Usual Protocol, an emerging decentralized finance (DeFi) protocol that has seen a remarkable rise in the past months, faced a community backlash on Friday after a tweak in the protocol’s performance-generating token triggered a sell-off in the secondary markets.
Amidst the turmoil, the protocol’s USD0++ token, which represents a locked – or staked – version of its stablecoin USD0 pegged at $1, briefly fell. under 90 cents from $1 on the Curve decentralized market. The protocol’s governance token, USUAL, fell as much as 17% on the day before recovering some of the losses.
The sale was caused by a change in the USD0++ token redemption mechanism introduced by the team on Thursday that caught investors and liquidity providers off guard.
By design, USD0 is backed by short-term government bonds to keep its price at $1. Stakers on Usual receive USD0++ which comes with a four-year lock-up period, meaning investors are locked in their funds without being able to redeem in exchange for rewards earned in the form of USD0 and USUAL tokens of the protocol. Performance farmers rushed in, catapulting the protocols 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 function called “exit dual-path” will allow investors to redeem the previously closed tokens at a floor price of 0.87 USD0, or at par, giving up a part of the rewards earned, calling the exchange 1: 1. rate in question.
The sudden implementation was pulling criticizes DeFi users for changing the design without notice. In some liquidity poolsthe price of the token was hardcoded to the value of $1, causing havoc among borrowers and liquidity providers.
“They just allowed the degens to jump in 1:1 and then tap the USD0++?”, Ignas, a DeFi analyst, said X post. “They pushed for the largest USD0/USD0++ pool on Curve knowing full well that USD0++ should not trade 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 for each other.” noticed Patrick McKenzie, an advisor to the payments company Stripe.
The Usual team said in a statement that the design change with the principle of the unstaking mechanism was communicated in advance from October. The protocol will also enable revenue switching starting from Monday and will start distributing the protocol’s earnings to governance token holders who stake their coin for longer (USUALx).
“The current situation regarding USD0++ stems from a misunderstanding of the protocol’s mechanisms with a communication that should have been better articulated,” the statement said. “We apologize and will continue to do our best to communicate transparent information to users.”
The episode is another lesson for crypto investors about the potential risks of DeFi products that entice users with high returns via token incentives and reward flyers.
“Users who take the risk need to know what the exact rules are and be able to trust that they will not change, otherwise it can result in market panic,” Rob Hadick, general partner of the venture capital company Dragonfly, told CoinDesk. “We should be grateful that this is happening now, before the protocol becomes a risk to the wider DeFi ecosystem.”
However, USD0++ recently traded at 0.91 USD0 in the Curve pool, while the protocol total value closeda key DeFi metric, fell below $1.6 billion.
