Usual’s USD0++ is currently trading for less than a dollar, yet this was allegedly part of the plan all along. Before the depeg event, I was about to write a post about Usual, as it has been getting a lot of attention lately. It’s one of the fastest growing stablecoin protocols, recently partnered with Ethena, and made a lot of money for many YT miners on Pendle. However, if you ask people what Usual does, you tend to get a variety of answers. “It gives you a yield based on RWA (real world assets).” The natural question then is: how is this different from Ondo? “Oh, it decentralizes RWA yields”, well, isn’t that also true of Maker or Sky? And so on and so forth. If you look closely, @usualmoney’s product is the token, not any actual product. Essentially, if the user gets a risk-free rate above 4%, then the source of the yield is the user themselves. But how did we get to this point? How did a protocol with over a billion dollars in TVL suddenly and rapidly collapse? How does Usual work?
How do USD0 and USD0++ work?
USD0 is Usual’s standard, non-yielding stablecoin. There’s not a lot to unpack here, but things get interesting once you dig into USD0++. Despite the similar name, USD0++ isn’t a stablecoin per se. Initially, USD0++ was redeemable 1:1 for USD0, which in turn was redeemable for $1. However, the project states in its documentation that sometime in Q1 2025, this will change and USD0++ will function more like a bond, with a floor of the effective price of a US 4-year Treasury bond while paying a real underlying yield of zero. Naturally, the community assumes that this change will be announced in advance and that there will be some process to allow users to exit if they no longer wish to do liquidity mining or choose to continue holding longer and accept the higher risk that comes with it. Regardless of what changes occur in Q1 2025, the value of USD0++ will drop dramatically as soon as this change is announced. Holders of USD0++ will no longer hold purely for its USD value, but because they believe that the $USUAL tokens they will receive are worth being locked up for longer.
Conflict of Interest
To facilitate liquidity mining, USD0 and USD0++ pools are deployed on multiple platforms including Morpho and Euler. Morpho’s risk management is outsourced to other managers, including MEV Capital, an important player in the story. MEV Capital’s reputation is already known in some circles to be somewhat dubious - they have previously caused investors to lose money and covered it up with questionable accounting practices. In addition, one of MEV Capital’s shareholders, @AdliTB, is also the co-founder of Usual, which is obviously a conflict of interest. MEV Capital’s job is to help lenders manage risk, not to arbitrarily direct large amounts of capital to Usual without restraint. To achieve this, MEV Capital used vaults that hard-coded the value of USD0++ to $1. In other words, its Oracle effectively assumed that the value of USD0++ was always $1, regardless of market prices. Another well-known protocol that operates in a similar manner is Anchor, which played a key role in the UST collapse. While there may be some justification for doing so, it is irresponsible to take this approach on an asset where liquidity will eventually be removed. Euler’s oracle operates using market prices, resulting in liquidations, and many Usual’s pools now appear to be holding large amounts of bad debt.
1 dollar becomes 80 cents: the decoupling event
Instead of announcing that liquidity mining users can exit, the Usual team actually chose to launch a "raid" on its users and all parties using Usual assets. According to @GauntletXYZ, at 4:56 pm EST, Usual notified Gauntlet and other @MorphoLabs managers via Telegram chat that the unconditional 1:1 redemption mechanism for USD0++ in the primary market was terminated immediately. At the same time, the team also released a public tweet announcing the change and said that two new mechanisms would be introduced: a price protection mechanism with a floor price of $0.87, and a 1:1 early unbonding mechanism for converting USD0++ to USD0, which is expected to be available next week.
As soon as the news came out, USD0++ began to decouple, falling several percentage points in a few hours. Euler began to liquidate because its oracle correctly calculated that the debt position was becoming unhealthy. The price continued to fall, and MEV Capital's funding pool began to suffer as interest rates rose sharply, due to borrowers withdrawing funds and traders taking advantage of poor risk management to leverage operations to profit when the USD0++ price recovered.
Why people buy and the pyramidal supply structure of $USUAL
This scenario and the potential explosion of trapped funds seemed highly likely to me at some point, but it is incredible that the team would change in such an extreme way, without warning, and with shocking, highly misleading, and even completely false statements.
In reality, most people participating in Usual are actually liquidity mining its tokens, and the team knows this. If they were not operating in this way, one might reasonably believe that they were trying to create a positive flywheel effect. However, the announcement in this way, which is clearly intended to catch users off guard and deprive them of the opportunity to choose between withdrawing funds or continuing to participate, makes this situation look more like a "honeypot". The team’s statement that this change will happen sometime in Q1 is both disingenuous and infuriating. We are only ten days into a 90-day quarter and this is clearly a deliberate attempt to catch people off guard2. Most people would have expected some advance warning for such a significant change.
Furthermore, the team clearly knew what was coming. This is directly from Usual’s announcement:
“Highly leveraged positions in the USD0++/USDC Chainlink Oracle Morpho market are encouraged to increase their health factor to gain maximum security during this volatility period, during which arbitrage bots may not be able to effectively maintain a floor price.”
In order to compensate and increase the health factor, miners had to sell the now no longer value-backed USD0++!
While the team has started to back off after facing a lot of opposition and even legal threats from some miners, they still haven’t fully acknowledged responsibility for failing to properly communicate the change in the fundamental properties of USD0++.
Some General Thoughts
Many smart people I know are surprised by this. I think that arbitrarily changing the redemption rules of USD0++ without any reasonable warning cannot be considered an act of good faith, and it may be illegal (definitely in the US, and also in France), but it doesn’t necessarily mean there will be consequences. This should not be used to attack Morpho, the Morpho system is manager-centric. There is a manager who is directly colluding with the protocol, which now strengthens the position of managers who are not colluding, which will further entrench Morpho, whose model is designed for this kind of event. A different approach does not mean a wrong approach.
Overall, caution is needed when pursuing yield and trading, especially in crypto. Do your own research, understand the team, if there is not a good system in place to generate yield (see @ethena_labs), then the source of yield is you, and if you are the source of yield, either play the game like Curve/Velo/Aero did, or don't play at all. Bad teams exist and they should be exposed and condemned. In my opinion, even if the team is not bad, the way this decision was executed was terrible and even bordered on criminal. However, the crypto and DeFi space is still the wild west, do your own research, where there is smoke, there is always fire.
Catherine
