DeFi Chaos: Usual Protocol Update Sparks Massive Sell-Off

 

Usual Protocol's unexpected update shakes DeFi markets, plummeting token values and raising concerns

Red-Hot DeFi Platform Faces Backlash After Token Update

The decentralized finance (DeFi) ecosystem thrives on transparency, trust, and innovation. However, rapid changes in protocols often reveal cracks in this burgeoning sector. A prime example unfolded recently with Usual Protocol, a rising star in the DeFi landscape, when a surprise update to its token redemption mechanism sent shockwaves through the market.

Background: Usual Protocol’s Rise in DeFi

Launched as a robust and innovative player in the DeFi space, Usual Protocol gained popularity by offering lucrative rewards to its users. Its native stablecoin, USD0, and its staked counterpart, USD0++, promised consistent returns, backed by short-term government securities to ensure price stability. Investors locked their USD0 in exchange for USD0++, committing to a four-year lock-up period to earn attractive rewards.

This strategy attracted significant attention, catapulting the protocol's total value locked (TVL) to an impressive $1.87 billion in January 2025, up from $300 million just a few months earlier. However, the appeal of high yields came with inherent risks.

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The “Dual-Path Exit” Mechanism: A Sudden Shock

On Thursday, the protocol introduced a new feature called the dual-path exit, which allowed stakers to unlock their USD0++ early by either:

1. Redeeming at a discounted floor price of $0.87 per USD0.
2. Redeeming at par ($1) by forgoing accrued rewards.

While the change aimed to provide more flexibility for investors, it had unintended consequences. Critics argued that this mechanism undermined USD0++’s $1 peg, causing instability in liquidity pools and unexpected sell-offs.

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Market Impact: Tokens in Turmoil

The repercussions were swift and dramatic:

• USD0++ Price Drop: The staked token’s value briefly fell below $0.90 on decentralized marketplaces like Curve.
• USUAL Governance Token: The governance token, USUAL, plunged by 17% in a single day before showing signs of recovery.
• TVL Decline: Usual Protocol's TVL dropped below $1.6 billion as investors rushed to exit positions.

This disruption left borrowers and liquidity providers scrambling. Liquidity pools hardcoded to treat USD0++ as equal to $1 faced a cascading crisis as their assumptions no longer held true.

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Community Backlash: Transparency in Question

DeFi operates on trust and predictable mechanisms. Usual Protocol’s sudden implementation of the dual-path exit without clear communication drew ire from the community. Prominent DeFi analyst Ignas criticized the move in a viral post on X (formerly Twitter), accusing the team of enabling “degens” to exploit the pool while misleading others about the true value of USD0++.

"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," noted Patrick McKenzie, a payments industry expert.

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The Protocol’s Response: Damage Control

Acknowledging the backlash, the Usual team released a statement defending the update as a planned change communicated since October 2024. However, they admitted their messaging lacked clarity:

"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 will continue to strive for transparent user communication."

In an effort to stabilize the situation, Usual Protocol announced the activation of its revenue-sharing mechanism. Starting Monday, governance token holders staking USUALx (a long-term version of the token) will receive distributions from the protocol’s earnings.

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Lessons for DeFi Investors

This episode highlights a recurring theme in DeFi: the delicate balance between innovation and stability. High-yield incentives often come with increased risk, and sudden design changes can trigger market panic.

As Rob Hadick, a general partner at Dragonfly Capital, stated:

"Users who are taking risks need to know the exact rules and trust that they won't change. Otherwise, it can result in market panic. We should be thankful this happened now, before the protocol became a broader systemic risk."

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Broader Implications for DeFi

The events surrounding Usual Protocol serve as a cautionary tale for the DeFi sector:

1. Transparent Communication: Protocols must clearly communicate changes, especially those impacting tokenomics or user investments.
2. Resilient Mechanisms: Ensuring the stability of pegged assets is critical for market trust.
3. Risk Awareness: Investors must thoroughly understand the mechanisms and risks before committing funds.

While USD0++ has since recovered to $0.91, and USUAL has regained some of its losses, the incident underscores the volatility inherent in DeFi.

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Conclusion

The Usual Protocol controversy is a stark reminder of the importance of clarity, predictability, and trust in DeFi. As the sector evolves, it must address these growing pains to solidify its place in the broader financial ecosystem.