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Over-Collateralization And Haircuts​

To maintain solvency and defend the USP peg, Pi Protocol applies haircut-based over-collateralization to all deposited assets. A haircut is a predefined percentage reduction applied to the notional value of tokenized real-world assets (RWAs) when calculating mintable USP. This creates a buffer that protects the system against credit events, price volatility, and interest rate risk.

Haircuts are determined by several factors, including:

  • Credit quality and spread of the underlying asset
  • Duration and maturity profile
  • Historical default probability
  • Secondary market liquidity
  • Asset issuer profile and jurisdictional exposure

For instance, short-duration sovereign debt instruments with high credit ratings are assigned minimal haircut ratios, while longer-term, privately originated assets such as insurance premium receivables or structured debt instruments may incur higher adjustments to reflect increased credit and liquidity risk.

These parameters are reviewed and adjusted by governance based on on-chain performance data, real-world macro indicators, and collateral behavior. The haircut design ensures that every USP token in circulation remains safely overcollateralized throughout the lifecycle of the underlying asset.