Usual Protocol, an upcoming decentralized finance (DeFi) protocol that has seen a remarkable rise over the past few months, faced community backlash on Friday after a tweak to the protocol’s return-generating token triggered a selloff in 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 from $1 on decentralized marketplace Curve. The protocol’s governing token, USUAL, fell as much as 17% throughout the day before some of the losses were recovered.
The sell-off was caused by a change in the redemption mechanism of the USD0++ token introduced by the team on Thursday, which caught investors and liquidity providers off guard.
By design, USD0 is backed by short-term Treasuries to keep the price at $1. Stakers on Usual receive USD0++ that comes with a four-year lock-up period, meaning investors lock up their money without being able to cash out in exchange for rewards earned in the form of the protocol’s USD0 and USUAL tokens. Dividend farmers rushed in, catapulting the protocols’ 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 redeem the locked tokens early at a minimum price of $0.870 or at par by giving up part of the earned rewards by calling the 1:1 exchange bet in doubt.
The abrupt implementation drew criticism across DeFi users for changing the design without notice. In certain liquidity pools, the token’s price was hardcoded to a value of $1, causing chaos among borrowers and liquidity providers.
“Did they just allow degens to jump into 1:1 and then cover USD0++?” said prominent DeFi analyst Ignas in an X post. “They pushed for the largest USD0/USD0++ pool on Curve, knowing that USD0++ was not supposed to trade at 1:1.”
“DeFi continues to learn the most important truth about sticks: a stick is a story about why two things that are not the same can be exchanged for each other,” noted Patrick McKenzie, an advisor to payments firm Stripe.
The Usual team said in a statement that the design change with the early unstaking mechanism was communicated in advance from October. The protocol will also activate the revenue switch from Monday and start distributing the protocol’s earnings to governance token holders who stake their coin for the longer term (USUALx).
“The current situation regarding USD0++ stems from a misunderstanding of the mechanisms of the protocol along with a communication that should have been better worded,” the statement read. “We apologize and we 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 flywheels.
“Users taking risk need to know what the exact rules are and be able to trust that they won’t change, or it could result in market panic,” Rob Hadick, general partner at venture capital firm Dragonfly, told CoinDesk . “We should be thankful that this happened now, before the protocol became a risk to the wider DeFi ecosystem.”
Still, USD0++ recently traded at USD0.91 in the Curve pool, while the protocol’s total value locked, a key DeFi metric, fell below $1.6 billion.
