100% backed by Bitcoin. This structure offers several advantages:

Feature	mUSD	USDT & USDC	USDe	MakerDAO (DAI)
Backing Asset	100% Bitcoin	Fiat	Mixed Collateral	Crypto (ETH, USDC)
Decentralized	Yes	No	No	Partially
Peg Stability	Strong (arbitrage mechanism)	Strong (fiat reserves)	Moderate (market dependent)	Moderate (market dependent)
Interest Rate	Fixed (1%-5%)	N/A	Variable	Variable
Custodial Risk	None	High	Moderate	Moderate

Bitcoin-backed stablecoins like mUSD provide a censorship-resistant alternative to traditional stablecoins while maintaining peg stability through onchain mechanics.

Revenue Model and Fee Structure

mUSD generates revenue through:

• Interest Fees: Borrowers pay a fixed-rate interest (1%-5% APR) on loans.
• Redemption Fees: A 0.5% fee applies when redeeming mUSD for BTC without an active loan.
• Gas Fees: Users pay blockchain network fees for minting, redeeming, and staking transactions.
• mUSD Savings Rate: Holders can stake mUSD to earn rewards from Mezo’s veBTC incentive system.

These mechanisms create a sustainable revenue model while rewarding users for participating in the ecosystem.

Future Developments for mUSD

mUSD is currently live on testnet, with plans to introduce:

• Soft Liquidation: Auto-repurchasing collateral as BTC value increases to prevent full liquidation.
• Expanded Collateral Options: Potential inclusion of real-world assets to diversify loan collateral.
• Enhanced Ecosystem Integrations: More DeFi partnerships to expand mUSD’s use cases.

Conclusion

mUSD represents a groundbreaking solution for Bitcoiners seeking to unlock liquidity without selling their holdings. By offering fixed-rate loans, full decentralization, and onchain transparency, mUSD addresses major flaws in existing Bitcoin lending markets. As adoption grows, mUSD has the potential to become the premier stablecoin for Bitcoin-backed borrowing and decentralized finance.

If you’re interested in accessing 1% borrow rates against your Bitcoin collateral, join the mUSD waitlist today.

Read more here:

• USDf Synthetic Dollar
• USDN Stablecoin