Usual Protocol, a promising decentralized finance (DeFi) protocol that has seen a remarkable rise in recent months, faced community backlash on Friday after an adjustment to the protocol’s yield-generating token triggered a sell-off massive on secondary markets.
Amid the turmoil, the protocol’s USD0++ token, which represents a locked — or staked — version of its $1-pegged stablecoin USD0, briefly fell below 90 cents to $1 on decentralized marketplace Curve. The protocol’s governance token, USUAL, fell as much as 17% during the day before recovering some of the losses.
The sell-off was caused by a change in the USD0++ token redemption mechanism introduced by the team on Thursday, which caught investors and liquidity providers off guard.
By design, USD0 is backed by short-term government securities to maintain its price at $1. Stakers on Usual receive 0 USD ++ accompanied by a four-year lock-up period, meaning investors lock up their funds without being able to redeem them in exchange for rewards earned in the form of the protocol’s USD 0 and USUAL tokens. Yield producers rushed in, catapulting the protocol’s total value locked (TVL), a key DeFi metric, to $1.87 billion earlier this week from less than $300 million in October.
However, the new feature called “dual-path exit” will allow investors to repurchase tokens locked in earlier at a floor price of $0.87, or at par, by giving up a portion of the rewards earned, calling the exchange 1 :1. rate in question.
The abrupt implementation sparked criticism among DeFi users for changing the design without warning. In some liquidity pools, the token price was hardcoded at $1, causing havoc among borrowers and liquidity providers.
“Did they just allow degens to step in at 1:1 and then cover USD0++?” said Ignas, a leading DeFi analyst, in an article to get the largest USD0/USD0++ pool on Curve, knowing full well that USD0++ should not trade 1:1.”
“DeFi continues to learn the most important truth about pegs: a peg is a story about why two things that are not the same are interchangeable,” noted Patrick McKenzie, an advisor to payments company Stripe.
The Usual team said in a statement that the design change with the early disengagement mechanism was communicated in advance starting in October. The protocol will also activate the revenue switch starting Monday and begin distributing protocol profits to governance token holders who stake their coin for the longer term (USUALx).
“The current situation regarding USD0++ arises from a misunderstanding of the protocol’s mechanics as well as communication that should have been better articulated,” the statement said. “We apologize and will continue to do our best to communicate transparent information to users.”
The episode is another lesson for crypto investors about the potential risks of DeFi products that lure users with high returns via token incentives and reward shuttles.
“Users who take risks need to know the exact rules and be confident that they will not change, otherwise it could lead to a market panic,” Rob Hadick, general partner at venture capital firm Dragonfly, told CoinDesk . “We should be grateful that this happened now, before the protocol becomes a risk to the broader DeFi ecosystem.”
Yet USD0++ recently traded at $0.91 USD0 in the Curve pool, while the protocol’s total value locked, a key DeFi metric, fell below $1.6 billion.
