Editor's Note: CDP "stablecoins" on HyperEVM, such as feUSD and USDXL, have failed to maintain their 1 USD peg due to a lack of robust arbitrage mechanisms, weak demand on Hyperliquid, and low borrowing costs. Hyperliquid natively provides leveraged trading, so users do not need CDP stablecoins. As airdrops and point rewards are exhausted, CDP tokens will lose value and ultimately become unsustainable.
Following is the original content (edited for readability):
Disclaimer: This article is not intended to FUD or attack the CDP protocol on HyperEVM.
In short: CDP stablecoins like feUSD and USDXL are not actually stable or capital efficient. They lack strong arbitrage mechanisms, have limited use cases, primarily used for leveraged trading, and Hyperliquid already natively provides a better user experience and liquidity. Therefore, these tokens trade below their 1 USD peg, and without incentives like airdrops, they are likely to gradually disappear.
Collateralized Debt Position (CDP) stablecoins promise a decentralized alternative to USD-backed stablecoins (like USDC and USDT) or centralized synthetic dollars (like USDe), but reality often falls short of expectations. feUSD, USDXL, and KEI are the latest examples attempting to emulate Liquity, but they all face serious issues with peg stability, scalability, or flawed incentive design.
This article will analyze these issues, what paid KOLs haven't told you, and why these are not just growing pains - they are structural problems.
CDP Design Overview
First, let's understand the basic concept: CDP "stablecoins" are not actually true stablecoins or "USD" tokens. That's why DAI is called "DAI" and not USDD or something else. Naming CDP stablecoins with a "USD" prefix is misleading and can confuse DeFi newcomers. They lack arbitrage mechanisms and direct collateralization. Each CDP token is minted out of thin air and could be far below 1 USD in value.
To mint a CDP token, users must lock collateral worth over 100% to borrow tokens. This reduces capital efficiency and limits growth. To mint 1 token, you need to lock more than 1 USD in value. Depending on the loan-to-value ratio, this could be even higher.
Without aggressive mechanisms like Felix's redemption (where arbitrageurs can seize someone's collateral if borrowing rates are too low) or Dai's PSM module, CDP tokens cannot maintain a 1:1 USD peg, especially when their primary use case is leveraged trading.
In DeFi, CDP is just another form of lending. Borrowers mint CDP stablecoins and exchange them for other assets or yield strategies they believe will outperform the protocol's borrowing rates.
What Happened?
Everyone exchanges their CDP stablecoins for other assets, typically more stable centralized assets like USDC or USDT, or volatile assets like HYPE for leveraged trading. Holding these tokens makes no sense, especially when you're paying borrowing rates: feUSD has a 7% APY borrowing rate on Felix, USDXL has a 10.5% APY borrowing rate on HypurrFi.
Take USDXL as an example: It has no native use case, and users have no reason to hold it. That's why it can fluctuate at prices like 0.80 USD or 1.20 USD - its price is not anchored by any real arbitrage mechanism. Its price merely reflects the demand for borrowing HYPE. When USDXL trades above 1 USD, borrowers can borrow more USD; when below 1 USD, they borrow less - it's that simple.
feUSD is slightly better. Felix provides users with a stability pool where they can earn 75% of borrowing fees and liquidation bonuses, currently around 8% APY. This helps reduce price volatility, but like USDXL, it still lacks a strong arbitrage mechanism to firmly maintain the 1 USD peg. Its price still fluctuates based on borrowing demand.
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The core issue is: Users buying feUSD and putting it in the stability pool are essentially lending their USDC or HYPE (via Felix) to those minting feUSD. These CDP tokens have no intrinsic value. They only have value when paired with valuable tokens like HYPE or USDC in liquidity pools.
This introduces third-party risks. Without airdrops or other incentives, DeFi users have no real reason to borrow illiquid, unpegged tokens like feUSD or USDXL, or buy them as exit liquidity for borrowers. Why would you do this when you can directly borrow stablecoins like USDT or USDe? Anyway, the borrowed stablecoins will ultimately be converted to other tokens, so you don't care about the decentralization of the borrowed asset.
Another reason CDP hasn't succeeded on HyperEVM is that leveraged trading is already a native feature of the Hyperliquid ecosystem. On other chains, CDP provides decentralized leveraged trading. But on Hyperliquid, users just need to use the platform itself, utilizing leveraged perpetual contracts (perps) and excellent user experience, without relying on CDP stablecoins.
To summarize, here are the reasons CDP "stablecoins" perform poorly on HyperEVM:
· Lack of strong arbitrage mechanisms
· Weak demand for CDP products on Hyperliquid
· Low borrowing costs with no reason to hold CDP tokens
Therefore, CDP "stablecoins" like feUSD and USDXL are trading below their 1 USD soft peg: feUSD at 0.985 USD (-1.5%), USDXL at 0.93 USD (-7%).
Conclusion: I don't believe CDP stablecoins have any potential in the Hyperliquid ecosystem. Users don't need them - Hyperliquid already provides a better user experience and deeper liquidity, natively supporting leveraged trading. Once airdrops and point reward programs are exhausted, CDP tokens will lose their remaining utility value.
Hypurrliquid, don't be exit liquidity.
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