Why did Usual, a company with over US$1 billion in TVL, suddenly collapse? Interpretation of USD0++ decoupling event
Reprinted from panewslab
01/13/2025·0MAuthor of the article: DC | In SF
Article compilation: Block unicorn
Usual’s USD0++ is currently trading below a dollar, however this is said to have been part of the plan all along. Before the decoupling incident, I was writing an article about Usual because it has been getting a lot of attention lately. It is one of the fastest growing stablecoin protocols and has recently partnered with Ethena and is making 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 returns based on RWA (real world assets).” So the natural question is: How is this different from Ondo? “Oh, it decentralizes RWA revenue”, well, doesn’t that mean Maker or Sky too? Wait, wait. If you look closely, @usualmoney’s product is a token, not any actual product. Essentially, if the risk-free interest rate obtained by the user is higher than 4%, then the source of income is the user himself. But how did we get here? Why did a deal with a TVL of over a billion dollars suddenly collapse so quickly? How exactly does Usual work?
How do USD0 and USD0++ work?
USD0 is Usual’s standard, non-yield stablecoin. There isn’t much to decipher here, but once you dig into USD0++, things get interesting. Despite the similar name, USD0++ is not a stablecoin per se. Initially, USD0++ can be exchanged for USD0 at a 1:1 ratio, which in turn can be exchanged for 1 USD. However, the project states in its documentation that at some point in the first quarter of 2025, this will change and USD0++ will function more like a bond, with a lower bound being the effective price of a US 4-year Treasury note, while paying The actual underlying rate of return is zero. Naturally, the community assumed that this change would be announced in advance and that there would be some kind of process that would allow users to exit if they no longer wish to do liquidity mining or choose to continue holding for longer and accept the changes that come with it. High risk. Regardless of what happens in the first quarter of 2025, the value of USD0++ will drop dramatically as soon as this change is announced. Holders of USD0++ are no longer holding simply for its USD value, but rather because they believe the $USUAL tokens they will receive are worth being locked up for longer.
 conflict of interest
In order to facilitate liquidity mining, USD0 and USD0++ capital 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've made investors lose money before and hid it with questionable accounting. In addition, one of the shareholders of MEV Capital, @AdliTB, is also a co-founder of Usual, which is an obvious conflict of interest. MEV Capital's role is to help lenders manage risks, rather than directing large amounts of funds to Usual at will. To achieve this, MEV Capital uses a vault with a value of USD0++ hard-coded to $1. In other words, its oracle actually assumes that USD0++ is always worth $1, regardless of market price. Another well-known protocol operating in a similar manner is Anchor, which played a key role in the UST collapse. While there may be some justification for doing so, taking this approach on an asset where liquidity will eventually be removed is irresponsible. Euler's oracles, which operate using market prices, led to liquidations, while many of Usual's pools now appear to be holding large amounts of bad debt.
1 dollar becomes 80 cents: the decoupling event
Rather than announcing that liquidity mining users could quit, the Usual team actually chose to launch a "raid" on its users and all related parties using Usual assets. According to @GauntletXYZ, at 4:56 PM ET, Usual notified Gauntlet and other @MorphoLabs managers via Telegram chat that the unconditional 1:1 redemption mechanism of USD0++ in the primary market was terminated with immediate effect. At the same time, the team also issued a public tweet announcing the change and stated that it will introduce two new mechanisms: a price protection mechanism with a floor price of $0.87, and a 1:1 early undeposit mechanism for USD0++ Converted to USD0 and expected to be available next week.
As soon as the news broke, USD0++ started decoupling, losing several percentage points in a matter of hours. Since Euler's oracle correctly calculated that the debt position was becoming unhealthy, Euler began liquidating it. The price continued to fall, and MEV Capital's capital pool began to take a hit as interest rates rose sharply, as borrowers withdrew funds and traders took advantage of poor risk management to leverage operations to profit when the USD0++ price recovered.
Why people buy and $USUAL’s pyramid supply structure
It seems to me that this scenario, along with the possible bombshell of trapped funds, was extremely likely to happen at some point, but for the team to make changes in such an extreme way, without warning, and make a shocking statement , extremely misleading and even completely false statements, which are really unbelievable.
In reality, most people participating in Usual are actually liquidity mining their tokens, and the team is well aware of this. If they were not operating in this way, one might reasonably assume that they were trying to create a positive flywheel effect. However, the announcement in this manner was clearly designed to catch users off guard and deprive them of the opportunity to choose between withdrawing their funds or continuing to participate, making the situation look more like a “honeypot.” The team's statement that this change will happen sometime in the first quarter is both dishonest and infuriating. We are only entering the tenth day of a 90-day quarter, which is clearly intended to catch people off guard2. With such a major change, most people expect some advance warning.
Furthermore, the team clearly knew what to expect. This can be seen directly from Usual’s announcement:
“Highly leveraged positions in the USD0++/USDC ChainlinkOracleMorpho market are encouraged to increase their health factor to obtain maximum safety during this period of volatility, during which arbitrage bots may not yet be able to effectively maintain price floors.”
In order to compensate and improve health factors, miners have to sell USD0++ which is no longer supported by value!
Although the team has begun to back off after facing a large amount of opposition and even legal threats from some miners, they have not yet fully acknowledged responsibility for their inability to properly communicate changes to USD0++'s fundamental properties.
Some general thoughts
Many smart people I know are surprised by this. I believe that arbitrarily changing the redemption rules for USD0++ without any reasonable warning cannot be considered an act of good faith, it may be illegal (definitely so in the US, and also in France), but that doesn't necessarily mean What will be the consequences? This should not be used against Morpho, the Morpho system is administrator-centric. Having one manager collude directly with the protocol now strengthens the position of those managers who did not collude, which will further strengthen Morpho, whose model was designed for this kind of event. A different approach does not mean a wrong approach.
Overall, caution is required when pursuing gains and trading, especially in the crypto space. Do your own research, get to know the team, if there isn't a good system in place for earning (see @ethena_labs) then the source of the earnings is you, and if you are the source, either get involved in the game like Curve/Velo/Aero or completely Not participating. Bad teams exist and they should be exposed and condemned. In my opinion, even if the team wasn't bad, the way this decision was executed was terrible and even bordered on criminal. However, the crypto and DeFi fields are still the Wild West, do your own research, and where there is smoke, there will always be fire.
jinse
chaincatcher