USD0++ loses 1:1 USD peg, panic reigns 

On January 9, the stablecoin issued by Usual, USD0++, suddenly lost its 1:1 peg to the USD to around $0.937, with one USD0++ token now only redeemable for less than the expected $1. The sudden loss of stability compounds a rough start to the year that began with Usual’s token, once a market favorite, losing its momentum. 

The token price already dropped by over 30% within a week. Usual was one of the eye-catching stablecoin projects that emerged in 2024, launching on Binance at the end of 2024 with great market performance. It has the backing of French MP Pierre Person’s government background and Binance’s famed launchpad.

The stablecoin markets saw a boom in 2024, with at least 23 stablecoin projects securing substantial funding ranging from 2 million to 45 million in the second half of the year. 

How the market reacted to USD0++ losing its 1:1 peg

Crypto market analysts quickly took to X to warn their audience about further price drops in the future. The question everyone is asking now is whether USD0++ is about to become another UST. 

The USD0++ stablecoin fell to a low of $0.89 before rising to stabilize at around $0.93—about 7% below its intended $1 peg. The dual exit system provides users with two redemption options:

1. A conditional exit: this option allows for 1:1 redemption at the $1 peg but demands that users forfeit a portion of accrued rewards.
2. An unconditional exit: this option allows redemption at a current floor price of $0.87, but it is set to rise gradually to $1 over a period of four years.

The abrupt changes to the protocol’s official documentation shocked many users, shaking out weak hands and leaving the stronger ones gasping for clarity.

Stani Kulechov, founder of Aave, shared his opinions on the situation via a post on X. In his statement, he emphasized the risks linked with immutable price feeds. His comments also reflected broader community concerns regarding the implications of new redemption mechanisms, stating his preference for GHO, an alternative stablecoin.

This is another example on how things can go wrong with fully hardcoded and immutable price feeds.

USD0++ depegged to $0.93 and the given USD0++ holders lock their asset for 4 years, the discounted illiquid value in reality is at $0.855.

Resulting now to a bank run on Morpho,… https://t.co/ruQK6qw7EQ

— Stani (@StaniKulechov) January 10, 2025

Other users have also echoed his sentiments as the market continues to react to the shocking update with significant volatility. Things got so bad that liquidity providers on platforms like Curve Finance and Pendle reportedly experienced sudden shifts that resulted in hundreds of millions in USD0++ leaving the DeFi ecosystem, raising fears of multimillion-dollar liquidations.

Responding to community concerns, Usual’s decentralized autonomous organization (DAO) has announced plans to cover any potential bad debt in non-migrable markets up to the current amount.

Why did Usual settle on $0.87?

There are two possible theories about why the official announcement set the unconditional exit ratio at a precise 0.87. 

One is the profit burning theory. 

Consider the possibility of the 0.87:1 ratio set in the official announcement triggering a profit evaluation among whale holders. Since the previous 1:1 guaranteed redemption strategy failed, losing the official guarantee, large holders now face the dilemma of selecting the best option among the “short ones.” 

If they go for conditional redemption, investors need to return part of their subsequent profits to the project. The problem is the details of this profit withdrawal have not been disclosed officially. 

Conversely, if they accept the unconditional redemption method, the worst-case scenario guarantees only $0.87, with the remaining $0.13 becoming the core of the game. 

Naturally, when either of the two exit methods offers higher returns, the more profitable one comes out on top. A well-designed mechanism should allow users the opportunity to choose rather than be “one-sided.” As such, the $0.13 gap likely means that the official has yet to disclose the portion of profits that need to be burned, allowing users to make a choice between the two methods. 

From the user’s perspective, if they have to pay a guaranteed cost of $0.13 later, they might as well sell at the current depegged price (currently around $0.94). USD0++ would then return to its economic essence as a bond, with $0.13 representing the discounted portion, while $0.87 reflects its intrinsic value.

The other is the liquidation bottom line theory. 

Before the update, Usual’s mechanism allowed many large holders to safely take positions and obtain almost risk-free returns. This further increases leverage and capital efficiency via lending protocols like Morpho. 

Typically, these users engaging in circular lending would collateralize their USD0++, borrow a certain amount of USDC, then exchange this USDC for USD0++, and subsequently initiate a new round of circular lending. These users, who benefited from circular lending, provided Usual with considerable TVL, continuously elevating the system. However, there is a liquidation line behind the TVL “perpetual motion machine.”

In the Morpho protocol, the liquidation line for USD0 is determined by the Loan-to-Value ratio (LLTV). LLTV is a fixed ratio, and when a user’s Loan-to-Value (LTV) exceeds LLTV, their position is exposed to liquidation risk. At this time, Morpho’s liquidation line is set at 86%, just a step away from the 0.87 bottom line in the official unconditional exit.

The 0.87 in Usual’s official announcement is just above Morpho’s 0.86 liquidation line. It can be likened to a final barrier set by the official to prevent systemic liquidation risks. 

The new update means many loans are now above the liquidation threshold. The situation is worsened by a hardcoded oracle, leading to an exodus of suppliers and a spike in borrow rates. 

Some users have called for on-chain hedging and liquidity buffers to mitigate such risks, emphasizing the importance of risk management in DeFi. 

Holders await further news next week 

There is still a lot of panic surrounding USD0++ in the market, but a majority of people have taken a cautious approach, holding their positions and waiting to see what happens. The market’s reasonable value for USD0++ is around 0.94, but all eyes are on official channels as people expect to hear detailed information on how the “unconditional exit” will burn and how much profit will be deducted next week. 

If the worst happens and Usual does not burn the anticipated 13 points next week and instead chooses to burn 0.5% of USUAL, then USD0++ could quickly re-peg to around 0.995. In short, the re-pegging of USD0++ is dependent on the burning details Usual is expected to announce next week.

Regardless of how the final mechanism details are determined, holders of the tokens UsualX and USUAL are expected to benefit. The market’s exit method will decrease USUAL/USD0++ TVL, driving up the price of the USUAL token. 

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