vUSD on Bifrost: Building a Stablecoin on Cross-Chain Liquid Staking

Liquid staking has become a foundational primitive in Proof-of-Stake ecosystems. It allows users to stake assets while retaining liquidity through derivative tokens, removing the need to choose between yield and flexibility. However, most liquid staking systems are still single-chain by design. While users receive a liquid representation of their staked assets, using that liquidity elsewhere often requires manual bridging, fragmented liquidity, and additional trust assumptions.

This is the problem space where vUSD on Bifrost is designed to operate.

Agenda

In this article, we will cover:

1. How voucher tokens work and why parachains matter
2. The earning dynamics behind voucher tokens
3. Why stablecoins are a natural extension of liquid staking
4. A Liquity-inspired borrowing model
5. How vUSD works in practice
6. Where to explore the implementation

How voucher tokens work and why parachains matter

Bifrost is designed as a Polkadot parachain, which fundamentally changes how liquid staking assets are issued and utilised.

Instead of creating liquid staking derivatives confined to a single chain, Bifrost introduces voucher tokens (vTokens) as cross-chain financial primitives.

Voucher Tokens and the Power of Parachains

When a user stakes through Bifrost:

• The underlying asset is staked at the protocol level
• A voucher token (such as vDOT or vETH) is issued
• The vToken represents the staked position and accrues staking rewards over time

Because Bifrost operates as a parachain, these vTokens are designed to move across the Polkadot ecosystem, benefiting from shared security and native cross-chain messaging. Rather than being isolated receipts, vTokens act as portable, yield-bearing collateral. Which naturally leads to the question of how value continues to accumulate once these tokens are in circulation.

The Earning Dynamics of Voucher Tokens

Voucher tokens are yield-bearing by design. Staking rewards are continuously reflected in the value of the vToken relative to the underlying asset. Over time:

• One vToken represents a growing claim on the staked asset
• Users retain exposure to staking rewards
• Liquidity is preserved without unstaking

This embedded yield is a critical property. It ensures that vTokens remain economically active even when they are no longer held in a passive staking position. Because yield continues to accrue, vTokens can safely be reused within DeFi without sacrificing their core purpose.

Once yield-bearing assets become composable, the next requirement is a stable unit of account to unlock more advanced financial use cases.

Why Stablecoins Matter for Voucher Tokens

As DeFi activity grows around voucher tokens, a stable unit of account becomes essential. Stablecoins enable:

• Predictable pricing
• Capital efficiency
• Risk management without selling assets

Using voucher tokens as collateral for stablecoins allows users to:

• access liquidity without exiting staking positions
• avoid bridging or selling yield-bearing assets
• keep collateral productive while borrowing

Using voucher tokens as collateral for stablecoins allows users to unlock liquidity without exiting staking positions, avoid unnecessary bridging or asset sales, and keep collateral productive while borrowing. This makes over-collateralised stablecoins a natural extension of liquid staking rather than an unrelated financial primitive.

At this point, the design question becomes how borrowing should be structured to preserve safety while leveraging yield-bearing collateral.

Borrowing Models: A Liquity-Inspired Approach

Over-collateralised borrowing protocols typically follow one of two models: Maker-style vaults or Liquity-style positions.

Liquity’s design emphasises:

• Conservative collateralization
• No variable interest rates
• Explicit user actions for borrowing, repayment, and collateral withdrawal
• System safety is enforced at every state transition

This approach minimises ambiguity and avoids hidden debt dynamics. It is particularly well-suited for yield-bearing collateral, where predictability and transparency are critical. These principles directly inform how vUSD is structured.

vUSD: A Stablecoin Built on Voucher Tokens

vUSD is an over-collateralised stablecoin designed specifically for the Bifrost ecosystem.

Users lock vTokens (such as vDOT) as collateral and mint vUSD based on a predefined collateralization ratio. For example, at a 150% collateral ratio:

• $1 of vUSD is backed by at least $1.50 worth of vDOT
• The system remains solvent even under market volatility

Once minted, vUSD can be used across DeFi, swapped, held, or integrated into other protocols while the underlying collateral continues to earn staking rewards. To understand this more concretely, it helps to walk through a simple lifecycle example.

vUSD Lifecycle Example

1. Alice stakes DOT and receives vDOT
2. Alice locks vDOT as collateral and mints vUSD
3. vUSD enters circulation and can be used across DeFi
4. Underlying DOT continues to earn staking rewards
5. When Alice repays vUSD, the stablecoin is burned and collateral is unlocked

Because minting and burning are explicit actions, the vUSD supply expands and contracts strictly through borrowing and repayment. There is no reflexive supply adjustment or algorithmic minting outside user-driven actions.

This lifecycle also sets the stage for how yield is distributed across the system.

Yield Distribution: How vUSD Earns Without Interest

vUSD is yield-backed, not interest-bearing.

Staking yield generated by excess collateral value is shared between:

• vUSD holders
• vToken collateral positions

At the minimum collateralization ratio of 150%:

• Each $1 of vUSD debt controls $2.50 of economic value
• Yield is split proportionally based on backing value

The yield share for vUSD is defined as:

At minimum collateralization, this results in a 40% yield share.
If collateral prices fall, vUSD’s share is reduced to preserve safety, ensuring yield extraction never weakens collateral backing.

Yield is distributed via rebasing, which increases all vUSD balances proportionally without requiring explicit transfers.

Conclusion

Bifrost’s parachain-native voucher token model enables cross-chain, yield-bearing collateral that remains productive beyond simple staking. vUSD builds on this foundation by introducing a conservative, Liquity-inspired stablecoin designed to unlock stable liquidity while preserving safety and composability.

The current implementation represents a minimal first iteration focused on the core building blocks of the system: voucher-token-backed collateral, explicit borrowing and repayment flows, and a clear over-collateralization model. More advanced components — such as staking yield distribution, liquidation mechanisms, and system-level risk controls — are intentionally not included yet and will be introduced in subsequent iterations.

The full codebase, including the initial contracts, mock voucher tokens, and documented design assumptions, is open-source and available here:
https://github.com/yehia67/vUSD

As the protocol evolves, each major iteration will be accompanied by a follow-up article that documents the new components, design decisions, and trade-offs introduced at that stage. This approach ensures that both the code and the system design evolve transparently, with clear context provided at every step.

vUSD on Bifrost: Building a Stablecoin on Cross-Chain Liquid Staking was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.