Counterparty Risk
Counterparty risk is a core dimension of Usual Protocol’s risk management framework. Because USD0 is backed by tokenized Real-World Assets (RWAs) held through external providers, the integrity, operational resilience, and solvency of each entity in the collateral chain directly affect the safety of the stablecoin and its holders.
Definition
Counterparty risk is the possibility that a counterparty (e.g., a financial institution, service provider, or other entity) fails to meet its contractual obligations, defaults on its commitments, or becomes insolvent.
In Usual Protocol, key counterparties form a three-layer chain:
Tokenizer — creates and manages the on-chain token representation of the underlying RWA (e.g., Hashnote for USYC, Superstate for USTBL).
Fund manager — manages the underlying investment portfolio (e.g., US Treasury Bills, reverse repos, government securities). This may be the tokenizer itself or a dependent party.
Banks and custodians — hold, settle, safeguard, and clear the underlying assets (e.g., BNY Mellon for Hashnote custody, DTCC for clearing).
Impact on Usual’s Collateral
USD0 collateral can be impaired if any counterparty in the RWA chain fails. The impact depends on where the failure occurs:
Tokenizer failure May prevent or delay minting, redemption, or liquidation of the tokenized RWA. If the tokenizer’s operations or technology are compromised, access to collateral can be disrupted.
Fund manager default or insolvency Can lead to portfolio losses that reduce the value of the collateral pool. Poor investment decisions, unauthorized leverage, or fraud could erode the assets backing USD0.
Banking or custodial failure Can restrict access to funds or lead to direct losses during liquidity crises or insolvencies—historically illustrated by Lehman Brothers (2008) and Silicon Valley Bank (2023). The SVB event caused Circle’s USDC to depeg to approximately $0.95 due to 8% of reserves being held at the failed bank. Usual’s risk policy is explicitly designed to avoid such exposure.
Collateral Eligibility Requirements
Before any counterparty is accepted into Usual’s collateral system, it must pass a rigorous due diligence process. The protocol enforces strict eligibility criteria across all three layers (tokenizer, fund manager, and banking/custody):
Full collateralization
100% collateralized — no leverage, no fractional reserves. Excludes any exposure to fractional reserve banking or leveraged positions.
Asset quality
Investments restricted exclusively to US Treasuries, quasi-government debt, reverse repos, or cash. Corporate debt is strictly prohibited.
Duration limit
Individual RWA duration must be < 0.5 years; portfolio average duration must not exceed 0.33 years (~4 months).
FX risk
Zero tolerance — only USD-denominated assets or positions that are 100% FX-hedged.
Credit risk
Zero tolerance — no corporate credit exposure permitted under any circumstances.
Liquidity
RWAs must be redeemable or sellable with minimal slippage within a maximum of 5 days.
Transparency
Collateral must be verifiable on-chain in real time and provide high transparency off-chain through frequent public financial audits.
Regulatory compliance
Tokenizers must be fully licensed and regulated under appropriate financial authorities (e.g., CIMA, CFTC).
Asset protection
Assets must be ring-fenced in a bankruptcy remote vehicle (BRV) in the event of the tokenizer’s insolvency.
Risk Monitoring and Management
Usual applies a comprehensive, multi-layered approach to counterparty risk using a three-line-of-mitigation model. Each line defines (1) criteria, (2) monitoring, and (3) contingency actions across each counterparty layer.
First Line of Mitigation: Clear Counterparty Criteria
Tokenizer
Must operate via bankruptcy remote vehicles (BRVs).
Must demonstrate robust operations and financial stability, verified through independent audits.
Must undergo thorough technology audits (smart contract audits and operational security audits).
Only experienced tokenizers with proven track records are eligible.
Fund manager
Must have a demonstrated track record managing Treasury and sovereign debt portfolios.
Must be regulated under appropriate financial authorities.
Must follow strict guidelines that prohibit leverage, corporate debt, and FX-unhedged positions.
Must maintain skilled and compliant asset management teams.
Banks and custodians
Must be highly rated institutions demonstrating strong risk management, compliance, and capital adequacy (e.g., BNY Mellon for institutional-grade custody; DTCC with an AA- credit rating).
Must maintain diversified banking relationships to reduce concentration risk at any single institution.
Second Line of Mitigation: Ongoing Monitoring and Compliance Checks
Tokenizer
Periodic audits, security reviews, and performance assessments to ensure continued compliance with technical, regulatory, and operational requirements.
Dual-layer monitoring: both the tokenizer and Usual independently monitor holdings for compliance with the risk policy.
Fund manager
Regular review of investment decisions, risk exposure, duration profiles, and portfolio composition to ensure alignment with Usual’s risk appetite.
The protocol monitors the weighted average duration of reserve assets, with:
a tolerance threshold of 0.25 years for minor fluctuations; and
alerts triggered when the rolling 180-day weighted average deviates more than ±5% from the previous day or more than ±20% from the SOFR benchmark.
Banks and custodians
Continuous monitoring of partner health and stability, including credit ratings, risk exposure, regulatory standing, and liquidity position.
Any deterioration triggers escalation procedures.
Third Line of Mitigation: Contingency Plans and Corrective Actions
Tokenizer
Pre-defined contingency plans for tokenizer failure, including alternative redemption paths, collateral liquidation, and migration to backup collateral providers.
The DAO can remove underperforming or at-risk collateral types via governance vote.
Fund manager
Mechanisms to switch fund management services quickly to minimize disruption.
Recovery procedures and asset-transfer protocols are documented and tested.
Banks and custodians
Custody and banking are diversified across multiple institutions to mitigate single-institution failure risk.
Contingency plans include rapid asset reallocation and alternative settlement arrangements.
Historical failures (Lehman Brothers, Silicon Valley Bank) are explicitly treated as scenarios the risk policy is designed to withstand.
Insurance Fund Protection
To further mitigate counterparty-related collateral losses, Usual maintains a dedicated insurance fund per Liquid Deposit Token (LDT):
Funding source
A portion of yield generated by the LDT (insurance accrual rate set by the DAO, approximately 20%)
Maximum cap
Between 0.33% and 5.33% of all USD0 LDTs, determined by historical stress testing (VAR analysis)
Replenishment time
Approximately 24 days (at 0.33-year average duration and 5% coupon rate)
Mechanism
Burns LDT held in the insurance fund to increase the salvageable redemption value per LDT
The insurance fund cap is calibrated against extreme historical scenarios, including:
A 75 bps interest rate rise over a two-week period (observed in 2022)
A 100 bps increase over a one-month period (observed in 2022)
SVB-type counterparty exposure resulting in up to a 5% depeg (as experienced by USDC in March 2023)
Given the portfolio’s maximum average duration of 0.33 years, even these extreme scenarios would temporarily reduce collateral value by approximately 0.33%.
Counter Bank Run Mechanism (CBR)
The Counter Bank Run Mechanism (CBR) adjusts the salvageable redemption value using the insurance fund:
If the salvageable redemption value falls below 1, the DAO can temporarily pause the minting engine and direct minting through the secondary market to focus on re-pegging.
Collateral Diversification as Risk Mitigation
Counterparty risk is further reduced through multi-provider collateral diversification. USD0 is backed by assets from multiple tokenizers, custodians, and service providers, reducing single points of failure:
USYC
Hashnote
BNY Mellon (custody), DTCC (clearing, AA- rated), Marex (prime broker)
M
M0 Foundation
Independent custody and administration
USTBL
Superstate
SEC-regulated, US Treasury Bills
USDC
Circle
Indirect minting collateral via Collateral Providers
The Multi Collateral Controller dynamically manages portfolio composition across providers by:
continuously adjusting reward rates to incentivize balanced collateral contributions; and
triggering rebalancing when the maximum deviation between actual and optimal portfolio weights exceeds a predefined threshold.
Community Governance of Counterparty Exposure
Counterparty and collateral exposure is governed by the community through USUAL token governance. Holders can vote on:
Adding or removing collateral types and their associated counterparties
Setting maximum exposure limits per collateral provider
Adjusting risk parameters based on evolving market conditions
Responding to counterparty deterioration or emerging risks
This governance layer keeps counterparty-risk decisions transparent, community-driven, and responsive to changing conditions rather than controlled by a single corporate entity.
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