Stability

#//todo add a circular schematic showign the peg retention

USD-B’s peg relies on two pillars. First, overcollateralisation ensures the value of locked Bitcoin always exceeds outstanding USD-B tokens by a configurable margin (200%). Second, atomic on-chain minting and redemption enable arbitrageurs to correct price deviations instantly. When USD-B trades at a premium, users mint and sell; when it trades at a discount, traders redeem and buy back, restoring parity without external market makers.

Auction-Backed Liquidations

To address under collateralised positions, Covenant protocol uses a continuously running, unique auction that adapts to transaction fee conditions. The unique Auction algorithm ensures that collateral is liquidated at the earliest, and every completed auction yields protocol fees—turning liquidations into revenue rather than cost. This mechanism guarantees reliable, profitable liquidations even when network fees surge.

Protocol Incentives

Covenant aligns participant incentives to bolster stability:

Fee Reserves: A share of minting, redemption, and auction fees accrues to a reserve pool.This reserve is used in extreme market conditions to counter the inflated network fees and providing a buffer to the protocol mechanics in extreme market moves.

Auction Rebates: Bidders receive fee discounts, encouraging deep, responsive liquidity in liquidation events.