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Usual Protocol Sells Out Investors with Sneaky Update, Token Price Plummets 17%

HomeUsual Protocol Sells Out Investors with Sneaky Update, Token Price Plummets 17%

Usual Protocol Sells Out Investors with Sneaky Update, Token Price Plummets 17%

Usual Protocol Sells Out Investors with Sneaky Update, Token Price Plummets 17%

Usual Protocol Faces Backlash Over Yield-Generating Token Tweak

Usual Protocol, an emerging decentralized finance (DeFi) platform that has witnessed an impressive surge over the past few months, encountered community backlash on Friday after a tweak in its yield-generating token triggered a sell-off on secondary markets. The incident highlights the risks associated with DeFi products that offer high-yields via token incentives and rewards flywheels.

The protocol's USD0++ token, which represents a locked-up – or staked – version of its $1-anchored stablecoin USD0, fell briefly below 90 cents from $1 on decentralized marketplace Curve. This sudden drop was caused by the introduction of a "dual-path exit" feature that allows investors to redeem their locked-up tokens early at a 0.87 USD0 floor price or at par, by giving up a part of the rewards earned.

The Impact of the Tweak

The tweak in the protocol's yield-generating token triggered a sell-off on secondary markets, causing the protocol's governance token, USUAL, to plummet as much as 17% through the day before recovering some of the losses. The selloff was caused by a change in the redemption mechanism of USD0++ token introduced by the team on Thursday that caught investors and liquidity providers off-guard.

By design, USD0 is backed by short-term government securities to keep its price at $1. Stakers on Usual receive USD0++ that comes with a four-year lock-up period, meaning that investors are locking up their funds without being able to redeem in exchange for rewards earned in the form of the protocol's USD0 and USUAL tokens.

The sudden implementation of the dual-path exit feature drew criticism across DeFi users for changing the design without warning. In certain liquidity pools, the token's price was hardcoded to be worth $1, causing havoc among borrowers and liquidity providers.

Community Reaction

The incident sparked a heated discussion in the DeFi community, with prominent DeFi analyst Ignas stating that the team allowed degens (high-risk traders) to jump in at 1:1 and then "rug" (remove support for) USD0++. He added that the team pushed for the largest USD0/USD0++ pool on Curve knowing all well that USD0++ shouldn't trade at 1:1.

Patrick McKenzie, advisor to payments firm Stripe, noted that DeFi continues learning 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."

Usual Protocol's Response

The Usual team responded to the backlash by stating that the design change with the early unstaking mechanism was communicated in advance from October. The protocol will also activate the revenue switch starting on Monday and start distributing the protocol's earnings to governance token holders who stake their coin for longer-term (USUALx).

The statement reads, "The current situation regarding USD0++ stems from a misunderstanding of the protocol’s mechanisms along with a communication that should have been better articulated. We apologize and we’ll continue to do our best to communicate transparent information to users."

Lessons Learned

The episode serves as another lesson for crypto investors about the potential risks of DeFi products that entice users with high-yields via token incentives and rewards flywheels.

Users who are taking risk need to know what the exact rules are and be able to trust that they won't change, otherwise it can result in market panic. As Rob Hadick, general partner at venture capital firm Dragonfly, told CoinDesk, "We should be thankful this happened now, before the protocol became a risk to the broader DeFi ecosystem."

Conclusion

The incident highlights the importance of transparent communication and clear understanding of the rules associated with DeFi products. The Usual Protocol's tweak in its yield-generating token triggered a sell-off on secondary markets, causing market panic and sparking a heated discussion in the DeFi community.

As the DeFi ecosystem continues to evolve, it is essential for users to be aware of the potential risks associated with these high-yield products and to carefully consider the rules and mechanisms involved.