Recently, the decentralized finance (DeFi) market has been shaken, with the price of the stablecoin USD0++ falling to $0.94 on the decentralized exchange (DEX), decoupling 6% from its proper price of $1. The reason behind this is not only related to the protocol’s newly launched “double exit mechanism”, but also reflects its complex token economic model and the game of user behavior.

What are USD0 and USD0++?

USD0 is an ordinary stable currency whose value is 100% guaranteed by U.S. Treasury bonds. Users can convert USD0 pledge into USD0++. USD0++ is the key to passive income of the entire protocol. After users lock it up, they can obtain the $USUAL token issued by the protocol. coins in return.

However, the staking period for USD0++ is 4 years, during which no interest will be generated, functioning similarly to a 'zero-coupon bond' rather than a stablecoin. After users lock up their holdings, they must wait until maturity to redeem at a price of 1 dollar. Since the early team provided an unconditional 1:1 exit guarantee, this potential long-term lock-up condition caught many early free-riding players off guard.

In the current market environment, if we calculate with an annual yield of 4%, the reasonable present value of USD0++ should be approximately $0.855.

What is the newly launched 'dual exit mechanism'?

In order to improve the economic model, the team has eliminated the unsustainable 'free-riding' model, and the protocol has decided to charge players for exits and introduce new exit options:

Conditional Exit:

Users can redeem USD0++ at a 1:1 ratio, but they need to forfeit some of the accumulated USUAL rewards. This mechanism is expected to go live next week and may require burning USUAL to enable.

Unconditional Exit:

Users can redeem USD0++ at the current fixed price, which is currently set at 0.87 by the official, and will gradually rise to 1 over time, but it will take 4 years.

After the new exit mechanism was launched, due to panic (many people were fearful of the bottom price of 0.87) coupled with DeFi players using leveraged mining withdrawing their investments, it is better for ordinary investors to buy more liquid and stable-return products like government bond ETFs rather than locking up for 4 years.

As a result, a large amount of USD0++ was sold off in the market, causing an imbalance in its proportion in the Curve liquidity pool, leading to a price decoupling.

From the current situation, there is no issue with the reserves of USD0 itself, and the likelihood of systemic risk occurring is relatively low, but it remains to be seen when large holders will be willing to enter the secondary market to fill the gap between the market price of USD0 and the pegged price.

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