The soaring decentralized finance (DeFi) platform Usual Protocol found itself at the center of controversy on Friday after an unexpected update to its yield-generating token USD0++ triggered a sharp market sell-off, highlighting the risks and challenges in the rapidly evolving DeFi space.
The episode unfolded after Usual made an abrupt change to USD0++’s redemption mechanism, allowing early unstaking at a discounted rate. This caught investors off guard, causing USD0++ to briefly trade below $0.90 and the protocol’s governance token USUAL to plummet as much as 17%.
What Went Wrong
At the heart of the turmoil was Usual’s introduction of a “dual-path exit” feature for its locked-up stablecoin USD0++. Previously, USD0++ had a four-year lockup during which stakers earned rewards but could not redeem. The new feature allows early redemption at a floor price of 0.87 USD0.
This change disrupted the 1:1 peg expectation and wrought havoc in DeFi pools where the price was hardcoded at $1. Critics slammed Usual for implementing the change without sufficient warning, arguing it undermined USD0++’s peg.
Did they just allow degens to jump in at 1:1 and then rug the USD0++? They pushed for the largest USD0/USD0++ pool on Curve knowing all well that USD0++ shouldn’t trade at 1:1.
– Ignas, DeFi analyst, via X
High Stakes in DeFi’s “Peg” Promises
The situation underscores the critical importance – and fragility – of stablecoin pegs in DeFi. As advisor Patrick McKenzie noted, “a peg is a story about why two things that are not the same are interchangeable.” When that story changes unexpectedly, it can spark market panic.
For yield farmers and liquidity providers drawn to Usual’s high returns, the redemption change was a rude awakening to the risks behind those rewards. Usual’s TVL had skyrocketed from $300 million to nearly $2 billion in mere months as investors piled in – only to plunge back below $1.6 billion in the sell-off.
Communication Breakdown
Usual maintains the dual-path exit was communicated in advance, but apologized for insufficient clarity. That disconnect highlights the critical role of transparent, proactive communication in maintaining market confidence, especially with novel financial products.
The current situation regarding USD0++ stems from a misunderstanding of the protocol’s mechanisms along with a communication that should have been better articulated.
– Usual team statement
Key Lessons for DeFi Investors
As the dust settles, the Usual episode offers vital lessons for DeFi participants:
- Understand redemption terms – Don’t assume fixed redemption rates; know the specific conditions.
- Beware hardcoded prices – Pools with hardcoded prices are vulnerable to peg breaks.
- Watch for rule changes – Projects can change rules in ways that impact token economics.
- Monitor communication channels – Track official project channels for critical updates.
- Prepare for impermanent loss – Providing liquidity means exposure to impermanent loss if prices diverge.
Though most DeFi investors understand the risks of smart contract exploits and flash loan attacks, the Usual situation shows how even changes from the project team itself can trigger market volatility and losses if not handled well.
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. We should be thankful this happened now, before the protocol became a risk to the broader DeFi ecosystem.
– Rob Hadick, Dragonfly Capital general partner
As DeFi continues its meteoric growth and innovative protocols push the boundaries of crypto-native finance, clear, consistent communication and transparent, trusted tokenomics will be essential to building stable, sustainable markets. Investors must remain diligent in understanding the dynamic risks involved.
The Usual Protocol incident, while exposing critical fragilities, will hopefully accelerate efforts to make DeFi more robust, reliable, and resilient as it scales to the next level. How the Usual team addresses the fallout and strengthens their practices will be closely watched. In the constant code-is-law push for trustless finance, trust in the teams behind the code still matters immensely.
