Hey Edge readers,
This week, we’re diving into a lesser-known but fascinating corner of DeFi, USD0++ and the reflexive mechanics behind its soft peg.
While many stablecoins aim to keep a clean 1:1 peg to the dollar, USD0++ plays a different game. It’s a locked, yield-bearing stablecoin that trades below par on the secondary market, but still manages to function as leverage-friendly collateral thanks to a clever lending system called USL. The result is a feedback machine that can either hold the system up or bring it down depending on sentiment and liquidity conditions.
Stay sharp. 🫡
- The Exponential team
Stability on a Loop: Understanding USD0++ and USL
Stablecoins aren’t always as “stable” as they seem, especially when redemption mechanics are gated, delayed, or rely on complex offchain processes. This week, we’re unpacking USD0++, a yield-bearing, time-locked version of USD0 that plays a central role in the Usual ecosystem and and introduces some reflexive dynamics that can amplify both stability and volatility.
What is USD0++?
USD0++ is a yield-bearing version of USD0, a stablecoin issued by the Usual DAO. When you mint USD0++, you’re locking your USD0 for 4 years in exchange for a fixed yield. Because it can’t be redeemed for full value until maturity, USD0++ often trades below $1 on secondary markets.
To support price stability, the protocol offers a soft redemption floor at 0.92 USD0. But secondary market prices can still dip below this level due to factors like:
- KYC requirements or delays when redeeming
- Offchain frictions
- Shallow liquidity or shifts in market confidence
Enter: Usual Stability Loans (USL)
Right now, nearly 92% of all USD0 is locked in USD0++. To unlock liquidity for USD0++ holders and improve the secondary pricing, the protocol introduced a clever mechanism called the Usual Stability Loan (USL).
USL treats USD0++ at par value ($1), regardless of its market price, and offers loans at 83% loan-to-value (LTV) with a fixed 5% annual interest rate. The DAO itself supplies all the USD0 used for lending.
This allows users to loop: use USD0++ as collateral → borrow USD0 → buy more USD0++. When confidence is high, this “looping” creates buy pressure, narrows the discount on USD0++, and generates revenue for the DAO through interest payments.
Currently, the collateral backing for USD0 is:
- 43.5% backed by USL loans (i.e., users borrowing USD0 against USD0++)
- 46.1% backed by USYC, a tokenized version of U.S. Treasuries
- The rest is split across smaller tokenized stablecoins (e.g., USUALM, USDtb)
This structure introduces a circular dependency:
USD0++ is backed by USD0, and USD0 is issued via loans collateralized by USD0++.
While this loop is economically sound under normal conditions, it can introduce reflexive behavior:
- If the USD0++ discount widens due to liquidity concerns or market sentiment
- Users may stop looping
- This reduces buy pressure, which can further depress USD0++ price
And while users can redeem USD0++ for 0.92 USD0, KYC requirements, redemption delays, or friction may discourage redemptions and lead to more selling on secondary markets.
It’s important to note:
This is not a solvency risk. Even if USD0++ trades below $0.92, all USL loans are time-based and fully collateralized. If a user defaults, USD0++ is burned, and the DAO retains any excess interest.
Still, confidence and liquidity drive behavior. Reflexivity doesn’t threaten the system’s core integrity, but it does impact how smoothly it functions during stress. When everything’s working, USD0++ gets support from recursive demand. When confidence wobbles, so does the peg.
In the news 🗞️
- Core Foundation adds BitGo and KODA to validator set. Core Foundation has onboarded institutional custodians BitGo and KODA as new validators to bolster its Bitcoin-native DeFi ecosystem. BitGo brings regulatory credibility, while KODA expands Core’s reach in Asia. With over $500M in BTC staked and a hybrid PoW/PoS consensus called “Satoshi Plus,” Core is positioning itself as a scalable, yield-focused Layer 1 for Bitcoin.
- Maple expands syrupUSDC to Solana. Maple has launched on Solana using Chainlink’s CCIP, aiming to bring institutional DeFi yields to one of crypto’s most liquid stablecoin ecosystems. The expansion includes $500K in incentives and $30M in coordinated liquidity, with syrupUSDC now live on Kamino and Orca. Robinhood-backed stablecoin USDG, from the Global Dollar Network, will serve as a key supply asset supporting the launch.
- Tether-backed blockchain ‘Stable’ launching with Bitfinex support. A new blockchain called Stable is being developed with backing from Bitfinex and guidance from Tether. Designed for institutional use, Stable will use USDT to pay for transaction fees and offer “enterprise lanes” for faster settlement. The project aims to solve issues with existing blockchain infrastructure and is part of Tether’s broader push into real-world financial applications.