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UIP-2: Proposal: Increase the Usual Stability Loan (USL) Cap to 500M USD0

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UIP-2: Proposal: Increase the Usual Stability Loan (USL) Cap to 500M USD0

Category: Feature Cap Increase

Authors: Usual Labs Core Contributors

Date: 2025-02-28

Status: Proposed

1. Summary

This proposal seeks to increase the max cap of the Usual Stability Loan (USL) from 100M to 500M according to market demand and operational feasibility. This increase will enhance liquidity efficiency, optimize capital deployment, and further support the growth of the Usual ecosystem.

2. Context & Rationale

The USL mechanism has been successfully implemented, with over 75M USD0++ deposited in Euler and more than 45M+ USD0 borrowed.
Current Performance: USL has proven to be an effective liquidity tool, stabilizing USD0++ while allowing for users to borrow leverage at a predictable fixed rate and LTV that take liquidation, before the maturity of USD0++, out of the equation. It facilitates efficient arbitrage of USD0++ volatility, and the revenue generated directly benefits the DAO Treasury.
Scaling Demand: With growing adoption and increasing demand for capital efficiency, raising the USL cap will:
- Allow for a larger allocation of liquidity into strategic positions;
- Strengthen both TVL and USUAL DAO revenue, which accrues directly to the USUAL token holders;
- Enhance the overall stability and usability of USD0++ within the ecosystem.

3. Vault Parameters & Mechanics reminder

The USL vault follows a structured risk-management framework with immutable parameters:

Max LTV (Loan-to-Value): 0.83
- A user locking 1 USD0++ can borrow up to 0.83 USD0.
- If the collateral (net of accrued interest) reaches this threshold, the position is liquidated, all USD0++ is burned, and any remaining USD0 is allocated to the DAO Treasury.
- The oracle price of USD0++ is set at a 1:1 conversion rate with USD0.
Liquidation LTV (LLTV): 0.9999
- If a borrower’s outstanding debt—including accrued interest—reaches this threshold, the DAO is authorized to liquidate the position. Even tough in non volatile market conditions, this should not happen before the maturity of the USD0++ bond.
Fixed Interest Rate: 5% per year
- A user locking USD0++ accrues an interest debt of 0.05 USD0 per USD0 borrowed per year.
- If a user borrows 0.83 USD0, after four years, the total debt (principal + interest) grows to exactly 1 USD0, making the locked USD0++ fully liquidatable.
- This rate is strategically set lower than other lending/borrowing markets like Morpho and Aave, ensuring competitive borrowing costs for the users and stable profitability for the DAO.
Market Type: Ungoverned
- Usual does not rely on any external curators for this vault.
- Parameters are immutable, requiring no further risk management interventions.

4. Collateral Structure

Debt Issuance:
- USL mints eUSD0, representing debt positions.
Collateral Type:
- No changes to the collateral model. All circulating USD0 and USD0++ are backed 1:1 by locked RWA.
- USD0++ locked in USL is represented as eUSD0 vault shares in the USD0 collateral contract.

5. Risk Mitigation

Fully Collateralized Structure
- USD0 is always over-collateralized by locked RWA, and as people lock 1 USD0++ in the vault, only 0.83 USD0 are unlocked to them, reassuring once again that USD0 will always be over-collateralized.
- There is no risk of under-collateralization, as circulating USD0 is always backed by more RWA than its issuance.
Short-term Yield Generation
- USL offers efficient capital activation while maintaining a low-risk yield opportunity for the DAO Treasury.

6. Security & Audit Coverage

The security foundation of our USL feature has been established through rigorous, multi-layered auditing processes. We have completed two major security audits with industry-leading firms focusing specifically on the eUSD0/eUSD0++ vaults deployment, periphery contracts, and their integration within the USL framework:

Spearbit Security Audit

Lead Security Researcher Xmxanuel, Security Researcher Om Parikh
- Full examination of potential impacts on the Usual protocol and its RWA backing
- Systematic vulnerability assessment
Sherlock Security Audit
- Lead Security Experts: xiaoming90, eeyore, and nirohgo
- Full examination of potential impacts on Usual protocol and its RWA backing
- Systematic vulnerability assessment

The complete audit reports are publicly accessible through our security documentation portal: Usual Security and Audits. You can read more on our general security approach at Usual here: https://tech.usual.money/security-and-audits/security-practices

6.1 Strategic Security Partnerships

Our security approach extends beyond standard auditing through several strategic partnerships:

6.1.1 Euler Protocol Collaboration

We've established an enhanced security collaboration between Usual Lab and Euler Lab, creating a unified security framework for the USL Euler Vaults. This partnership leverages Euler's extensive security expertise with our specialized knowledge of the USL implementation.

The Euler Protocol's V2 EVK, which forms the foundation of our implementation, represents one of DeFi's most thoroughly examined codebases:

30+ dedicated audits of the V2 EVK implementation
40+ total audits across the entire V2 ecosystem
Audit documentation available at: Euler Finance Security Audits
6.1.2 Industry-Leading Bug Bounty Programs

We're demonstrating our commitment to security through substantial financial incentives for ethical security researchers:

a) Euler Bug Bounty Enhancement

Recent increase from $1M to $5M in their Cantina bug bounty program
Governance proposal details: EIP-62 Proposal

b) Usual Supplementary Bounty
Planned contribution of an additional $2.5M worth of $USUAL tokens
This will create a combined bounty pool of $7.5M, positioning the USL feature among the most security-incentivized protocols in DeFi
6.1.3 Real-Time Security Monitoring

We maintain continuous protection through a diverse array of operational web3 security vendors actively monitoring the USL. This multi-vendor approach ensures:

24/7 surveillance of on-chain activity
Automated threat detection and responses
6.1.4 Financial Risk Audit:

The DAO has mandated OAK to conduct a Qualitative Economic Risk Assessment Report on the financial soundness of the USL mechanism.

Open the report here.

7. 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

Yes – Approve to increase the max cap of the Usual Stability Loan (USL) from 100M to 500M and signal interest in both this proposal and Usual governance participation.
No – Oppose the cap increase in its current form. A majority of 51% “No” votes results in a veto.
Abstain – You wish to signal neither support nor opposition but support governance participation.

8. Conclusion

Increasing the USL cap to 500M USD0 aligns with Usual’s long-term vision of enhancing liquidity, stability, and capital efficiency. By scaling this mechanism, we strengthen TVL, improve yield opportunities with predictable borrowing rates, something that extends the importance of USUAL in the future DeFi landscape, further cementing Usual’s position as one of the leading DeFi protocols.

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

Additional References & Documentation

Disclaimer: All aspects of this proposal are subject to veto or revision.

Proposed by:

Usual Labs Core Contributors

2025-02-28