# How a Bitcoin-Backed Vault Actually Works: The Mechanics of 0% Interest Borrowing *A plain-English walkthrough of vaults, BPD, the stability pool, redemptions, and the liquidation math — so you understand exactly what's happening when you borrow against Bitcoin at 0% interest.* Most explanations of Bitcoin-backed lending stop at the marketing line: "borrow against your BTC without selling it." True, but it tells you nothing about *how*. Where does the dollar-pegged stablecoin come from? Who lends you the money? Why is the interest rate zero, and how can that possibly be sustainable? What actually happens at the moment of a liquidation? This is the mechanics deep-dive — the under-the-hood tour of how [Money Protocol](https://www.moneyprotocol.co/) turns Bitcoin into spendable liquidity with no bank, no counterparty, and no recurring interest. If you've ever wanted to understand the machine before you trust it with your coins, start here. ## What a vault is A **vault** is your individual, isolated borrowing position. You deposit **RBTC** — Bitcoin on the Rootstock network — into a smart contract, and that contract holds your collateral. Nobody else's deposits are pooled with yours; your vault's health depends only on your own collateral and your own debt. There is no shared loan book where one borrower's bad bet drags you down. Against that collateral you mint **BPD**, the protocol's USD-pegged stablecoin. "Mint" is the precise word — the BPD doesn't come from a lender's balance sheet. It's created by the protocol the moment you borrow, backed by the Bitcoin you just locked, and destroyed (burned) when you repay. You're not borrowing someone else's dollars; you're issuing a claim against your own collateral. ## Where the 0% interest actually comes from Here's the question that trips everyone up: if no one is lending you their capital, who's giving up yield, and why would the rate be zero? The answer is that **there is no lender to compensate.** In a traditional loan — or a CeFi crypto lender like the ones that collapsed in 2022 — someone supplies the dollars and demands ongoing interest as the price of their capital and their risk. Money Protocol removes that party entirely. The stablecoin is algorithmically minted against your collateral, so there's no depositor whose return has to be paid for by your interest. Instead of a recurring rate, the protocol charges a **one-time borrowing fee** at the moment you mint BPD, and a one-time redemption fee on the other side. That's it. Once your vault is open, the debt does not grow. A loan you open today is the same size in a year, whether BTC goes to the moon or sideways. Zero interest isn't a promotional teaser rate — it's a structural consequence of cutting the lender out of the design. ## The collateral ratio: the one number that runs everything Your vault's safety is governed by a single figure: the **collateral ratio**, which is the dollar value of your RBTC divided by the BPD you've minted. Deposit $30,000 of RBTC, mint 10,000 BPD, and your ratio is 300%. This number moves constantly, because your debt is fixed in dollars while your collateral is priced in Bitcoin. Every tick of the BTC price re-prices your collateral and therefore your ratio. Understanding the vault is really just understanding how this one ratio behaves and what thresholds it must respect. ## The two thresholds that matter **110% — the minimum collateral ratio.** If an individual vault falls below 110%, it becomes eligible for liquidation. The protocol closes the position and uses the collateral to cancel the debt. This is enforced by code, applied identically to every vault. There's no risk officer deciding your fate and no margin-call phone tree — just a published rule. **150% — the system-wide Recovery Mode threshold.** This one is about the protocol as a whole. If the *total* collateral ratio across all vaults drops below 150% — typically during a violent market-wide crash — the system enters **Recovery Mode**, in which vaults below 150% (not just below 110%) can be liquidated to quickly restore overall health. The practical takeaway: in a real crash the genuinely safe ratio is well above 110%, because the system can tighten the rules for everyone at once. ## The stability pool: where liquidations actually go This is the most elegant and least-understood piece of the machine. When a vault is liquidated, where does its debt go, and who absorbs it? The answer is the **stability pool**. Other users deposit BPD into this pool voluntarily. When a vault gets liquidated, the pool's BPD is used to cancel that vault's debt, and in exchange the pool receives the liquidated vault's RBTC collateral — which, because liquidation happens around the 110% line, is worth more than the debt it cancels. So the system is self-funding. Borrowers get an instant, automated backstop that clears bad debt the moment it appears. Stability-pool depositors get liquidated Bitcoin at an effective discount as the reward for providing that backstop. No outside bailout, no insurance company, no central treasury writing checks — the liquidation mechanism pays for itself with the collateral it processes. ## Redemptions: how BPD stays pegged to a dollar A stablecoin is only as good as its peg. Money Protocol keeps BPD near $1 through **redemptions**. Anyone holding BPD can redeem it directly with the protocol for $1 worth of RBTC, drawn from the riskiest vaults first (those with the lowest collateral ratios). This creates a hard arbitrage floor: if BPD ever trades below $1, traders buy it cheap and redeem it for a full dollar of Bitcoin, pocketing the difference — and that buying pressure pushes the price back toward $1. The peg isn't defended by a company promising to hold reserves; it's defended by math anyone can act on. If you're a borrower, redemptions are the reason to keep a healthy ratio for a second reason beyond liquidation: vaults with the lowest ratios are first in line to be redeemed against, which closes part of your position whether you wanted that or not. ## The MP token: governance-free by design The secondary token, **MP**, captures the fees the protocol generates — the one-time borrowing and redemption fees flow to those who stake MP and to the stability-pool incentive structure. Crucially, MP is *not* a governance token in the usual sense. There's no token-holder vote that can change the 110% threshold, raise the interest rate, or alter the liquidation rules on a whim. That's deliberate. The whole proposition of a code-enforced system is that the rules can't be quietly rewritten by whoever holds the most tokens. "No governance" isn't a missing feature — it's the guarantee that the machine you trusted on day one is the same machine on day one thousand. ## Putting the machine together Walk through one full loop and the design clicks: 1. You lock RBTC in a **vault** and mint **BPD** against it at **0% interest**, paying only a one-time fee. 2. Your **collateral ratio** floats with the BTC price; you keep it comfortably above **110%** (and mind the **150%** system line in a crash). 3. If a vault ever breaches the threshold, the **stability pool** absorbs the debt and takes the collateral — an automated, self-funding backstop. 4. **Redemptions** keep BPD pinned near $1 by letting anyone swap it for a dollar of RBTC. 5. The **MP token** routes fees to participants, while the core rules stay fixed in code rather than up for a vote. Every part exists to remove a human from the loop. No lender to pay, no custodian to trust, no committee to lobby. The full specification — exact fee formulas, liquidation math, and Recovery Mode details — lives at [docs.moneyprotocol.co](https://docs.moneyprotocol.co/), and when you understand the machine well enough to trust it, you can [borrow against Bitcoin at 0% interest](https://www.moneyprotocol.co/) and keep every coin in your own custody the entire time. Understanding the mechanism is the point. A system you can fully understand is a system no one can quietly change on you.