Why did a protocol with over $1 billion in TVL suddenly collapse so quickly?
Author: DC | In SF
Source: Block unicorn
The current trading price of Usual's USD0++ is below $1, but it is said to be part of the plan. Before the de-pegging event, I was writing an article about Usual because it has recently received widespread attention. It is one of the fastest-growing stablecoin protocols and has recently collaborated with Ethena, earning a lot of money for many YT miners on Pendle. However, if you ask people what Usual does, you often get a variety of answers. "It provides you with yields based on RWA (real-world assets)." So the natural question is: how is this different from Ondo? "Oh, it decentralizes RWA yields," well, doesn't Maker or Sky do that too? And so on. If you look closely, @usualmoney's product is a token, not any actual product. Fundamentally, if the risk-free rate that users receive is higher than 4%, the source of the yield is the users themselves. But how did we get to this point? Why did a protocol with over $1 billion in TVL suddenly collapse so quickly? What is the mechanism behind Usual?
How do USD0 and USD0++ work?
USD0 is Usual's standard, non-yielding stablecoin. There is not much to interpret here, but once you delve into USD0++, things get interesting. Although the name is similar, USD0++ is not a stablecoin at its core. Initially, USD0++ could be redeemed 1:1 for USD0, and USD0 could be redeemed for $1. However, the project has stated in its documentation that at some point in Q1 2025, this will change, and the functionality of USD0++ will be more like a bond, with a floor price equal to the effective price of the 4-year US Treasury, and an actual underlying yield rate of zero. Naturally, the community expected this change to be announced in advance, and there would be some process to allow users to exit if they no longer wished to engage in liquidity mining or chose to hold for a longer period and accept the higher risk that comes with it. Regardless of what happens in Q1 2025, as soon as this change is announced, the value of USD0++ will plummet. USD0++ holders no longer hold it solely for its dollar value, but because they believe the $USUAL tokens they will receive are worth being locked up for a longer period.
To facilitate liquidity mining, the USD0 and USD0++ liquidity pools have been deployed on multiple platforms, including Morpho and Euler. Morpho's risk management is outsourced to other managers, including MEV Capital, which plays an important role in this story. MEV Capital's reputation in some circles is already known to be somewhat suspicious - they have previously caused losses to investors and covered it up through questionable accounting practices. Additionally, one of MEV Capital's shareholders, @AdliTB, is also a co-founder of Usual, which is clearly a conflict of interest. MEV Capital's responsibility is to help the lenders manage risk, not to recklessly channel large amounts of funds to Usual. To achieve this, MEV Capital used an insurance vault that hard-coded the value of USD0++ to $1. In other words, its Oracle effectively assumed that the value of USD0++ was always $1, regardless of the market price. Another well-known protocol that operated in a similar manner is Anchor, which played a key role in the UST collapse. While this approach may have had some justification, it is irresponsible to adopt such a method on assets whose liquidity will ultimately be removed. Euler's oracle used market prices to operate, leading to liquidations, and many of Usual's liquidity pools now appear to be holding significant bad debt.
$1 becomes $0.80: The de-pegging event
Rather than announcing that liquidity mining users could exit, the Usual team actually chose to "raid" its users and all related parties using Usual assets. According to @GauntletXYZ, at 4:56 PM EST, Usual notified Gauntlet and other @MorphoLabs managers via a Telegram chat that the unconditional 1:1 redemption mechanism for USD0++ in the primary market was immediately terminated. The team also posted a public tweet announcing the change and stating that two new mechanisms would be introduced: a price protection mechanism with a floor of $0.87, and a 1:1 early unstaking mechanism to convert USD0++ to USD0, which is expected to be made available next week.
As soon as the news broke, USD0++ began to de-peg, dropping several percentage points within a few hours. Due to Euler's oracle correctly calculating that the debt positions were becoming unhealthy, Euler began liquidations. Prices continued to fall, and MEV Capital's liquidity pools were hit hard by the rapid rise in interest rates, as borrowers withdrew and traders leveraged the poor risk management to profit when USD0++ prices rebounded.
Reasons for people's purchases and the pyramid-like supply structure of $USUAL
In my view, this situation and the potential for a blowup with funds being trapped seemed highly likely at some point, but the team's extremely abrupt changes, lack of warning, and the issuance of shocking, misleading, and even completely false statements are simply unbelievable.
In reality, most participants in Usual were actually liquidity mining its tokens, and the team was well aware of this. If they had not operated in this manner, one could reasonably assume they were trying to build a positive flywheel effect. However, the way this announcement was made appears to be designed to catch users off guard and deprive them of the opportunity to choose between withdrawing or continuing to participate, making this situation look more like a "honeypot". The team's claim that this change would occur at some point in Q1 is both dishonest and infuriating. We are barely 10 days into a 90-day quarter, and this is clearly a deliberate attempt to catch people off guard.
Furthermore, the team clearly knew what was going to happen. This can be seen directly from Usual's announcement:
"Encourage high-leverage USD0++/USDC Chainlink Oracle Morpho market positions to increase their health factors to maximize safety during this volatility period, during which arbitrage bots may not be able to effectively maintain the floor price."
To compensate and improve their health factors, miners had to sell their USD0++, which no longer had any value support!
Although the team has started to backtrack in the face of significant opposition, and even some miners' legal threats, they have not fully acknowledged their responsibility for failing to properly convey the fundamental change in the nature of USD0++.
Some general thoughts
Many smart people I know were 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, and may be illegal (it certainly is in the US, and likely in France as well), but this does not necessarily mean there will be any consequences. This should not be used to attack Morpho, as the Morpho system is manager-centric. A manager directly colluding with the protocol has now actually strengthened the position of those managers who did not collude, further entrenching Morpho's model, which was designed for such events. Different approaches do not mean wrong approaches.
Here is the English translation:Overall, caution is needed when pursuing profits and trading, especially in the crypto field. Do your own research, understand the team, and if you don't have a good system to generate profits (see @ethena_labs), then the source of profits is yourself, and if you are the source of profits, either participate in the game like Curve / Velo / Aero, or don't participate at all. Bad teams exist and they should be exposed and condemned. In my view, even if the team is not bad, the way this decision is executed is very poor, bordering on criminal. However, the crypto and DeFi field is still a Wild West, do your own research, where there's smoke, there's fire.
