Collateral and Risk

Collateral (wstETH): The sole collateral backing ETH0 is Lido’s wrapped staked Ether (wstETH). WstETH is a non-rebasing token that represents staked ETH plus accumulated rewards – its value increases over time as staking yields accrue. When you mint ETH0, your wstETH collateral is held in the Usual protocol’s Collateral treasury. This on-chain collateral is transparent and can be independently verified (anyone can view the balance of wstETH in the ETH0 contracts). Using wstETH as collateral means the system benefits from Ethereum’s native staking yield and relies on a blue-chip DeFi asset with a large market presence. Importantly, wstETH is over-collateralized by ETH itself (managed by Lido), so each unit of wstETH is always backed by actual ETH in the Ethereum beacon chain.

Risks and Protections: Since ETH0’s value is directly tied to ETH, its primary risk factors are those associated with the collateral and smart contracts:

• Lido/Staking Risk: A significant slashing event or a smart contract vulnerability in Lido could affect the value of stETH/wstETH, and thus the collateral backing ETH0. In extreme scenarios (for example, if Lido were hacked or stETH lost its peg to ETH), the Usual protocol’s safety module would kick in – a Chainlink oracle monitor watches the stETH/ETH price feed and can automatically pause ETH0 minting or redeeming if an anomaly is detected . This pause halts new activity to prevent damage while the issue is addressed. Additionally, because ETH0 is fully collateralized, even if staking yields fluctuate or temporarily drop, the base 1:1 backing remains intact (there is no dependence on external lenders or risky yield strategies that could impair the collateral).

• Smart Contract Risk: Like any DeFi product, ETH0 relies on smart contracts. Usual has prioritized security by reusing audited components from the USD0 stablecoin protocol and implementing emergency admin controls. There are explicit emergency pause/unpause mechanisms and other governance controls that allow the community or authorized parties to respond to unexpected situations . Users should be aware that while audits and testing reduce risk, they do not eliminate it entirely. However, by being over-collateralized and relatively simple (no leverage or algorithmic minting), ETH0’s design minimizes complexity and potential attack surfaces.

• Market Risk: ETH0 is pegged to ETH, so its price will move with ETH’s market price. Holding ETH0 is effectively the same as holding ETH in terms of market exposure. If ETH’s price drops, the value of ETH0 drops correspondingly (and vice versa for price increases). The protocol does not shield users from underlying ETH market volatility – it is not a stablecoin against fiat, but rather a stable representation of ETH. This is by design, and users seeking to avoid ETH price risk should convert to a fiat-backed stablecoin instead.

• Liquidity Risk: As ETH0 is a new asset, liquidity on secondary markets (exchanges, AMMs) may initially be limited. The protocol’s 1:1 redeemability ensures that even if trading liquidity is low, large holders can redeem directly on-chain to access the underlying wstETH (and then ETH). This backstop means that liquidity risk is mitigated – one can always fall back to direct redemption if needed, assuming Ethereum network and Lido withdrawal mechanisms are functioning normally. Over time, as ETH0 adoption grows, we expect liquidity to improve, especially if ETH0 is added to popular pools (for instance, an ETH0/wstETH or ETH0/ETH pool could allow easy swapping while earning fees).

In summary, ETH0 inherits the core security of the Ethereum staking system and augments it with additional protocol safeguards. There is no exposure to traditional finance risks (e.g. banks or stablecoin issuers) since the collateral is native crypto. While users should always perform their own due diligence, ETH0’s fully backed model and transparent design give it a strong risk profile for an on-chain asset. By using wstETH as collateral and implementing prudent risk controls, Usual has created an ETH derivative that aims to be as secure and stable as holding ETH itself, with the added advantage of compounding rewards for its holders.