# How It Works USD.AI is a two-sided credit protocol that connects AI infrastructure operators who need capital with depositors who want yield exposure to compute-backed lending. The protocol originates GPU-secured loans, funds them through onchain deposits, and distributes yield through a tokenized instrument stack; all while maintaining a traditional, legally enforceable lending structure off-chain. The system operates across three layers: a depositor layer where capital enters, a lending layer where loans are originated and serviced, and a governance layer where protocol parameters are set by CHIP token holders. ### Capital In: USDai and sUSDai Capital enters the protocol when depositors deposit PYUSD (PayPal's regulated, dollar-backed stablecoin) in exchange for USDai, a synthetic dollar pegged 1:1 and fully backed by the underlying PYUSD. USDai itself does not generate yield; it is a stable, composable asset designed for holding, transferring, or use across DeFi. To earn yield, depositors stake USDai in exchange for sUSDai, the protocol's yield-bearing token. sUSDai captures income from two sources: interest payments on active GPU-backed loans, and Treasury bill yield earned on idle reserves. This yield accrues continuously and is reflected in a rising exchange rate between USDai and sUSDai - holders do not need to claim anything manually. Direct minting and redemption of USDai at the smart contract level is currently permissionless, but will be restricted to whitelisted, KYC-verified market makers and institutions in Q2 2026. However, USDai and sUSDai are always permissionless to hold, transfer, stake, and trade on secondary markets. ### Loans Out: GPU Infrastructure Financing On the borrowing side, AI infrastructure operators — neoclouds, data center companies, and compute providers — apply for financing to acquire GPU hardware. Loans are non-recourse and secured by the physical GPU assets themselves along with their contracted cashflows, structured similarly to traditional equipment finance. Every loan follows a four-phase process. First, an escrow is established and funded (held by Wilmington Trust). Second, the OEM builds and ships the servers. Third, hardware is installed, tested, and verified at the datacenter, and a permanent lien is filed. Fourth, escrow is released, bridge lenders (or the OEM, if providing net terms) are repaid, and the borrower enters standard repayment — interest and principal due every 30 days over a 3-year amortization schedule. Each borrower operates through a bankruptcy-remote Delaware SPV, legally isolating the GPU collateral from the operator's broader balance sheet. A comprehensive legal package — including a Loan and Security Agreement, UCC-1 filings, pledge agreements, and datacenter lien waivers — ensures enforceable collateral rights in the real world. ### The Hybrid Structure: Onchain Meets Offchain USD.AI operates simultaneously across two record systems. Offchain, the legal infrastructure provides real-world enforceability: perfected liens, SPV structures, bank accounts, escrow, and insurance. Onchain, the protocol provides transparency and programmability: Loan NFTs represent collateral positions, the Onchain Record serves as the authoritative lender register, and smart contracts automate the payment waterfall and reserve drawdowns. These two layers are synchronized at every material event. The Loan NFT is only minted once all off-chain conditions are met (servers delivered, installed, verified, liens filed) and all on-chain conditions are satisfied (wallet provisioned, record updated). Escrow cannot release until the NFT exists. In default, enforcement runs on both layers simultaneously — the on-chain NFT freezes and the waterfall shifts to acceleration, while off-chain the Agent exercises UCC remedies and can physically repossess hardware. ### Risk Mitigation and Collateral Protection Loans are originated at 70–80% loan-to-value ratios. Borrowers fund a Debt Service Reserve Account (DSRA) at closing, covering approximately three months of peak debt service. The protocol maintains layered protections including property insurance (via Alliant), value reinsurance against hardware depreciation (via Barkr), real-time hardware monitoring (via Aravolta), and partnerships with ITAD firms for physical retrieval and resale in default scenarios. Borrowers who hold their DSRA in USDai receive a rate compression benefit: the yield generated by that USDai (from the PayPal PYUSD incentive and T-bill income) flows back into their interest rate, reducing their effective borrowing cost. ### Redemptions and Liquidity Because the protocol's capital is deployed into illiquid, amortizing GPU loans, sUSDai redemptions operate on a 30-day epoch cycle using a FIFO queue. Available USDai is distributed to queued redemptions at each epoch close. During periods of high utilization, redemption queues may extend across multiple epochs. The protocol does not prematurely liquidate loans to satisfy withdrawals. A future mechanism called Queue Extractable Value (QEV) will introduce auction-based priority bidding for redemption positioning, allowing depositors to pay for faster exits while redistributing those fees to passive stakers. ### Governance: CHIP CHIP is the protocol's governance token. CHIP holders vote on the parameters that shape how the system operates: which GPU hardware qualifies as eligible collateral, how interest rates are tiered across different offtake qualities, what borrower eligibility criteria apply, how protocol fees are set and routed, and when smart contract upgrades or new integrations are approved. CHIP can also be staked for sCHIP, which serves a backstop function — in the event of a shortfall, staked CHIP may be used to cover the deficit, making stakers active participants in the protocol's risk framework. ### The Sections That Follow The pages that follow provide detailed documentation for each side of the protocol. The **Borrower** section covers the full loan lifecycle, legal structure, onchain/offchain mechanics, and partner ecosystem. The **Depositor** section covers USDai, sUSDai, yield mechanics, redemption processes, and QEV. The **Governance** section covers CHIP utility, staking, and tokenomics. The **Technical Overview** provides smart contract architecture, audit reports, and deployed contract addresses.