Usual Protocol, an up-and-coming decentralized finance (DeFi) protocol that has seen a notable surge in recent months, faced community backlash on Friday after an adjustment to the protocol’s yield-generating token triggered a sell-off in the markets. secondary.
Amid the turmoil, the protocol’s USD0++ token, which represents a locked (or staked) version of its USD0 stablecoin pegged to $1, briefly fell below 90 cents from $1 on the Curve decentralized marketplace. The protocol’s governance token, USUAL, plunged as much as 17% during the day before recouping some of the losses.
The liquidation was due to a change in the USD0++ token redemption mechanism introduced by the team on Thursday that took investors and liquidity providers by surprise.
By design, USD0 is backed by short-term government securities to keep its price at $1. Participants in Usual receive USD0++ which comes with a four-year lock-up period, meaning investors are locking up their funds without being able to redeem them in exchange for rewards earned in the form of USD0 and USUAL tokens from the protocol. Yield producers were quick to intervene, catapulting the protocol’s 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 early locked tokens at a minimum price of $0.87, or at par, giving up a portion of the rewards earned, which is called swapping. 1:1. rate in question.
The abrupt implementation drew criticism from DeFi users for changing the design without prior notice. In certain liquidity pools, the token price was hardcoded to be worth $1, wreaking havoc on borrowers and liquidity providers.
“They just allowed degens to jump 1:1 and then top USD0++?” said prominent DeFi analyst Ignas in an should be negotiated at 1:1.”
“DeFi continues to learn the most important truth about pegs: A peg is a story about why two things that are not the same are interchangeable with each other,” said Patrick McKenzie, an advisor at payments firm Stripe.
The Usual team said in a statement that the design change with the early withdrawal mechanism was communicated in advance starting in October. The protocol will also activate revenue shifting starting Monday and begin distributing protocol profits to governance token holders who stake their coin for the long term (USUALx).
“The current situation regarding USD0++ is due to a poor understanding of the protocol mechanisms along with communication that should have been better articulated,” the statement reads. “We apologize and will continue to do our best to communicate transparent information to users.”
The episode is another lesson for cryptocurrency investors about the potential risks of DeFi products that lure users with high returns through token incentives and reward wheels.
“Risk-taking users need to know what the exact rules are and be able to trust that they won’t change, otherwise it can cause panic in the market,” Rob Hadick, general partner at venture capital firm Dragonfly, told CoinDesk. “We should be grateful that this happened now, before the protocol became a risk to the broader DeFi ecosystem.”
Still, USD0++ recently traded at $0.91 on the Curve pool, while the protocol’s total value locked, a key DeFi metric, fell below $1.6 billion.
