The Usual Protocol has recently emerged as a noteworthy player in the decentralized finance (DeFi) landscape, boasting impressive growth months prior. However, the protocol found itself at the center of community controversy on Friday following a modification in its yield-generating token mechanism, which subsequently triggered a significant sell-off on secondary markets.
At the center of this controversy is the USD0++ token, representing a staked version of Usual’s stablecoin, USD0—initially designed to remain pegged to the dollar. On decentralized marketplace Curve, USD0++ astonishingly dropped below the 90-cent mark, impacting the confidence of investors and liquidity providers alike. Meanwhile, the protocol’s governance token, USUAL, experienced a sharp decline of up to 17% before recovering some of its losses.
This turmoil stemmed from a change in the redemption mechanism of the USD0++ token, announced by the Usual team mere days before the cash out. This adjustment caught many investors off-guard, particularly given the existing structure of the USD0 token, which is designed to be backed by short-term government securities, maintaining its $1 price point.
Investors who staked their USD0 received USD0++, putting their funds into a four-year lock-up during which they are unable to redeem their tokens, receiving rewards instead in the form of USD0 and USUAL tokens. This initiative initially attracted a flood of yield farmers, propelling the protocol’s total value locked (TVL) skyward—from less than $300 million in October to an impressive $1.87 billion earlier this week.
The recent feature introduced, termed “dual-path exit,” allows stakers to redeem locked-up tokens prematurely, albeit at a reduced floor price of $0.87 or at par by sacrificing some rewards. This alteration called into question the previous 1:1 exchange rate, unraveling investor sentiment and contributing to market volatility.
In the wake of these developments, criticism mounted among the DeFi community regarding the sudden design changes. Reports suggested that the price of USD0++ in specific liquidity pools was hardcoded to $1, which caused considerable disruption for borrowers and liquidity providers. Prominent DeFi analysts, such as Ignas, remarked on social media, questioning if the protocol had allowed new participants to exploit the system and then abruptly changed the rules, effectively rug-pulling unwary investors.
This incident serves as a critical reminder of the delicate nature of pegged currencies, with industry experts such as Patrick McKenzie from Stripe emphasizing that a peg often exists as a narrative of interchangeability rather than a fixed correlation. The Usual team countered assertions of miscommunication, claiming that the design changes had been previously noted in October and asserting their commitment to transparency moving forward.
Looking forward, the Usual Protocol intends to invoke additional measures such as activating the revenue switch, starting this upcoming Monday, aimed at distributing earnings to long-term governance token stakers. In their official statement, the team acknowledged the miscommunication and expressed their commitment to improving communication moving forward.
This episode highlights the importance of clarity in DeFi mechanisms and the inherent risks of high-yield products enticing investors with attractive token incentives. As Rob Hadick, a general partner at venture capital firm Dragonfly, pointedly noted, “Users who are taking risk need to know what the exact rules are and be able to trust that they won’t change; otherwise, it can result in market panic.” He further stated that it was fortunate that this incident occurred before the protocol posed any broader risks to the DeFi ecosystem.
As of recent trading, USD0++ has seen a recovery to approximately $0.91 in the Curve pool, yet the protocol’s TVL has notably receded to below $1.6 billion, underscoring the fragility of investor confidence in such rapidly evolving protocols.
