Usual Faces Sell-Off After Introducing Dual Exit Mechanisms for USD0++ Stablecoin

Usual Faces Sell-Off After Introducing Dual Exit Mechanisms for USD0++ Stablecoin

Usual, a decentralized finance (DeFi) stablecoin issuer, has found itself at the center of market volatility following a significant update to its USD0++ stablecoin protocol. On January 9, Usual introduced a dual exit mechanism aimed at enhancing the long-term sustainability of USD0++, but the changes have sparked significant community debate and caused sharp market reactions.


The update is part of Usual's broader strategy to align USD0++ with its vision of evolving the staked stablecoin into a bond-like financial instrument backed by real-world revenue streams. While the move is seen as a step towards innovation, it has created an immediate disruption, with USD0++ falling as low as $0.89 before stabilizing at $0.92, marking an 8% drop below its usual $1 peg.


The Dual Exit Mechanism: Conditional vs. Unconditional Redemption

The core of the update lies in the introduction of dual exit mechanisms for USD0++ holders, offering users two redemption options:


Conditional Exit: This option allows users to redeem their USD0++ at the original $1 peg but with the condition that they forfeit a portion of accrued rewards. This effectively penalizes early withdrawals, making it less attractive for those looking to exit quickly.


Unconditional Exit: This mechanism offers users an immediate cash-out at a floor price of $0.87, but the floor will gradually rise over the next four years, eventually reaching $1. While this option provides an immediate redemption, it comes with a reduced initial value and a prolonged timeline for full recovery.


This change in the protocol’s redemption structure has caused confusion among users, who are grappling with the new conditions. The update also included modifications to the protocol’s official documentation, which has led to further unrest within the community. Some critics have expressed concerns, with one user even describing the changes as “fraud.”


Market Fallout and Liquidity Concerns

The announcement of these dual exit options triggered a market sell-off, leading to significant volatility for USD0++. At one point, the stablecoin’s value dipped to $0.89, well below its intended peg of $1. This decline in value spooked many liquidity providers, particularly those on platforms like Curve Finance and Pendle, where hundreds of millions of USD0++ were reported to have left DeFi protocols.


The sudden shifts in liquidity have sparked concerns over potential multimillion-dollar liquidations, as the staked version of USD0 (USD0++) is closely tied to DeFi liquidity pools. Users who had locked their assets into USD0++ may now face steep losses, especially if they were relying on the previous redemption terms.


To address these concerns, Usual’s Decentralized Autonomous Organization (DAO) has pledged to cover any potential bad debt in non-migrable markets up to the current amount, providing some assurance to users affected by the changes.


The Nature of USD0 and USD0++

USD0++ is the staked version of USD0, a stablecoin designed to provide both stability and liquidity within the DeFi space. USD0 is fully backed by real-world assets such as US Treasury bills and is primarily used as a collateralized, dollar-pegged token.


In contrast, USD0++ functions more like a bond-like instrument, where users lock their USD0 tokens into USD0++ and earn interest (yield) through emissions of the protocol’s native token, USUAL. However, the trade-off for participating in the USD0++ system is the four-year lock-up period that makes the tokens less liquid. This lock-up is further complicated by the newly introduced redemption mechanisms, which fluctuate based on market conditions and exit choices.


Community Response and Broader Implications

The announcement of these changes has ignited a wave of debate within the DeFi community. Stani Kulechov, the founder of Aave, shared his concerns in an X post, highlighting the potential pitfalls of having "fully hardcoded and immutable price feeds" in such systems. His comments reflect broader apprehension regarding the flexibility of DeFi protocols and the impact of sudden, drastic changes to established systems.


At the heart of the debate is whether the move towards bond-like structures and exit penalties for early withdrawals is in the best interest of users or whether it undermines the core principles of DeFi, such as accessibility and liquidity. While some see the update as a necessary step to increase the sustainability of the protocol, others view it as a risky maneuver that could alienate users and undermine confidence in the USD0++ token.


Conclusion

The recent update to Usual's USD0++ stablecoin protocol has introduced both innovative mechanisms and substantial risks. While the dual exit system aims to create a more sustainable, bond-like financial product, it has led to significant market disruption and created confusion among users. As the community grapples with the implications of the changes, the fallout in DeFi liquidity and the potential for liquidations remain key concerns.


With the four-year lock-up period and fluctuating redemption options, the future of USD0++ now depends on how the community responds to these adjustments and how effectively Usual addresses the growing concerns over liquidity and trust. As the situation develops, Usual’s handling of the current volatility will be critical in determining whether this upgrade ultimately leads to a stronger and more resilient protocol or whether it triggers further instability in the market.

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