How Kerne Works

The Deposit Flow

When you deposit a supported asset (such as WETH or a liquid staking token) into the KerneVault smart contract, you receive Kerne Vault shares (kLP) in return. These are ERC‑4626 tokenized vault shares that represent your proportional claim on the vault's total assets.

Your deposited collateral immediately begins earning Ethereum staking rewards. At the same time, the protocol opens a short position on ETH perpetual futures equal in value to your deposit. This short position earns funding rate payments from leveraged traders on the other side of the market.

The two positions together create a delta neutral structure: you have zero net exposure to ETH price movements, but you earn yield from both the staking rewards and the funding rate payments simultaneously. A 0.05% deposit fee is deducted from your deposit amount by the KerneVault contract. That fee belongs to this collateral deposit flow only. It is not charged on the live route, where you mint kUSD through the PSM at the tiered swap fee and stake into skUSD for nothing.

How Vault Shares Appreciate

Vault shares do not rebase. They do not automatically increase in quantity in your wallet. Instead, yield is reflected through share price appreciation: the amount of underlying collateral each share represents grows over time as yield compounds into the vault's total assets.

Think of it like a savings account where the balance quietly grows, except here the growth comes from real, verifiable on-chain yield sources rather than a bank's promise.

The vault's total assets include both on-chain collateral held in the smart contract and off-chain assets deployed on hedging venues such as Hyperliquid. All asset locations are tracked transparently and reported via the Proof of Reserves system. Actual APY will vary based on live market conditions and is never guaranteed.

kUSD: The Synthetic Dollar

kUSD is a separate ERC‑20 token pegged to $1.00. It is not the same as vault shares. There are two ways to obtain kUSD:

• Swap via PSM (live today): The Peg Stability Module allows direct 1:1 conversions between USDC and kUSD at a size-tiered fee: 10 bps is the base rate and larger mints pay less, down to 5 bps. Do not quote the base rate for an institutional ticket; call getFee(stable, amount) or read the feeSchedule block on the endpoint linked below. This is the only live path to acquire kUSD on Base mainnet today; the PSM is verified at 0xaBDE...9803 and its live mint-readiness gates are public at /api/psm-status.
• Mint via kUSDMinter (Phase 2, not yet deployed): A leverage-style minting path that will let users lock vault shares as collateral (target 150% collateral ratio) to mint kUSD directly against their vault position. The contract source is in the repository at src/kUSDMinter.sol but is not deployed on Base mainnet today (minterImpl: "" in deployments/8453.json). Until kUSDMinter ships, the only live path to kUSD is the PSM swap above.

kUSD on its own does not earn yield. It maintains a stable $1.00 value and is designed for composability: it can be held in any wallet, transferred freely, used as collateral in lending protocols, or traded on decentralized exchanges. Because kUSD does not rebase, it avoids compatibility issues with DeFi protocols that struggle with rebasing tokens.

skUSD: Yield Bearing kUSD (live)

skUSD is the ERC‑4626 staking wrapper that lets kUSD holders access protocol yield without touching the WETH vault.skUSD is live on Base today at 0x96F5102C15b839757f811A98CEc3725Ac21DfA14, source-verified on Sourcify. Stake kUSD into skUSD and the protocol strategist distributes captured delta-neutral yield into the wrapper, lifting the skUSD share price so holders accrue yield through that share appreciation. The displayed APY is Kerne's live modeled rate on the deployed basis (formula at kerne.fi/api/apy; the hedge is sized one for one against spot, so the carry is multiplied by L/(L+1), which is below one), and distributions scale through the Genesis phase as the delta-neutral book and staked balance grow. kUSD held outside skUSD stays a stable $1.00 token and does not itself earn yield.

Peg Stability

kUSD maintains its $1.00 peg through multiple mechanisms working together:

• PSM 1:1 backing (live today): every kUSD currently in circulation is minted via the PSM against deposited USDC at 1:1 with a size-tiered fee starting at 10 bps and falling to 5 bps on larger mints. The PSM cap, current exposure, remaining capacity and the fee the contract charges at each size are public at /api/psm-status.
• Peg Stability Module (PSM) arbitrage floor: direct 1:1 conversions between kUSD and USDC at the PSM fee create a structural arbitrage that pulls kUSD back to peg whenever it trades below $1.00 on a DEX.
• Insurance Fund (live, currently unfunded): KerneInsuranceFund is deployed at 0xE879...0403 (redeployed 2026-05-16, Sourcify-verified; legacy at 0x3C93...b08B9 retired) and is designed to absorb shortfalls before user redemptions. Its live USD balance is publicly verifiable; today the balance is $0 because the protocol is in genesis phase pre-revenue, and the fund accumulates from protocol revenue once minting volume begins.
• Redemption rights: kUSD holders can always redeem 1:1 for USDC via the PSM (subject to its USDC reserve and the depeg revert at 200 bps), creating a natural price floor.
• kUSDMinter over-collateralization (Phase 2): when the leverage-style mint path ships, kUSD minted against vault shares will be backed at a target 150% collateral ratio with a 120% liquidation threshold. This path is not live today; the source is in src/kUSDMinter.sol but is unshipped.

If kUSD ever trades below $1.00 on a DEX, arbitrageurs can buy kUSD cheaply and convert it to USDC at $1.00 through the PSM, capturing the difference. This arbitrage pressure continuously supports the peg from below.