> For the complete documentation index, see [llms.txt](https://docs.btcd.fi/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.btcd.fi/token-overviews-1/btcd/how-btcd-works.md).

# How BTCD Works

Overview of BTCD architecture

BTCD marries Bitcoin upside with stablecoin stability by maintaining a 50/50 BTC–USD basket. On mint, deposits are split evenly between spot BTC and cash equivalents, then an engine rebalances the holdings and deploys each sleeve into conservative yield strategies. Below is a step‑by‑step breakdown of how the protocol works:

First, the initial peg price is determined as a ratio to the BTC / USD reference price.&#x20;

\[INSERT PICTURE OF PEG PRICE FORMULA]

Below is an example of the minting and redemption flows for BTCD.&#x20;

<img src="https://1304119658-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FnIdk11PalG0VB24i5MDQ%2Fuploads%2F3jC8qhRN3wODrBWKP0Mp%2Funknown.png?alt=media&amp;token=a520236e-0109-4d3c-a2f4-24ecf7a50da0" alt="" data-size="original">

1. **Deposit** – Alice sends $100 USDC to the BTCD mint contract and receives BTCD (less fees such as gas). The protocol does not earn any profits from the minting or redeeming of BTCD.&#x20;
2. **Split** – The protocol executes a trading strategy consistent with the peg price at the time of minting BTCD. For example, the Treasury may swap the USDC into $50 of spot BTC and leave $50 in USDC to maintain the peg.
3. **Rebalance & Hedge** –
   1. The token peg will be determined by a price oracle that will observe changes in BTC to USD values each day.&#x20;
   2. If BTC has risen, the peg price is adjusted by assuming enough BTC is sold into USD if BTC increases in value, and vice versa, nudging the basket back to 50% BTC / 50% USD ratio.
4. The Collateral Assets are transferred directly to the protocol’s custody solution. Collateral assets remain on-chain and custodied with off-chain service providers. These assets are then delegated to derivative exchanges to margin the hedging strategies.
5. **Yield Deployment** –
   1. Cash sleeve: idle USD legs enter delta-neutral funding-rate trades on top CEXs, lent as LP positions, or tokenized T-bill pools.
   2. BTC sleeve: a portion of the spot BTC is lent or wrapped to earn conservative carry. The Treasury may borrow against BTC reserves to generate positive yield. Options contracts that fulfill implied rebalancing needs can be sold.
   3. Historical modelling shows the combined sleeves earning ≈ 5.5 – 7.5 % APY on total AUM.
6. **Redeem** - Alice later burns BTCD to redeem USDC at NAV.

### Rebalancing

BTCD maintains a constant-mix 50%/50% portfolio, rebalanced based on price drift.

* If BTC jumps +10%, BTCD rises roughly +5%.
* If BTC drops –20%, BTCD falls roughly –10%.

Mathematically, the strategy replicates a one-factor portfolio with \~0.5 beta to spot BTC over long horizons, delivering a smoother ride while still following Bitcoin’s overarching trend.&#x20;

See Rebalance Mechanics for the full derivation.

### Custody & Settlement

The custody infrastructure for BTCD and its reserve assets are broken into the following verticals.&#x20;

* On-chain collateral – The collateral assets backing USDC and wrapped BTC are managed via institutional-grade custody solutions.
* Off-exchange settlement – When assets are deployed to CEXs for funding-rate trades, they use institutional “off-exchange settlement” rails.  Principal risk is minimized as collateral sits off‑exchange, thereby minimizing collateral risk related to exchange exposures.

See Custody & Security for details.

### Protocol Yield

Yield is generated by deploying assets into a diversified set of conservative income‑producing strategies across both cash and BTC components. These strategies aim to capture market opportunities and interest, delivering a stable blended return.

The core strategies include:

| Sleeve | Strategy                            | Source of Return                     |
| ------ | ----------------------------------- | ------------------------------------ |
| Cash   | Spot-long / perp-short basis trades | Positive funding & basis convergence |
| Cash   | Stablecoin Lending                  | Borrow demand                        |
| Cash   | Tokenized T-Bills, short-term notes | Treasury yield                       |
| BTC    | CEX / on-chain BTC lending          | Borrow demand                        |
| BTC    | Covered Calls                       | Options Premiums                     |
| BTC    | Wrapper Liquidity                   | Incentives and AMM Fees              |

### Protocol Rewards

Holders who stake BTCD receive sBTCD, which will automatically accrue the net yield generated by Protocol Yield strategies once the fee switch is activated. Foregone yield from un-staked BTCD will be redirected by FISC governance once governance is activated.&#x20;

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