Usual Labs Changes the Code for the Bonds Backing Its USD0 Stablecoin, Plunging Several Apps That Integrated the Token into Chaos

DeFi Labs, the company behind the stablecoin protocol Usual, made changes to the code for the bonds backing its USD0 stablecoin on Thursday, causing problems for several applications that had integrated the token.

The code change from Usual reduced the fixed price of the staked, bond-like version of USD0, called USD0++, from $0.995 to $0.87.

While the protocol team said the change had been announced previously and was planned since October, the move appeared to have caught investors, users, and DeFi developers by surprise.

On the Usual Discord server, a messaging app that is popular in crypto, investors criticized the communication around the change.

“The fact that there is chaos in the market surely lets you know that you guys have messed up here,” one user said. “How are you guys not taking any responsibility?”

DeFi Labs did not immediately respond to DL News’ requests for comment.

Many DeFi applications treated USD0 and its staked version as equal in value. They were designed to allow the two assets to be swapped one-to-one.

That is no longer the case. Now, those managing the DeFi integrations are scrambling to adapt.

Users of Pendle, another protocol which lets users split assets into tokens that represent their principal and yield-bearing parts, may face losses after the value of USD0++ principal tokens declined in the aftermath of the change.

Many investors had staked the bond-like USD0++ on the understanding that it could be redeemed at a one-to-one ratio for USD0, which is pegged to the dollar.

However, with the new change, USD0++ can only be redeemed for $0.87, unless holders wait until 2028 when the bond token matures.

How does USD0 work?

USD0 is a token pegged to the dollar and backed one-to-one by real-world assets, such as short-dated US treasury bills.

Holders can stake USD0, converting it to USD0++, which is locked for four years and receives yield paid out in the protocol’s native token, USUAL.

Before Thursday’s changes, documentation on the Usual site said that USD0++ holders would be able to exchange their tokens for USD0 at below a one-to-one ratio.

After the changes, Usual updated its documentation to include the $0.87 floor on such redemptions.

A previous version of Usual’s documentation from before the change did not say the floor for USD0++ would be hardcoded to $0.87 in the future.

Conditional exit

There may be hope for USD0++ holders who weren’t aware of the change.

On the Usual Discord, community lead Noé Giglio confirmed to investors that a conditional exit from USD0++ to the dollar-pegged USD0 at a one-to-one ratio would go live early next week.

The redemptions, however, require users to forfeit a portion of accrued yields on their USD0++ holdings.

It’s not clear if those who choose to keep holding their USD0++ bond tokens will ever turn a profit, even when they mature.

“This is a very tricky situation, as if the USD0++ will be traded as a zero coupon bond, it means that the position will be underwater — basically bad debt in disguise — forever,” Stani Kulechov, founder of top DeFi lending protocol Aave, said on Telegram.

“Even after four years of maturity, the borrowers already might suffer so much borrowing costs that they just dump their positions as unprofitable and never repay,” he said.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.