Financial Risk

The primary risk to USD0 holders is the market value of the collateral backing the stablecoin. Usual Protocol applies a rigorous, multi-layered risk management framework designed to preserve USD0’s 1:1 peg and protect depositor value across four key dimensions:

• Interest rate risk

• Foreign exchange (FX) risk

• Credit risk

• Counterparty / third-party risk

Each category is governed by strict policies, continuous monitoring, and escalation procedures. This document outlines the risks, the protocol’s mitigation strategies, and the Insurance Fund, which serves as the final line of defense.

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Interest Rate Risk

Interest rate risk arises when changes in prevailing rates reduce the market value of collateral backing USD0. Because USD0 is backed by U.S. Treasury bills and reverse repurchase agreements, rising rates can temporarily reduce collateral value prior to maturity.

Risk Policy

Usual enforces strict duration limits as the primary control:

Parameter	Limit
Maximum individual RWA duration	< 0.5 years
Maximum portfolio average duration	≤ 0.33 years (~4 months)
Passive deviation tolerance	0.25 years

Three Lines of Mitigation

1. First line — Duration restrictions All accepted RWAs must have a duration of less than 0.5 years. The portfolio-wide weighted average duration must not exceed 0.33 years, limiting price sensitivity to interest rate movements.

2. Second line — Continuous monitoring The protocol calculates a daily weighted-average collateral rate and maintains a 180-day rolling average. Alerts are triggered when:

   • The rolling average deviates by more than ±5% from the previous day’s value, or

   • The weighted average deviates by more than ±20% from the SOFR benchmark on any given day.

3. Third line — Corrective measures If duration limits are breached or stress conditions emerge, the DAO can enact corrective actions, including:

   • Selling or redeeming higher-duration RWAs to reduce portfolio duration

   • Imposing temporary withdrawal restrictions

   • Increasing the Insurance Fund allocation

Historical Stress Testing

Risk parameters are calibrated against the most extreme interest rate movements observed in the last 30 years:

Scenario	Rate Change	Timeframe	Estimated Collateral Impact
2022 extreme rise	+75 bps	2 weeks	~0.25% loss
2022 sustained rise	+100 bps	1 month	~0.33% loss

Given the portfolio’s maximum average duration of 0.33 years, even these historically extreme scenarios would only temporarily reduce collateral value by approximately 0.33%—within the coverage capacity of the Insurance Fund.

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FX Risk

Foreign exchange (FX) risk would arise if any portion of USD0’s collateral were denominated in non-USD currencies, exposing the peg to exchange rate fluctuations.

Risk Policy

Usual maintains a zero-tolerance policy for FX risk:

• Only RWAs that exclusively invest in USD-denominated assets are eligible as collateral; or

• Assets must be 100% FX-hedged to eliminate currency exposure.

Monitoring

FX compliance is enforced through dual-layer monitoring:

1. Tokenizer-level monitoring Each collateral provider’s team independently verifies that all underlying holdings are USD-denominated or fully hedged.

2. Protocol-level monitoring Usual’s risk team independently reviews holdings for FX compliance on a regular basis.

Any deviation from the zero-tolerance policy triggers immediate corrective action, including potential removal of non-compliant collateral from the accepted asset list.

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Credit Risk

Credit risk is the possibility that an issuer of a collateral asset defaults on its obligations, causing a loss in collateral value.

Risk Policy

Usual enforces a zero-tolerance policy for credit risk:

Eligible Instruments	Prohibited Instruments
U.S. Treasury securities	Corporate debt
Quasi-government debt (agency securities)	High-yield bonds
Cash and cash equivalents	Structured credit products
Reverse repurchase agreements (with DTCC)	Any leveraged instruments

Investment is restricted exclusively to U.S. Treasuries, quasi-government debt, and cash. Corporate debt holdings of any kind are strictly prohibited.

Monitoring

• Regular audits and checks verify that collateral providers remain compliant with the credit risk policy.

• Any collateral provider found to hold non-compliant instruments is subject to immediate review and potential removal.

• The primary collateral provider, Hashnote USYC, executes reverse repos through the Depository Trust & Clearing Corporation (DTCC), which carries an AA- credit rating.

Counterparty Risk Layers

The protocol assesses and mitigates credit-related failure modes across three counterparty layers:

Layer	Risk	Mitigation
Tokenizer	Insolvency or operational failure	Bankruptcy Remote Vehicles (BRVs), independent audits, periodic performance reviews
Fund Manager	Poor investment decisions	Regulated managers with proven track records; regular assessment of investment strategies
Bank / Custodian	Institutional failure	Only highly rated institutions (e.g., BNY Mellon); diversified banking relationships; contingency plans informed by historical events (Lehman Brothers, SVB)

Lessons from SVB

Usual’s credit risk policy was explicitly designed to avoid scenarios like the Circle/SVB event (March 2023), where Circle had 8% of USDC collateral exposed to Silicon Valley Bank. During that episode, USDC experienced an average depeg of approximately $0.95 (a 5% loss). By requiring collateral invested exclusively in sovereign bonds rather than commercial bank deposits, Usual eliminates this category of counterparty exposure.

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Insurance Fund

The Insurance Fund is a dedicated reserve maintained per Liquid Deposit Token (LDT) to hedge against potential collateral losses. It serves as the protocol’s final safety net and activates the Counter Bank Run Mechanism (CBR) if collateral value falls below the required threshold.

Funding Mechanism

• The Insurance Fund is funded from a portion of the yield generated by USD0’s underlying collateral.

• The insurance accrual rate is set by the DAO at approximately 20% of yield (aligned with industry benchmarks such as Ethena’s insurance allocation).

Fund Size Parameters

Based on historical Value-at-Risk (VaR) analysis simulating extreme interest rate increases exceeding any recorded in the last 30 years, the DAO can set the Insurance Fund cap within the following range:

Parameter	Value
Minimum fund cap	0.33% of all USD0 in circulation
Maximum fund cap	5.33% of all USD0 in circulation
Replenishment time (at 0.33-year avg duration, 5% coupon)	~24 days

The upper bound (5.33%) accounts for extreme scenarios including simultaneous interest rate shocks and counterparty failures analogous to the SVB event (up to 5% depeg).

Counter Bank Run Mechanism (CBR)

The CBR is a reactive mechanism that adjusts the salvageable redemption value of USD0 using the Insurance Fund. When collateral value drops, the fund burns USD0 to increase the per-token redemption value for remaining holders.

The salvageable redemption value, (S_{LDT}), is:

$$S_{LDT} = \min \left( \frac{\sum_{i=1}^n P_{Collateral_i} \times C_{Collateral_i}}{Supply_{LDT} - Insurance_{LDT}},\; F_{LDT} \right)$$

Where:

Variable	Definition
(P_{Collateral_i} \times C_{Collateral_i})	Total value of collateral type (i)
(Supply_{LDT})	Total floating supply of USD0
(Insurance_{LDT})	USD0 held in the Insurance Fund
(F_{LDT})	Target fair price of USD0 (i.e., (1.00))

CBR Escalation Procedure

If the salvageable redemption value falls below $1.00, the DAO can take the following actions, in order of severity:

1. Burn Insurance Fund reserves USD0 held in the fund is burned, reducing circulating supply and restoring the per-token collateral ratio.

2. Temporarily pause the minting engine New minting is halted to prioritize re-pegging USD0.

3. Direct minting through secondary markets only All new USD0 acquisition is routed through DEX pools, creating organic buy pressure to support the re-peg.

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Collateral Eligibility Requirements

All accepted collateral must pass Usual’s due diligence process. The four core eligibility criteria are:

Criterion	Requirement
Fully Collateralized	100% collateralized with no leverage or fractional reserve exposure
Low Risk	Invested in liquid Treasury Bills; only sovereign bonds accepted
Transparent	On-chain verifiable with frequent off-chain public audits
Liquid	Portfolio duration below 0.33 years; redeemable within 5 days maximum

Tokenizer Evaluation Dimensions

Before any RWA tokenizer is accepted, Usual evaluates it across five areas:

1. Structuring & Regulation — Issuing entity, jurisdiction, regulatory framework, bankruptcy-remote structuring

2. Product Description — Issuance/redemption operations, fee structure, token characteristics, compatible blockchains

3. Asset Management — TVL, custody setup, investment policy, portfolio composition

4. Risk Policy — Technical and smart contract audits, counterparty risk, recovery procedures, conflicts of interest

5. Security Requirements — Experienced and audited technology; full regulatory compliance; assets ring-fenced in bankruptcy; reasonable fees; prompt redemption processes

Current Collateral Composition (June 2025)

Collateral	Amount (USD)	Share
USYC (Hashnote)	$264,829,800	42.73%
eUSD0 (Euler USL)	$287,973,600	46.46%
USUALM (Wrapped M)	$67,035,044	10.81%
USDtb	$0	0.00%

Liquidity Risk

Only RWAs that can be redeemed or sold with minimal slippage within a maximum of 5 days are eligible. The portfolio is diversified across multiple tokenizer platforms to mitigate the risk of any specific asset class becoming illiquid.

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Summary of Risk Controls

Risk Category	Policy	Key Parameter	Monitoring
Interest Rate	Strict duration limits	Portfolio avg ≤ 0.33 years	Daily weighted rate tracking; SOFR deviation alerts
FX	Zero tolerance	USD-only or 100% hedged	Dual-layer review (tokenizer + Usual)
Credit	Zero tolerance	U.S. Treasuries / quasi-gov / cash only	Regular audits; no corporate debt
Liquidity	High liquidity required	Redemption within 5 days	Portfolio diversification across tokenizers
Counterparty	Multi-layer mitigation	BRVs, rated custodians, contingency plans	Periodic reviews across all three counterparty layers
Insurance	Funded from yield	0.33%–5.33% of USD0 supply	DAO-set accrual rate (~20%); ~24-day replenishment

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Note on “KB” Updates

This draft includes the parameters and mechanisms exactly as provided. If you share the referenced KB entries (or the updated values), I can incorporate them while keeping the document GitBook-compatible and technically consistent.