UIP-1: Proposal for Implementation of the Usual Stability Loan (USL) Module

UIP-1: Proposal for Implementation of the Usual Stability Loan (USL) Module

Category: Protocol Upgrade and Feature

Authors: Usual Labs Core Contributors

Date: 2025-02-04

Status: Proposed

1. Summary

This proposal presents the Usual Stability Loan (USL) mechanism, which enables users to leverage their USD0++ by borrowing USD0 at a fixed interest rate. The objective is to allow users to capitalize on USD0++ when priced below its underlying counterpart (USD0), while ensuring the protocol remains fully collateralized. The USL will offer:

• A fixed interest rate (e.g., 5% APR)
• A DAO-set loan-to-value (LTV) ratio (e.g., 0.83)
• A liquidation threshold (LLTV) effectively at 1

These parameters are designed to maintain protocol safety and generate additional revenue for the DAO, all while providing competitive borrowing for users (compared to current USD0++ and other stablecoin borrowing opportunities on Morpho and Aave).

2. Motivation

• Unlock Additional Utility and Liquidity: USD0++ currently represents locked USD0. By introducing the USL, we allow this locked value to be borrowed against, increasing capital efficiency within the Usual ecosystem.
• Competitive Borrowing Rates: USL aims to offer a fixed and lower-cost alternative to external lending markets (e.g., Morpho, Aave).
• Protocol Revenue: The DAO benefits from interest income (or liquidation profit), creating new revenue streams for the Usual ecosystem.
• Mitigating Peg Deviation: Allowing users to borrow USD0 against USD0++ and re-purchase additional USD0++ can help stabilize secondary market prices.

3. Disclaimers & Governance Context

• This proposal and its parameters are subject to change only if there are audit findings and/or community findings.
• Nothing here is guaranteed to be implemented until the community approves the proposal by not opposing it.

Under our proto-governance framework, a 51% quorum (based on total voting power) is required to veto this proposal. If no veto surpasses that threshold, the proposal is considered approved. The voting power is allocated as follows:

• USUALx holders: 40% of voting power
• USUAL* holders: 40% of voting power
• USD0++ holders: 20% of voting power

The goal of this split is to maintain a fair equilibrium between different tokens and to allow an alignment between different long term tokens. This proto-governance framework will be improved over time and specified further in the next weeks and months.

4. Proposed Specifications

4.1 Core Parameters

1. LTV (Loan-to-Value)

• Proposed: 0.83
• Users can borrow up to 0.83 USD0 for every 1 USD0++ posted as collateral.

2. Interest Rate

• Proposed: 5% APR (fixed)
• This rate remains constant, ensuring predictable cost for borrowers and stable revenue for the DAO.

3. Liquidation Threshold (LLTV)

• Proposed: 0.9999
• If accrued debt (principal + interest) reaches or exceeds 0.9999 USD0 per 1 USD0++, the borrower is liquidated.

4. Oracle

• Proposed: Hardcoded 1:1 with upgradability to update it with proof-of-reserve rate when the oracle is ready.
• Upgradability will be given to 9-15 multisig and with timelock.

5. Platform used

• Usual will use Euler as the primary codebase for the USL. The development of USL has been done in close collaboration with Euler contributors. Euler has the needed modularity for this market and the V2 version is one of the most audited protocols.

4.2 Mechanism Overview

1. Collateral Locking

• A user deposits 1 USD0++ to borrow up to 0.83 USD0.

2. Fixed Interest Accrual

• Over time, the debt owed grows at a 5% APR.

3. Repayment

• At any time, users can repay principal + accrued interest to reclaim their USD0++.
• If they fail to repay, the protocol liquidates their USD0++ when the liquidation threshold is met.

4. DAO Revenue

• All interest collected flows to the DAO treasury.
• When liquidation occurs, the DAO seizes the difference between the USD0++ locked and the original borrowed amount.

5. Example Scenarios

• Liquidation: A user locks 1 USD0++, borrows 0.83 USD0, and accrues interest until it equals 1 USD0. If they do not repay, the protocol seizes and burns 1 USD0++, capturing the 0.17 USD0 which was not borrowed.

• Early Repayment:A user can repay earlier, saving on unaccrued interest. The protocol still realizes interest income, and the user recovers their USD0++.

• Looping / Leveraging: Users can repeatedly lock borrowed USD0 to mint more USD0++, then borrow again—earning compounding yield but incurring higher risk.

  These flows demonstrate the protocol’s ability to capture interest while maintaining full collateralization, provided that the collateral tokens (the underlying stable asset backing USD0) retain their peg—a risk mitigated through our rigorous due diligence and trusted tokenization partners. Furthermore, given the loan-to-value (LTV) ratio and the fixed interest rate, liquidation would only occur after 3.4 years.

6. Risk Considerations

• Collateral Volatility: The system assumes `USYC` and ‘wM’ (underlying collaterals for USD0) retains peg value. Extreme volatility or isolated tokenizer issues could present undercollateralization risks if LTV is set too high. Note that this risk exists even without the USL feature.
• Liquidity Crunch: If many borrowers redeem USD0 simultaneously, the protocol must ensure it has sufficient instant liquidity as part of its collateral reserves.
• Third-Party Dependencies: Smart contract exploits or integration risks (e.g., with Euler, bridging, etc.) could impact the system.
• USD0++ Market Price: Deviation from 1:1 parity in secondary markets can create or remove leverage opportunities through the USL, thereby impacting user behavior.

7. Implementation & Next Steps

1. Smart Contract Adjustments

• Introduce or upgrade the USL Module with the proposed parameters for fixed-rate borrowing and liquidation threshold.
• Integrate the liquidation logic to burn USD0++ upon liquidation.

2. Audits and Testing

• Thorough audits will be conducted before mainnet deployment.
• The core contributors will publish technical documentation for final feedback.

3. Rollout Timeline

• Phase 1: Audit completion and testnet release (end of the week).
• Phase 2: Mainnet activation, with initial LTV = 0.83 and interest rate = 5% and oracle 1:1.
• Phase 3: Evaluate performance, propose incremental LTV or rate adjustments if necessary. The existing loan will not be changed.

8. Voting Procedure

• Voting Period: 3 day
• Passing Criteria: A minimum of 51% (simple majority) across all votes is required to veto this proposal. If veto fails (i.e., less than 51% vote “No”), the proposal passes automatically.
• Voting Power Distribution:
  • USUALx: 40% of total voting power
  • USUAL*: 40% of total voting power
  • USD0++: 20% of total voting power

Vote Options

1. For – Approve the introduction of the USL mechanism with the above parameters and signal interest in both USL and Usual governance participation.
2. Against – Oppose the USL mechanism in its current form. A majority of 51% “No” votes results in a veto.
3. Abstain – You wish to signal neither support nor opposition but support governance participation.

9. Conclusion

The Usual Stability Loan mechanism represents a foundational step in expanding the Usual ecosystem’s utility. It leverages USD0++ with fixed-rate borrowing, offering competitive rates for users and revenue capture for the DAO. We invite the community to review, discuss, and vote on UIP-001.

Thank you for your participation in shaping the future of Usual Protocol!

Additional References & Documentation

• Tokenomics Specification of USL
• Discord Discussion Channel | #UIP001

End of the week:

• Code
• Audit Reports

Disclaimer: Final parameters and details may be amended based on community feedback and subsequent risk assessments. All aspects of this proposal are subject to veto or revision.

Proposed by:

Usual Labs Core Contributors

2025-02-04