In-depth analysis of Usual: The tricks behind USD0++ decoupling and revolving loan liquidation

Author: Bai Ding & Shew, GodRealmX

Recently, the USD0++ depegging issued by Usual has become a hotly discussed keyword in the market, and has also caused panic among many users. The project rose more than 10 times after being listed on the top CEX in November last year. Its RWA-based stablecoin issuance mechanism and token model are quite similar to Luna and OlympusDAO in the previous cycle. In addition, with the government background endorsement of French MP Pierre Person, Usual once received widespread attention and heated discussions in the market.

Although the general public once had a beautiful vision for Usual, the recent "farce" has pulled Usual off the altar. As Usual officially announced on January 10 that it would modify the early redemption rules of USD0++, USD0++ was once de-pegged to nearly $0.9. As of the evening of January 15, 2025 when this article was published, USD0++ was still hovering around $0.9.

(USD0++ de-pegged)

Currently, the controversy surrounding Usual has reached its peak, and the dissatisfaction in the market has completely erupted, causing an uproar. Although the overall product logic of Usual is not complicated, it involves many concepts and the details are relatively trivial. There are many different tokens in one project, and many people may not have a systematic understanding of the cause and effect.

The author of this article aims to systematically sort out the causal relationship between Usual's product logic, economic model and the USD0++ depegging from the perspective of DeFi product design, to help more people deepen their understanding and thinking about it. Here we also throw out a view that seems a bit "conspiracy theory":

Usual set the unconditional floor price of USD0++ to USD0 to 0.87 in a recent announcement, with the aim of blowing up the USD0++/USDC revolving loan positions on the Morpha lending platform and solving the main users in the mining, withdrawal and selling, but not to the extent that the USDC++/USDC vault has systematic bad debts (the liquidation line LTV is 0.86).

Below, we will start from the relationship between USD0, USD0++, Usual and its governance token, and take everyone to really understand the tricks behind Usual.

Understanding Usual’s Products from the Tokens It Issues

There are 4 main tokens in Usual’s product system, namely the stablecoin USD0, bond token USD0++ and project token USUAL. In addition, there is the governance token USUALx. However, since the latter is not important, Usual’s product logic is mainly divided into three layers according to the first three tokens.

（Usual product logic structure diagram）

First layer: stable currency USD0

USD0 is an equal-collateralized stable currency, using RWA assets as collateral. All USD0 is backed by RWA assets of equal value. However, most of the USD0 is currently minted with USYC, and some USD0 uses M as collateral. （USYC and M are both RWA assets secured by U.S. short-term Treasury bonds）

It can be found that the USD0 on-chain collateral is located in the 0xdd82875f0840AAD58a455A70B88eEd9F59ceC7c7 address, which holds a huge amount of USYC assets.

Why does the vault used to store the underlying RWA assets contain a large amount of USD0? This is because when users destroy USD0 to redeem RWA tokens, part of the handling fee will be deducted, and this part of the handling fee will be stored in the vault in the form of USD0.

The contract address for casting USD0 is 0xde6e1F680C4816446C8D515989E2358636A38b04 . This address allows users to cast USD0 in two ways:

1. Directly cast USD0 with RWA assets. Users can inject tokens supported by Usual such as USYC into the contract to cast USD0 stablecoins;

2. Transfer USDC to RWA providers to cast USD0.

The first solution is relatively simple. The user enters a certain number of RWA tokens, and the USUAL contract calculates how much these RWA tokens are worth in US dollars, and then issues the corresponding USD0 stablecoin to the user. When the user redeems, the corresponding value of RWA tokens will be returned based on the number of USD0 entered by the user and the price of the RWA token. In this process, the USUAL protocol will deduct part of the handling fee.

It is worth noting that at present, most RWA tokens are automatically compounded, and will continue to generate interest in the form of additional issuance or value growth. RWA token issuers often hold a large number of interest-bearing assets off-chain, the most common of which is US Treasury bonds, and then return the interest on the interest-bearing assets to RWA token holders.

The second scheme of minting USD0 is more interesting. It allows users to mint USD0 directly with USDC. However, this link must involve the participation of RWA providers/payers. In short, users need to place orders through the Swapper Engine contract, declare the amount of USDC to be paid, and send USDC to the Swapper Engine contract. When the order is matched, users can automatically get USD0. For example, for user Alice, the process she perceives is as follows:

However, the actual process involves the participation of RWA providers/payers. Taking the following figure as an example, Alice's request to exchange USDC for USD0++ is responded to by RWA provider Robert, who directly mints USD0 with RWA assets, then transfers USD0 to the user through the Swapper Engine contract, and then takes away the USDC assets paid by the user when placing an order.

Robert in the picture below is the RWA provider/payer. It is not difficult to see that this model is essentially similar to Gas payment. When you want to use tokens that you don’t have to trigger some operations, you use other tokens to find someone to trigger the operation on your behalf. The latter then tries to transfer the “proceeds” after the triggering operation to you and collects some handling fees from it.

The following figure shows the series of transfer actions triggered by the RWA provider accepting the user's USDC assets and minting USD0 tokens for the user:

Second Layer: Enhanced Treasury Bond USD0++

In the above, we mentioned that users need to pledge RWA assets when minting USD0 assets, but the interest on RWA assets that automatically generate interest will not be directly distributed to the minting USD0 holders, where does this interest go? The answer is that it goes to the Usual DAO organization, and then the interest of the underlying RWA assets will be redistributed. USD0++ holders can share the interest income. If you pledge USD0 to cast USD0++ and become a USD0++ holder, you can share the interest of the bottom-level RWA assets. But please note that only the underlying RWA interest corresponding to the part of USD0 that casts USD0++ will be distributed to USD0++ holders.

For example, the underlying RWA assets currently used for mortgaging USD0 are 1 million US dollars. 1 million US dollars of USD0 are minted, and then 100,000 US dollars of USD0 are minted into USD0++. Then these USD0++ holders only receive the interest income of 100,000 US dollars of RWA assets, and the interest of the other 900,000 US dollars of RWA assets becomes the income of the Usual treasury.

In addition, USD0++holders can also receive additional USUAL token incentives. USUAL will issue and distribute tokens every day through a specific algorithm, and 45% of the newly added tokens will be allocated to USD0++ holders. In summary, the income of USD0++ is divided into two parts: the income of the underlying RWA assets corresponding to USD0++; the income of the daily new USUAL token distribution; the above figure shows the source of income of USD0++. Holders can choose to receive income denominated in USUAL every day, or receive income denominated in USD0 every 6 months.

（Image source: Usual official website）

With the support of the above mechanism, the staking APY of USD0++ is usually maintained at more than 50%, and it is still 24% after the incident. But as mentioned above, most of the income of USD0++ holders is issued in USUAL tokens, which is very inflated as the price of Usual fluctuates. In the recent troubled times of Usual, this rate of return is most likely not guaranteed.

According to Usual's design, USD0 can be pledged 1:1 to mint USD0++, with a default lock-up period of 4 years. Therefore, USD0++ is similar to a tokenized four-year floating rate bond. When users hold USD0++, they can earn interest denominated in USUAL. If users cannot wait for 4 years and want to redeem USD0, they can first exit through secondary markets such as Curve and directly exchange the latter for USD0++ / USD0 trading pairs.

In addition to Curve, there is another solution, which is to use USD0++ as collateral in lending protocols such as Morpho to lend assets such as USDC. At this time, users need to pay interest. The figure below shows Morpho's lending pool using USD0++ to borrow USDC. You can see that the current annualized interest rate is 19.6%.

Of course, in addition to the above indirect exit paths, USD0++ also has a direct exit path, which is also the cause of the recent USD0++ depegging. But we plan to elaborate on this part later.

Third Layer: Project Tokens USUAL and USUALx

Users can obtain USUAL by staking USD0++ or purchasing directly from the secondary market. USUAL can also be used for staking and 1:1 casting of governance tokens USUALx. Whenever USUAL is issued, holders of USUALx can obtain 10% of it and share most of the underlying RWA income. According to the current documentation, USUALx also has an exit mechanism for conversion to USUAL, but requires a certain fee to be paid when exiting.

So far,the entire three-layer product logic of Usual is as follows:

In summary, the RWA assets underlying USD0 obtain interest-bearing income, and part of the income is distributed to USD0++ holders. Under the empowerment of USUAL tokens, the APY income of holding USD0++ is further increased, which can encourage users to further cast USD0 and then cast it into USD0++, and then obtain USUAL, and the existence of USUALx can prompt USUAL holders to lock positions.

Depegging incident: The "conspiracy theory" behind the modification of redemption rules - the explosion of revolving loans and the Morpha liquidation line

(Usual official announcement)

Usual's previous redemption mechanism was to exchange USD0++ for USD0 at a rate of 1:1, which is a guaranteed redemption. For stablecoin holders, an APY of more than 50% is very attractive, and the guaranteed redemption provides a clear and safe exit mechanism. Coupled with the French government's endorsement, Usual has successfully attracted many large investors. However, the official announcement on January 10th changed the redemption rules, and users can choose 1 of the following two redemption mechanisms: 1. Conditional redemption. The redemption ratio is still 1:1, but a considerable portion of the income issued in USUAL must be paid. 1/3 of this income is divided among USUAL holders, 1/3 is divided among USUALx holders, and 1/3 is burned; 2. Unconditional redemption, no income is deducted, but there is no bottom line guarantee, that is, the redeemed USD0 ratio is reduced to a minimum of 87%. The official said that this ratio may return to 100% over time. Of course, users can also choose not to redeem and lock USD0++ for 4 years, but this involves too many variables and opportunity costs.

So back to the point, why did Usual come up with such an apparently unreasonable clause?

As we mentioned earlier, USD0++ is essentially a tokenized 4-year floating rate bond, and a direct exit means forcing Usual to redeem the bond in advance. The USUAL protocol believes that when users mint USD0++, they promise to lock USD0 for four years. Withdrawing midway is a breach of contract and requires a fine.

According to the USD0++ white paper, if a user deposits 1 USD in USD0 at the beginning, when the user wants to withdraw early, he needs to make up the future interest income of this 1 USD. The asset that the user finally redeems is:

1 USD — future interest income. Therefore, the mandatory redemption floor price of USD0++ is lower than 1 USD.

The figure below shows the method of calculating the USD0++ base price from USUAL's official document (it seems a bit like bandit logic at the moment):

Usual’s announcement will not take effect until February 1, but many users began to flee at the first opportunity, causing a chain reaction. People generally believed that according to the redemption mechanism in the announcement, USD0++ could no longer maintain the rigid redemption with USD0, so USD0++ holders began to withdraw early;

This panic naturally spread to the secondary market, and people frantically sold USD0++, causing a serious imbalance in the USD0/USD0++ trading pair in Curve, with the ratio reaching an exaggerated 9:91; in addition, the price of USUAL plummeted. Under market pressure, Usual decided to advance the announcement to next week to raise the cost of users abandoning USD0++ and redeeming USD0 as much as possible, so as to protect the price of USD0++.

（Image source: Curve）

Of course, some people say that USD0++ is not a stablecoin, but a bond, so there is no such thing as depegging.Although this view is correct in theory,we would like to object here.

First, the unspoken rule of the crypto market is that only stablecoins have the word "USD" in their names. Second, USD0++ was originally exchanged for stablecoins at a 1:1 ratio in Usual, and people assume that its value is equivalent to stablecoins; third, Curve's stablecoin trading pool has trading pairs that include USD0++. If USD0++ does not want to be considered a stablecoin, it can change its name and ask Curve to delist USD0++, or switch it to a non-stablecoin pool.

So what is the motivation of the project party to make the relationship between USD0++ and bonds and stablecoins ambiguous? There may be two points. (Note: The following views contain conspiracy theory elements. They are our guesses based on some clues. Do not take them seriously)

1.First, it is to accurately blast the revolving loan. Why is the bottom ratio coefficient of unconditional redemption set at 0.87, which is just a little higher than the liquidation line of 0.86 on Morpha?

This involves another decentralized lending protocol: Morpho. Morpho is famous for creating a sophisticated DeFi protocol with 650 lines of minimalist code. Killing two birds with one stone is a DeFi tradition. Many users mint USD0++ and then borrow USDC from it in Morpho to increase the utilization rate of funds. The borrowed USDC is then used to re-mint USD0 and USD0++, thus forming a circular loan.

Revolving loans can significantly increase users' positions in the lending protocol, and more importantly, the USUAL protocol will allocate USUAL token incentives to the positions in the lending protocol:

Revolving loans have brought Usual a better TVL, but as time goes by, there is an increasing risk of leverage chain ruptures.And these revolving loan users rely on repeatedly casting USD0++ to obtain a large number of USUAL tokens, and are the main force in mining and selling.If Usual wants to develop in the long term, it must solve this problem.

（Circular Loan Diagram）

Let's briefly talk about the leverage ratio of circular loans. Assuming that you borrow USDC, mint USD0++, deposit USD0++, and borrow USDC back and forth as shown in the above figure, cycle this process and maintain a fixed deposit/loan value ratio (LTV) in Morpha.

Assume LTV = 50%, your initial capital is 100 USD0++ (assuming the value is 100 US dollars),The value of each USDC borrowed is half of the deposited USD0++. According to the geometric progression summation formula, when the USDC you can eventually borrow tends to infinity,the total USDC borrowed by your revolving loan tends to 200 US dollars. It is not difficult to see that the leverage ratio is almost 200%.The revolving loan leverage ratio under different LTVs follows the simple formula in the figure below:

For those who participated in the Morpha to Usual revolving loan before, the LTV may be higher than 50%, and the leverage ratio is even more amazing. It is conceivable how high the systemic risk behind it is. If it develops in this way for a long time, it will sooner or later lay mines.

Here we talk about the liquidation line value. Previously, on the Morpha protocol, the liquidation line LTV of USD0++/USDC was 0.86, which means that when the ratio of the value of your borrowed USDC/deposited USD0++ is higher than 0.86, liquidation will be triggered. For example, if you borrowed 86 USDC and deposited 100 USD0++, as long as USD0++ falls below 1 USD, your position will be liquidated.

（Image source: Morpho）

In fact, Morpha's liquidation line of 0.86 is very subtle, because the redemption ratio of USD0++ and USD0 announced by Usual is 0.87:1, and there is a direct correlation between the two.

We assume that many users, under the idea of ​​recognizing the USD0++ stablecoin, directly choose a very high LTV, even close to the liquidation line of 86%, for the above-mentioned revolving loan, so as to maintain a large position with a very high leverage ratio and obtain a large amount of interest-bearing income. However, using an LTV of nearly 86% means that as long as USD0++ is depegged, the position will be liquidated, which is also the main reason for the large amount of liquidation on Morpho after USD0++ is depegged.

But it should be noted here that even if the positions of the revolving loan users are liquidated at this time, there is no loss for the Morpha platform, because at this time 86% < LTV of the liquidated position < 100%, if denominated in US dollars, the USDC lent out is still lower than the value of the collateral USD0++, and the platform still has no systematic bad debts (this is very critical).

After understanding the above conclusions, it is not difficult for us to understand why the liquidation line of USD0++/USD0 on Morpha was deliberately set at 86%, which is just a little lower than the 0.87 in the later announcement.

From the perspective of the two versions of the conspiracy theory, the first version is that Morpha is the result and Usual is the cause:The USD0++/USDC vault on the Morpha lending platform was set by MEV Capital, the manager of Usual. They knew that the floor price would be set at 0.87 in the future, so the liquidation line was set slightly lower than 0.87.

First, after the Usual protocol was updated and announced, it was stated that the redemption floor price of USD0++ was 0.87, and the reason was explained in the USD0++ white paper with a specific discount formula and chart. After the announcement, USD0++ began to decouple and once approached 0.9 US dollars, but it was always higher than the floor price of 0.87. Here we believe that the redemption ratio of 0.87:1 in the announcement was not set arbitrarily, but had been precisely calculated long ago and was more affected by the interest rate of the financial market.

The coincidence is that the liquidation line on Morpha is 86%. As we mentioned earlier, if the floor price is 0.87, the USD0++/USDC vault on Morpha will not have systemic bad debts, and the revolving loan positions can be exploded to achieve deleveraging. Another version of the conspiracy theory is that Morpha was the cause and Usual’s later announcement was the result: the liquidation line of 0.86 on Morpha was determined before the floor price of 0.87, and later Usual took into account the situation on Morpha and deliberately set the floor price a little higher than 0.86. But in any case, there is definitely a strong correlation between the two.

2.Another motivation of the Usual project may be to save the coin price at the lowest cost

The economic model of USUAL-USUALx is a typical positive feedback flywheel. Its pledge mechanism determines that such tokens usually rise rapidly, but once there is a downward trend, they will fall faster and faster and enter a death spiral. Once the price of USUAL falls, the pledge yield will also be greatly reduced due to the compound effect of the decline in price and the number of additional issuances, triggering panic among users, leading to a large number of USUAL sales, forming a "falling faster and faster" death spiral.

USUAL has been falling since it reached a high of 1.6. The project may have realized the danger and believed that it had entered a death spiral. Once it enters the falling range, it can only try its best to raise the price of the currency to save the market. The most famous project of this type should be OlympusDAO in the last bull market. At that time, there should be strong external liquidity injection, which made its token OHM walk out of the double peak shape (quoted from the views of some people who experienced it).

（Source: CoinMarketCap）

But we can also see from the OHM chart that such projects often cannot escape the fate of the currency price returning to zero in the end. The project party is also clear about this, but time is profit. Someone has estimated that the monthly income of Usual’s treasury is about 5 million US dollars.They need to weigh the pros and cons and consider whetherthey canmake the project live as long as possible.

However, their actions now seem to be to avoid paying real money, and only reverse the downward trend through changes in gameplay and mechanisms. In the conditional redemption, part of the income of USD0++ pledgers is divided among USUAL and USUALx holders, and the remaining 1/3 is destroyed, and USUALx is obtained by staking USUAL.

The so-called conditional redemption is actually to empower USUAL tokens, prompting more people to pledge USUAL to obtain USUALx, reduce its circulation in the market, and play the role of under-damping protection.

But the intention of the project party is obviously not easy to achieve, because there is a self-contradictory point.

Since such projects need to set aside a large proportion of token distribution as a considerable staking reward to attract users, they must be low-circulation tokens. USUAL's current circulation is 518 million, but the total amount is 4 billion, and its staking incentive model must rely on a steady stream of tokens to unlock if it wants to continue to operate. In other words, USUAL's inflation is very serious. If you want to curb inflation by using the 1/3 destruction amount, the proportion of USUAL recovered by conditional redemption must be high enough.

Of course, this proportion is set by the project party itself. In the conditional redemption mode, the calculation formula for the amount of USUAL that the redeemer needs to pay to the Usual platform from the interest is:

Where Ut is the current amount of USUAL that can be "accumulated" for each USD0++; T is the time cost factor, which defaults to 180 days (set by DAO); A is the adjustment factor. In simple terms, the official sets a weekly redemption amount X. If the weekly redemption amount is greater than X, A=1; if the weekly redemption amount is less than X, A=redemption amount/X. Obviously, when there are too many redeemers, more Usual income needs to be paid. Both T and A are adjusted by the project party.

But the problem is that if the conditional redemption channel requires users to pay too high a proportion of Usual's income, users will directly choose unconditional redemption, which will easily cause the price of USD0++ to drop again until it reaches the floor price of 0.87. Coupled with the panic selling, unpledging, and reduced credibility caused by the announcement of the project party, it is difficult to say that this is a successful strategy.

However, there is another more interesting saying in the market: Usual solved the dilemma of mining, withdrawing and selling in DeFi by "closing the door and beating the dog" in its own unique way. Overall, the unconditional floor price of 0.87 US dollars designed by the Usual project party and the conditional redemption mechanism make us have to suspect that the Usual protocol is deliberately operated to make the large revolving loan holders spit out their income.

What will happen in the future and the problems exposed

Before the payment ratio of USUAL for conditional redemption is announced, it is difficult to judge which method most users will choose and whether USD0++ can return to the anchor. As for the price of USUAL, it is still the same contradictory problem: the project party wants to reverse the death spiral simply by using tricks in the gameplay mechanism instead of real money, but the unconditional guaranteed price of 0.87 is not low enough. Many people will eventually choose to exit unconditionally rather than conditionally, and they will not be able to burn too much USUAL to reduce the circulation.

Jumping out of Usual itself, this incident exposed three moredirect problems.

First, the official documents of Usual have long stated that there is a 4-year lock-up period for USD0 pledge, but the specific rules for early redemption have not been explained before. So this Usual announcement is not a sudden new rule that has never been mentioned before, but the market is indeed in an uproar and even panic. This shows that many people who participate in the DeFi protocol do not read the project documents carefully. The DeFi protocol has become more and more complicated today. There are fewer and fewer simple and clear projects like Uniswap and Compound. This is not necessarily a good thing. The amount of funds that users participate in DeFi is often not too small. At least they should read the documents on the official website of the DeFi protocol clearly.

（Image source: Usual Docs）

Second, even if the official documents have already stated it, it is undeniable that Usual also sets and modifies the rules as it pleases, and the so-called T, A and other parameters are also in its own hands. In this process, there was neither a strict DAO proposal resolution nor an inquiry into community opinions.

It is ironic that the official has always emphasized the governance attributes of USUALx tokens in the documents, but there is no governance link in the actual decision-making process.It must be admitted that most Web3 projects are still in a very centralized stage. Combined with the first point, there are still significant problems with the security of users' assets. We always emphasize TEE, ZK and other technologies that can better guarantee asset security, but the decentralization and asset security awareness of project parties and users should also be paid attention to.

Third, the entire industry is indeed developing. With the lessons of projects such as OlympusDAO, and because of similar economic models, Usual began to consider reversing the trend as soon as the coin price showed a downward trend. We always say that there are few truly implemented projects in web3, but the industry ecosystem as a whole is constantly developing rapidly. The previous projects are not completely meaningless. The success or failure is seen by the latecomers, and may exist in another way in those truly meaningful projects. At this point in time when the market and ecology are not so prosperous, we should not lose confidence in the entire industry.