Collateral and Risk
Collateral and Risk
ETH0 is fully backed by high-quality, Ethereum-native collateral and designed with multiple layers of protection to help maintain a 1:1 relationship with ETH. This page explains ETH0’s collateral model, key risk factors, and the safeguards Usual Protocol uses to keep ETH0 secure and transparent.
Collateral: Wrapped Staked Ether (wstETH)
ETH0 is backed exclusively by Lido’s wrapped staked Ether (wstETH). wstETH is a non-rebasing token representing staked ETH plus accumulated staking rewards. Rather than increasing your token balance, wstETH appreciates over time as Ethereum consensus-layer rewards accrue (i.e., the wstETH/ETH exchange rate increases).
How collateral works
When you mint ETH0, the corresponding wstETH is deposited into Usual Protocol’s on-chain Collateral Treasury.
This collateral is:
Transparent — anyone can verify the wstETH balance held by ETH0-related contracts on-chain at any time.
Fully collateralized — every ETH0 in circulation is backed by at least 1 ETH worth of wstETH. There is no fractional reserve, no leverage, and no algorithmic minting.
Ethereum-native — wstETH is ultimately backed by ETH staked on Ethereum’s Beacon Chain (via Lido). It is widely used across DeFi and is among the most liquid and battle-tested collateral assets.
Using wstETH as the sole collateral means ETH0 can benefit from Ethereum’s native staking yield while avoiding traditional finance risks such as bank counterparty risk, FX risk, or credit risk.
Collateral eligibility within the Usual framework
Usual Protocol applies strict due diligence to collateral across the ecosystem. The collateral constraints for USD0 (e.g., portfolio duration below 0.33 years and investment restricted to US Treasury Bills) are specific to fiat-backed designs. ETH0 follows a crypto-native framework tailored to ETH-denominated collateral, while maintaining the same overarching principles:
Fully collateralized
1:1 backing by wstETH; no leverage or fractional reserves
Low risk
wstETH is backed by ETH staked via Lido, the largest liquid staking protocol
Transparency
On-chain, real-time verifiable reserves
Liquidity
wstETH is deeply liquid on major DEXs and redeemable for ETH via Lido withdrawals
Risks and protections
ETH0 is designed to track ETH. Its risk profile therefore depends primarily on (1) the underlying staking collateral and (2) the smart contract infrastructure that governs minting, redemption, and custody.
Below is a detailed breakdown of key risks and the safeguards in place.
Lido / staking risk
A major slashing event, validator performance issues, or a smart contract vulnerability in Lido could impact stETH/wstETH and therefore affect the collateral backing ETH0.
Protections
Oracle-based circuit breaker — a Chainlink oracle monitors the stETH/ETH price feed and can automatically pause ETH0 minting and redeeming if an anomaly is detected. This helps stop new activity and limit cascading effects while the issue is assessed.
Full collateralization — ETH0 remains 1:1 backed and does not rely on external lenders or leveraged strategies. If staking yield decreases, the design does not introduce reflexive leverage risk.
Insurance fund — consistent with Usual Protocol’s approach for LDTs, the DAO can maintain an insurance fund for ETH0, funded by a portion of collateral yield. If collateral value declines, the fund can be used to burn ETH0 and restore the per-token backing ratio, following the same Counter Bank Run Mechanism (CBR) used for USD0.
Smart contract risk
Like all DeFi systems, ETH0 depends on smart contracts for minting, redemption, and collateral custody.
Protections
Audited components — ETH0 reuses audited infrastructure from the USD0 protocol, which has undergone 20+ audits by firms including Cantina, Sherlock, Spearbit, Halborn, Hexens, and Paladin.
Emergency controls — explicit pause/unpause mechanisms and governance controls enable rapid response to unexpected events.
Reduced complexity — ETH0’s single-collateral, fully collateralized design (no leverage, no algorithmic minting) reduces attack surface compared to more complex derivatives.
Note: Audits and testing materially reduce risk, but cannot eliminate it. Users should perform their own due diligence.
Market risk (ETH price exposure)
ETH0 is pegged to ETH, not to a fiat currency. Holding ETH0 is therefore equivalent to holding ETH with respect to market exposure.
ETH price drops 20%
ETH0 value drops ~20% in USD terms
ETH price rises 30%
ETH0 value rises ~30% in USD terms
ETH remains stable
ETH0 remains stable in ETH terms, and wstETH collateral continues to accrue staking yield
This is by design: ETH0 is a stable representation of ETH, not a fiat stablecoin. Users seeking to minimize ETH price volatility should consider a fiat-backed stablecoin such as USD0 instead.
Liquidity risk
As a newer asset, ETH0 may initially have limited liquidity on secondary markets (DEXs, AMMs).
Protections
1:1 redeemability; Even if trading liquidity is thin, holders can redeem ETH0 on-chain for the underlying wstETH via the protocol’s collateral contracts. This provides an on-chain liquidity backstop independent of secondary markets.
Growing ecosystem integration; As adoption increases, liquidity is expected to deepen through pools such as ETH0/wstETH or ETH0/ETH, enabling easier swaps and fee generation for LPs.
Counterparty risk
Unlike USD0 (which uses off-chain custodians, fund administrators, and tokenizers for T-Bill collateral), ETH0 has no traditional finance counterparty exposure:
No bank custody risk
No fund administrator risk
No tokenizer bankruptcy risk
Collateral remains entirely native to Ethereum
The primary counterparty dependency is Lido, whose smart contracts manage the underlying staking process. Lido is the largest liquid staking protocol on Ethereum with extensive audit coverage and a long operating track record.
Risk summary
Lido / slashing
Medium
Chainlink circuit breaker, automatic pause, insurance fund, full collateralization
Smart contract
Low–Medium
20+ audits, reuse of USD0 infrastructure, emergency pause controls
ETH market price
Inherent
By design: ETH0 tracks ETH; not intended for fiat-hedged exposure
Liquidity
Low (expected to decline over time)
Direct on-chain redemption for wstETH; USUAL-incentivized liquidity pools
Traditional finance counterparty
None
Fully on-chain collateral; no bank/custodian/tokenizer dependency
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