Notes are ERC-721 NFTs into which holders deposit approved ERC-20 tokens. This currently is ETH and will soon include LSTs and LRTs, other types of yield-bearing collateral, and Kerosene. Note holders can then mint DYAD against the combined USD value of tokens they deposit at a 150% minimum collateralization ratio.
The more DYAD a Note mints now, the more Kerosene tokens it will be able to claim once Kerosene launches, and the lower its DYAD mint cost will become.
Each DYAD stablecoin is backed by at least $1.50 of exogenous collateral. This surplus absorbs the collateral’s volatility, keeping DYAD fully backed in all conditions. Kerosene is a token that lets you mint DYAD against this collateral surplus. Kerosene can be deposited in Notes just like other collateral to increase the Note’s DYAD minting capacity.
The protocol sets Kerosene’s value as DYAD collateral deterministically:
$$ X = \frac{C - D}{K}
$$
Kerosene is thus as valuable as the degree of DYAD’s overcollateralization. Kerosene is not additional collateral; it’s a mechanism for allocating the right to mint against existing surplus collateral (C-D) in the system.
The secondary market may trade Kerosene above its deterministic protocol-defined value. If it trades below, arbitrageurs will quickly bid its price back to par. This is because Kerosene available for less than its deterministic value as DYAD collateral is free DYAD.
There is a total supply of 1 billion Kerosene tokens emitted over 10 years. Note holders can now earn Kerosene by minting DYAD. Eventually, users will earn Kerosene by providing liquidity for DYAD and staking the LP tokens to their Notes. The protocol rewards Note holders with Kerosene for both the size and duration of their LP token stakes. It uses a metadata trait called Velocity to represent the Note’s multiplier on Kerosene accrual, delta to represent constant acceleration, and mass to represent LP token stake size and additions: