In-depth Analysis of Usual: The Tricks Behind USD0++ Decoupling and Loop Loan Liquidation

Recently, the USD0++ decoupling issued by Usual has become a hot topic in the market, causing panic among users. After being listed on top exchanges last November, the project surged over 10 times. Its RWA-based stablecoin issuance mechanism and token model are similar to the previous cycle’s Luna and OlympusDAO, coupled with the endorsement from French Member of Parliament Pierre Person’s government background, Usual once gained widespread attention in the market.

Although people once had high hopes for Usual, recent “drama” has brought it down from its pedestal. On January 10th, Usual’s official announcement stated that it would modify the early redemption rules for USD0++, which briefly depegged to nearly 0.9 USD. As of the evening of January 15th, it was still hovering around 0.9 USD.

The controversy surrounding Usual has reached a tipping point, with market dissatisfaction fully erupting. Although the overall product logic of Usual is not complicated, it involves many concepts and intricate details, with multiple different Tokens in the project, and many people may not have a systematic understanding of the causes and effects.

This article aims to systematically sort out the product logic, economic model, and the causal relationship of this USD0++ decoupling from the perspective of Defi product design, helping more people deepen their understanding and thinking. We first put forward a seemingly “conspiracy theory” viewpoint:

In the recent announcement, Usual set the unconditional floor price for USD0++ to USD0 at 0.87, aiming to get liquidated the USD0++/USDC circular loan positions on the Morpha lending platform, addressing the main users in mining, withdrawing, and selling, but without causing systemic bad debts in the USDC++/USDC vault (the liquidation line LTV is 0.86).

Next, we will elaborate on the relationship between USD0, USD0++, Usual, and their governance Token, helping everyone to understand the tricks behind Usual.

Understand the products of the Token issued by Usual

In Usual’s product system, there are mainly 4 types of Tokens: stablecoin USD0, bond token USD0++, and project token USUAL. Additionally, there is a governance token USUALx, but the latter is not important, so Usual’s product logic is mainly divided into three layers according to the first three types of Tokens.

Layer 1: Stablecoin USD0

USD0 is a stablecoin that is fully collateralized, using RWA assets as collateral, and every USD0 is backed by an equivalent amount of RWA assets. Currently, most USD0 are minted using USYC, while a portion of USD0 uses M as collateral. (Both USYC and M are RWA assets backed by U.S. short-term treasury bonds.)

The minting contract address for USD0 is 0xde6e1F680C4816446C8D515989E2358636A38b04. This address allows users to mint USD0 in two ways:

1. Directly mint USD0 with RWA assets. Users can inject tokens supported by Usual such as USYC into the contract to mint the USD0 stablecoin;

2. Transfer USDC to RWA providers to mint USD0.

The first solution is relatively simple. Users input a certain amount of RWA tokens, and the USUAL contract will calculate how much these RWA tokens are worth in USD, then send the user the corresponding USD0 stablecoin. When users redeem, based on the amount of USD0 the user inputs and the price of RWA tokens, the corresponding value of RWA tokens will be returned. During this process, the USUAL protocol will deduct a portion of the fees.

The second option for minting USD0 is more interesting, as it allows users to mint USD0 directly with USDC. However, the participation of an RWA provider/payor is necessary in this process. Simply put, users need to place an order through the Swapper Engine contract, declare the amount of USDC they are willing to pay, and send the USDC to the Swapper Engine contract. Once the order is matched, users can automatically receive USD0.

Second Layer: Enhanced Treasury Bonds USD0++

In the above text, we mentioned that when users mint USD0 assets, they need to pledge RWA assets, but the interest generated from RWA assets will not be directly distributed to those who mint USD0. So where does this portion of interest ultimately flow? The answer is that it flows to the Usual DAO organization, which will then redistribute the interest of the underlying RWA assets.

Holders of USD0++ can earn interest income. If you stake USD0 to mint USD0++, becoming a USD0++ holder, you can share in the interest of the underlying RWA assets. However, it is important to note that only the portion of USD0 that corresponds to the minted USD0++ will have its underlying RWA interest distributed to USD0++ holders.

In addition, USD0++ holders can also receive additional USUAL token incentives. USUAL will daily issue new tokens and distribute them through a specific algorithm, with 45% of the new tokens allocated to USD0++ holders. In summary, the earnings from USD0++ are divided into two parts:

1. The yield of the underlying RWA assets corresponding to USD0++.
2. Daily new USUAL token distribution profits;

With the support of the above mechanism, the staking APY of USD0++ usually remains above 50%, and still has 24% after the incident. However, as mentioned above, a large portion of the earnings for USD0++ holders is distributed in USUAL tokens, which are subject to significant fluctuations in value. In the recent tumultuous period for Usual, this yield is almost certainly not guaranteed.

According to Usual’s design, USD0 can be staked 1:1 to mint USD0++, with a default lock-up period of 4 years. Therefore, USD0++ is similar to a tokenized 4-year floating rate bond, and when users hold USD0++, they can earn interest denominated in USUAL. If a user cannot wait for 4 years and wishes to redeem USD0, they can first exit through secondary markets such as Curve, directly exchanging via the USD0++/USD0 trading pair for the latter.

In addition to Curve, there is another solution, which is to use USD0++ as collateral in lending protocols like Morpho to borrow assets such as USDC. At this point, users need to pay interest. The following image shows the lending pool for borrowing USDC using USD0++ in Morpho, where the current annual interest rate is 19.6%.

Layer 3: Project tokens USUAL and USUALx

Users can obtain USUAL by staking USD0++ or directly purchasing from the secondary market. USUAL can also be staked to mint governance token USUALx at a 1:1 ratio. Whenever USUAL is issued, holders of USUALx can receive 10% of it. Currently, according to the documentation, there is also an exit mechanism for converting USUALx back to USUAL, but it requires a certain fee to be paid upon exit.

At this point, the three-tier product logic of Usual is as follows:

1. The RWA assets underlying USD0 generate interest income.
2. A portion of the profits is distributed to USD0++ holders
3. Under the empowerment of the USUAL token, the APY yield for holding USD0++ is further elevated.
4. Encourage users to further mint USD0 and then re-mint it as USD0++, thereby obtaining USUAL.
5. The existence of USUALx can encourage USUAL holders to lock up their assets.

De-pegging Events: The “Conspiracy Theory” Behind Modifying Redemption Rules — Cycle Loan Explosion and Morpha Liquidation Line

The previous redemption mechanism of Usual allowed for a 1:1 exchange of USD0++ for USD0, which is a guaranteed redemption. For stablecoin holders, an APY exceeding 50% is highly attractive, and the guaranteed redemption provides a clear and safe exit mechanism. Coupled with the backing of the French government, Usual successfully attracted many large investors. However, on January 10, the official announcement modified the redemption rules, changing it to allow users to choose one of the following two redemption mechanisms:

1. Conditional redemption. The redemption ratio remains at 1:1, but a considerable portion of the income distributed by USUAL must be paid. This income is divided into 1/3 for USUAL holders, 1/3 for USUALx holders, and 1/3 is burned.

2. Unconditional redemption, no deduction of earnings, but no guarantee, which means the redemption ratio of USD0 is lowered to a minimum of 87%, and the official statement indicates that this ratio may return to 100% over time.

So back to the point, why does Usual have to come up with such seemingly unreasonable terms?

As mentioned earlier, USD0++ is essentially a tokenized 4-year floating rate bond, and opting out directly means a forced request for Usual to redeem the bond early. The USUAL protocol believes that users commit to locking USD0 for four years when minting USD0++, and exiting midway is considered a breach of contract, requiring a penalty fee.

According to the USD0++ white paper, if a user initially deposits 1 USD of USD0, when the user wants to exit early, they need to make up for the future interest earnings on that 1 USD. The assets that the user ultimately redeems are:

1 USD - Future interest income. As a result, the forced redemption price floor of USD0++ is below 1 USD.

The announcement content of Usual will only take effect on February 1, but many users started fleeing immediately, causing a chain reaction. It is generally believed that based on the redemption mechanism in the announcement, USD0++ can no longer maintain its rigid redemption with USD0, so holders of USD0++ began to exit early.

This panic sentiment naturally spread to the secondary market, causing people to frantically sell USD0++, leading to a severe imbalance in the USD0/USD0++ trading pair on Curve, with a ratio reaching an exaggerated 9:91; moreover, the price of USUAL plummeted as a result. Under market pressure, Usual decided to advance the announcement to take effect next week, in order to raise the cost for users abandoning USD0++ to redeem USD0 as much as possible, serving to protect the price of USD0++.

Of course, some people say that USD0++ is not actually a stablecoin, but a bond, so the concept of decoupling does not exist. While this viewpoint is theoretically correct, we would like to express our opposition to it.

First, the unspoken rule of the crypto market is that only stablecoins will have the “USD” designation in their names. Second, USD0++ is essentially exchanged 1:1 with stablecoins in Usual, and people assume its value is equivalent to that of a stablecoin; third, the Curve stablecoin trading pool includes trading pairs with USD0++. If USD0++ does not want to be considered a stablecoin, it can change its name and request Curve to delist USD0++, or move to a non-stablecoin pool.

So what is the motivation of the project team to blur the relationship between USD0++ and bonds and stablecoins? There may be two points. (Note: The following views contain conspiracy theory elements and are based on our speculation from some clues, so please do not take them seriously.)

1. First is the precision liquidation of the revolving loan. Why is the unconditional redemption floor ratio coefficient set at 0.87, just a bit higher than the liquidation line of 0.86 on Morpha?

This involves another decentralized lending protocol: Morpho. Morpho is known for creating an elegant DeFi protocol with just 650 lines of minimalist code. The practice of one fish eating multiple meals is a tradition in DeFi, where many users mint USD0++ and, in order to increase capital utilization, lend USD0++ in Morpho to borrow USDC, and then use the borrowed USDC to mint USD0 and USD0++, thus forming a circular loan.

The revolving loan can significantly increase the user’s position within the lending protocol, and more importantly, the USUAL protocol will allocate USUAL token incentives for the positions within the lending protocol.

The loop lending has brought a better TVL to Usual, but over time, there is an increasing risk of leveraged chain breaks, and these loop lending users have relied on repeatedly minting USD0++, acquiring a large amount of USUAL tokens, which are the main force for mining, withdrawing, and selling. If Usual wants to develop in the long term, it must solve this problem.

Let’s briefly talk about the leverage ratio of revolving loans. Suppose you borrow USDC back and forth as shown in the diagram, mint USD0++, deposit USD0++, and borrow USDC again, looping this process while maintaining a fixed deposit/borrow value ratio (LTV) in Morpha.

Assuming LTV = 50%, your initial funds are 100 USD0++ (assumed value of 100 dollars), and the value of USDC borrowed each time is stored.