The Usual Protocol, an up-and-coming decentralized finance (DeFi) protocol that has seen impressive gains over the past few months, announced on Friday that tweaks to the protocol's yield-generating tokens caused a decline in the secondary market, sparking a community backlash. faced.
Amid the turmoil, the protocol's USD0++ token, which represents a locked-up (or staking) version of the USD0 stablecoin pegged at $1, briefly fell below $1 to 90 cents on the decentralized market curve. USUAL, the protocol’s governance token, plunged 17% throughout the day before recovering some of its losses.
The decline was caused by changes to the USD0++ token redemption mechanism introduced by the team on Thursday that caught investors and liquidity providers off guard.
By design, USD0 is backed by short-term government securities to keep the price at $1. Usual stakers receive USD0++ with a 4-year lockup period. This means that investors are locking up their funds without being able to redeem them for the rewards they earn in the form of the protocol’s USD0 and USUAL tokens. Harvester farmers have flooded in, sending DeFi's key metric, Protocol Total Value Locked (TVL), soaring from less than $300 million in October to $1.87 billion earlier this week.
However, a new feature called “Dual Path Exit” allows investors to trade tokens locked up at a floor price or face value of 0.87 USD0 by giving up a portion of their earned rewards in what is known as a 1:1 exchange. You can redeem it early. Evaluation matters.
The sudden implementation sparked criticism from DeFi users across the board for changing the design without warning. In certain liquidity pools, the token price was hard-coded to the equivalent of $1, causing chaos among borrowers and liquidity providers.
Ignace, a prominent DeFi analyst, said in a post on “They knew very well that USD0++ should not trade 1:1 and promoted the largest USD0/USD0++ pool on Curve.”
“DeFi continues to learn the most important truth about pegs. A peg is a story about why two things that are not the same can be interchanged,” said Patrick McKenzie, advisor at payments company Stripe. said.
The Usual team said in a statement that the design change with the early de-staking mechanism had been communicated in advance since October. The protocol will also activate a revenue switch starting Monday, which will begin distributing the protocol’s revenue to governance token holders who stake their coins long-term (USUALx).
“The current situation regarding USD0++ stems from a misunderstanding of the mechanisms of the protocol and communication that should have been more clearly expressed,” the statement said. “We apologize. We will continue to do our best to provide transparent information to our users.”
This episode is another lesson for crypto investors about the potential risks of DeFi products that lure users with high yields through token incentives and reward flywheels.
Rob Haddick, general partner at venture capital firm Dragonfly, told CoinDesk: “Risk-taking users need to know what the exact rules are and be able to trust that the rules won't change. “It could cause a market panic.” “We should be thankful this happened now, before this protocol became a risk to the broader DeFi ecosystem.”
Still, USD0++ recently traded at 0.91 USD0 on the Curve pool, while the total amount of locked protocols, a key indicator in DeFi, fell below $1.6 billion.
