The governance token, USUAL, saw a 17% drop before partially recovering. Critics pointed out that the new “dual exit” feature, which allows early exits at discounted prices, weakened the $1 peg and disrupted the balance in DeFi pools, catching investors off guard. The Usual team apologized for the confusion caused by the lack of information and emphasized that the change had been previously announced.

Sell-off Waves in Usual Protocol

Usual Protocol had shown a remarkable rise in recent months. However, a change in the protocol’s yield-bearing token triggered a sell-off in the secondary market, leading to community backlash on Friday.

Amid the chaos, the stake version of the 1-dollar stablecoin USD0, known as USD0++, briefly fell below 90 cents on the decentralized marketplace Curve. The governance token, USUAL, dropped by as much as 17% before partially recovering.

The change in the redemption mechanism of USD0++, introduced by the Usual team on Thursday, led to the sell-off wave. USD0 is backed by short-term government bonds to maintain its price at $1.

Users who stake in the Usual protocol receive USD0++ tokens with a four-year lock-up period, meaning investors must tie up their funds in the protocol without being able to use them. With the total value locked (TVL), a key DeFi metric, rising from $300 million in October to $1.87 billion earlier this week, yield farmers had shown significant interest.

The protocol faced heavy criticism. The new “dual exit” feature allows investors to redeem their staked tokens early at a price of $0.87 USD0 or an equivalent price by forgoing part of their rewards, leading to questions about the 1:1 exchange rate.

This sudden change drew backlash among DeFi users due to the design change being made without prior notice. In some liquidity pools, the token price was fixed, which caused confusion among borrowers and liquidity providers. Renowned DeFi analyst Ignas expressed on X:

“They allowed degens to jump into 1:1 and then rug pulled USD0++? They knew very well that USD0++ shouldn’t be trading at 1:1, yet they pushed it for the largest USD0/USD0++ pool on Curve.”

Stripe advisor Patrick McKenzie commented:

“DeFi continues to learn the most important truth about pegs: a peg is a story about why two things that aren’t the same can be used interchangeably.”

The Usual team stated in their announcement that the early redemption mechanism and design change had been communicated since October. The protocol also announced that it would activate its revenue sharing mechanism starting Monday, distributing earnings to governance token holders (USUALx) who stake their coins for the long term.

Risks in DeFi Products

This incident once again highlighted the nature of DeFi products, which offer high returns but carry potential risks for crypto investors. Dragonfly Capital’s general partner emphasized that when users take risks, they must be able to trust that the rules are clearly defined and unchanging, or panic could ensue in the market. He also noted that it was fortunate that this happened before it became a threat to the broader DeFi ecosystem.

Meanwhile, the USD0++ token was recently trading at $0.91 USD0 in the Curve pool, and the protocol’s total value locked (TVL) had fallen below $1.6 billion.

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