USD0++ is the next UST? Do you need to panic about USUAL positions?

Author: Ray’s New World, BlockBeats

2024 has become a big year for stablecoin projects. More and more innovative new stablecoin projects have emerged in the market. In the second half of last year alone, at least 23 stablecoin projects received high funding ranging from 2 million to 45 million. amount of financing. In addition to Ethena, which surpassed DAI's market share with USDe, Usual has become another eye-catching stablecoin project. Not only is it endorsed by the government background of French Congressman Pierre Person, but Usual will be listed on Binance for the first time at the end of 2024, and its performance in the market is also obvious to all.

However, Usual, once a hot commodity in the market, not only saw its token Usual fall by more than 30% within a week, but its token USD0++ was also instantly unanchored to around US$0.946 this morning. A USD0++ token can only be exchanged for about 0.94. Dollar. Currently, the proportion of USD0++ in the USD0/USD0++ pool on Curve is tilted to 90.75%.

USD0++ unanchored, source: Curve

What happened to Usual? Why did USD0++ suddenly crash?

A panicked flight caused by an announcement

The unanchoring of USD0++ started with an official announcement issued by Usual on the morning of January 10th. In the announcement, Usual officially changed the redemption conditions of USD0++ from the original 1:1 redemption to a new double withdrawal method. One of the ways is to conditionally withdraw. Users can still withdraw USD0++ at a 1:1 ratio, but they need to burn part of the proceeds when withdrawing. Another way is to withdraw unconditionally, but unlike the previous deterministic 1:1, the official guaranteed withdrawal ratio is 0.87:1, and will gradually return to $1 over time.

Usual announced two exit methods, source: Usual official website

Usual's announcement quickly spread among the Usual community. Therefore, under the fermentation of the new USD0++ redemption regulations, panic began to gradually spread from the large whales to the bottom retail investors. In this "leopard chasing man" game, the user who runs first will always suffer less losses than the user who is slower. After today's announcement, retail investors also cut their flesh and fled due to the flight of large investors and the spread of panic. The outflow of USD0 has not only begun to accelerate, but USD0/USD0++ in Curve has been "smashed through". As a large amount of USD0++ was redeemed, the proportion of USD0 also dropped to an astonishing 8.18%.

Source: Curve

Let’s take the timeline back to when USUAL was listed on Binance. Initially, the redemption mechanism set by Usual officials last year allowed redemption at a ratio of 1:1. Unlike Ethena, which is more focused on To B, Usual's products, which are more focused on To C, have attracted many big players. In this situation with Usual's official 1:1 complete redemption guarantee, many large investors not only take large positions, but also continuously increase their leverage and capital efficiency through circular lending and other methods. Because this is essentially a risk-free benefit that Usual gives to all users. This method of handling funds is feasible as long as Usual officials do not change the rules of the game. It means that large investors can obtain the benefits of the mining currency USUAL without paying extra opportunity costs.

At the same time, the price of USUAL has also been rising. The higher price has led to a surge in the book APY, thus attracting more users to pledge, and a positive flywheel has been formed under the pull of USUAL. Higher prices attract excess TVL, which in turn drives prices higher, and so on. Usual's high degree of control over mining coins and paper APY attracting TVL is almost a conspiracy on the table. And small retail investors can also follow the big investors to drink soup under Usual's "left foot stepping on the right foot" model. So Usual's forward flywheel quickly started turning.

Usual’s super high APY, source: Usual official website

The most critical thing about such a mechanism is the exit issue. For long-term holders, USUAL will link the additional issuance to the income of the overall agreement. The higher the TVL, the less USUAL will issue additional issuance, forming a deflationary mechanism. On the supply side, the supply of USUAL is reduced, artificially creating a certain degree of scarcity. The team has not left behind on the mechanism design of USUAL. After staking USUAL tokens, they will receive USUALx. These holders can receive 10% of the total newly minted USUAL every day to reward early participants in the ecosystem. At the same time, when USD0++ is redeemed in advance, 33% of the destroyed USUAL will be distributed to USUALx holders, forming an additional source of income. So for short-term holders, one is to choose to buy USUAL and run away with the bucket, and the other is to continue to hold USUAL and pledge it to obtain more income. Here comes the question, should we choose to "make a big difference" or "unplug the network cable and run away"? Under the premise that the currency price continues to rise, running away with a bucket will only get the current USUAL income. If you choose to stand on the side of time, you will get "pledge income + USUAL token increase + additional income". The rise and fall of Usual is constantly being drawn into the economic game between short-term holders and long-term holders.

But all of Destiny's gifts actually come with a price tag. Usual officials have hinted long ago that USD0++ needs to charge an exit fee. And almost all Usual participants tacitly agree on who will be the last one left before the building collapses.

Why is it the “mysterious” 0.87?

So, why did the official set the unconditional exit ratio to 0.87 in today's announcement? How did the official consider setting the precise ratio of 0.87?

profit burning theory

The ratio of 0.87:1 set in the official announcement has caused the interests of large investors to weigh. Since the previous 1:1 guaranteed redemption strategy has expired and lost the official guarantee, the problem that big investors now need to face is how to choose generals among the "dwarfs". If conditional redemption is adopted, investors need to return part of the subsequent profits to the project side, but the official details of the retracement of this part of the profits have not yet been disclosed. On the contrary, if you accept the unconditional redemption method, then the worst case scenario can only guarantee a minimum of 0.87, and this 0.13 part becomes the core of the game. When either of the two exit methods has a higher return, funds will of course vote for the exit method with the highest return, but a good mechanism design should give users a choice rather than being "one-sided." Therefore, the current 0.13 space is likely to be the part that needs to be burned for profits that has not yet been officially announced. Let the user choose between the two methods. Therefore, from the user's perspective, if you have to pay a minimum guarantee cost of 0.13 in the future, it is better to sell at the current unanchored price (currently maintained at around 0.94). USD0++ will also shed its previous packaging and return to the economic essence of its bonds. Among them, 0.13 is the discount part, and 0.87 is the reflection of its own value.

liquidation theory

Since Usual previously provided users with a 1:1 anchoring mechanism of USD0++, many large investors can safely take positions to obtain almost risk-free returns, and further increase leverage and expand capital utilization efficiency through lending protocols such as Morpho. Usually, these users who start revolving loans will mortgage their USD0++, lend a certain amount of USDC, and then exchange this part of USDC for USD0++, and then start a new cycle. This type of users who are keen on revolving loans have provided Usual with considerable TVL, and they are constantly rising into the sky with their left foot and right foot. However, there is also a liquidation line behind the "perpetual motion machine" of TVL.

In the Morpho protocol, the USD0 liquidation line is determined by the liquidation loan-to-value ratio (LLTV). LLTV is a fixed ratio. When the user's loan-to-value ratio (LTV) exceeds the LLTV, the user's position will face the risk of liquidation. The current liquidation line of Morpho is 86%, which is only one step away from the official unconditional exit support of 0.87.

The liquidation line of USD0++ in Morpho is 86%. Source: Morpho

The 0.87 in Usual's official announcement is just above Morpho's liquidation line of 0.86. It can be said to be the last barrier set up by the authorities to prevent systemic liquidation risks. Although the setting of 0.87 is a final support, it keeps the project decent to users.

But this is also the reason why many large investors stay on the sidelines. There are 13 points in the middle of the space that can fluctuate freely. More people will interpret it as that as long as the final series of liquidation does not occur, it will eventually be allowed to "free fall".

What are the long- and short-term effects of unanchoring?

So what will happen after USD0++ breaks its anchor? The current panic about the USD0++ pair in the market has not ended. Most people are taking a wait-and-see view on risk control, staying put. The market's reasonable value for USD0++ is stable at around 0.94. This consensus is based on the situation after the temporary announcement. The official has not disclosed in detail how the "unconditional exit" in the exit mechanism will be burned and how much revenue will be deducted. It is expected that further details will be announced next week. At the extreme end, if the official price next week is not the same as the 13-point space predicted by the market but will burn 0.5% of USUAL, then USD0++ will quickly anchor back to the 0.995 level. The situation of USD0++ re-anchoring will depend on the burning details after Usual officially announces it next week.

No matter how the final mechanism details are decided, it will benefit holders of tokens UsualX and USUAL. Usual officially reduces the revenue of USD0++ through the design of a new exit method. Although the method of triggering market exit is too drastic, it will cause the TVL of USUAL/USD0++ to decrease, which will also increase the price of the token USUAL. After starting to burn, USUAL will be consumed, thereby obtaining further token value capture, and the price will therefore become stronger. It can also be seen from the mechanism design of Usual that USUAL is a key part of the flywheel rotation in the design of the protocol flywheel. USUAL has fallen by about 58% since the high of 1.6, and USUAL needs to take off again to make the flywheel turn again.

The price of token USUAL surged by 58%. Source: tradingview

What is ironic is that although a large number of arbitrageurs have contributed a large amount of TVL to Usual through Morpho's revolving loans, the official bottom line of 0.87 is more like a warning to those who are in the 0.86 liquidation line of revolving loans.

Now Usual has officially removed the "privilege" of the previous 1:1 rigid redemption, correcting the previous mechanism that "should not have existed". As for the return of USD0++, the entire market is also waiting for Usual’s official announcement next week, and Blockbeats will continue to follow up.