Usual Protocol, an up-and-coming decentralized finance (DeFi) protocol that has seen a remarkable rise over the past months, faced community backlash on Friday after a tweak in the protocol’s yield-generating token triggered a sell-off on secondary markets.

Amid the turmoil, the protocol’s USD0++ token, which represents a locked-up – or staked – version of its $1-anchored stablecoin USD0, fell briefly below 90 cents from $1 on decentralized marketplace Curve. The protocol’s governance token, USUAL, plummeted as much as 17% through the day before recovering some of the losses.

The selloff was caused by a change in the redemption mechanism of USD0++ token introduced by the team on Thursday that caught investors and liquidity providers off-guard.

By design, USD0 is backed by short-term government securities to keep its price at $1. Stakers on Usual receive USD0++ that comes with a four-year lock-up period, meaning that investors are locking up their funds without being able to redeem in exchange for rewards earned in the form of the protocol’s USD0 and USUAL tokens. Yield farmers rushed in, catapulting the protocols total value locked (TVL), a key DeFi metric, to $1.87 billion earlier this week from less than $300 million in October.

However, the new feature called “dual-path exit” will allow investors to redeem the locked-up tokens early at a 0.87 USD0 floor price, or at par, by giving up a part of the rewards earned, calling the 1:1 exchange rate into question.

The abrupt implementation drew criticism across DeFi users for changing the design without warning. In certain liquidity pools, the token’s price was hardcoded to worth $1, causing havoc among borrowers and liquidity providers.

“Did they just allow degens to jump in at 1:1 and then rug the USD0++?,” prominent DeFi analyst Ignas said in an X post. “They pushed for the largest USD0/USD0++ pool on Curve knowing all well that USD0++ shouldn’t trade at 1:1.”

“DeFi continues learning the most important truth about pegs: a peg is a story about why two things that are not the same are interchangeable for each other,” noted Patrick McKenzie, advisor to payments firm Stripe.

The Usual team said in a statement that the design change with the early unstaking mechanism was communicated in advance from October. The protocol will also activate the revenue switch starting on Monday and start distributing the protocol’s earnings to governance token holders who stake their coin for longer-term (USUALx).

“The current situation regarding USD0++ stems from a misunderstanding of the protocol’s mechanisms along with a communication that should have been better articulated,” the statement reads. “We apologize and we’ll continue to do our best to communicate transparent information to users.”

The episode is another lesson for crypto investors about the potential risks of DeFi products that entice users with high-yields via token incentives and rewards flywheels.

“Users who are taking risk need to know what the exact rules are and be able to trust that they won’t change, otherwise it can result in market panic,” Rob Hadick, general partner at venture capital firm Dragonfly, told CoinDesk. “We should be thankful this happened now, before the protocol became a risk to the broader DeFi ecosystem.”

Still, USD0++ traded recently at 0.91 USD0 in the Curve pool, while the protocol’s total value locked, a key DeFi metric, dropped below $1.6 billion.

Is the EU’s MiCA framework forcing investors to rethink their allegiance to Tether’s USDT and explore alternatives like Circle’s USDC and Ripple’s RLUSD?

USDT under radar

For years, Tether’s USDT (USDT) has been the go-to stablecoin for traders and investors. Yet, as we step into 2025, its dominance is starting to waver, particularly in the European Union, where mounting regulatory scrutiny and growing competition are challenging its unshakable reputation.

The turning point came on December 30, 2024, with the full implementation of the European Union’s Markets in Crypto-Assets regulations. 

Designed to bring order to the unpredictable crypto market, MiCA has imposed stringent compliance requirements on stablecoin issuers, including a mandate for major players like Tether to hold 60% of their reserves in EU banks.

As these regulations take effect, Tether is grappling with a wave of redemptions, new regulatory hurdles, and intensifying competition from rivals like Circle’s USDC (USDC) and Ripple’s RLUSD (RLUSD). 

In the past, Tether’s CEO, Paolo Ardoino, raised concerns over the risks of “bank failures,” arguing that such requirements could expose stablecoin issuers to systemic vulnerabilities rather than reducing them.

But the market seems less concerned with Tether’s reasoning and more with its actions — or lack thereof. 

In the days leading up to MiCA’s implementation, nearly $4 billion worth of USDT was redeemed, marking the largest outflow since the 2022 crypto winter. 

Back then, scandals like the collapse of FTX and revelations of fraud across the industry sent shockwaves through crypto, shrinking USDT’s market cap from $83 billion in May to $65 billion by November — a 21% drop. 

The recent decline, while smaller, carries deeper implications. As of Jan. 9, Tether’s market cap stands at $137.5 billion, down from $141 billion just two weeks earlier.

The question now is not just whether Tether can adapt but whether the market will wait for it to do so. With USDC cementing its regulatory foothold and RLUSD rapidly gaining momentum, could this be the beginning of a sharp decline for the world’s largest stablecoin? Let’s try to decode.

Competitors closing In: USDC and RLUSD’s strategic advances

Tether’s reluctance to comply with its strict reserve requirements has raised red flags among investors, while its competitors are thriving under the new framework. 

Even though EU member states have up to 18 months to fully enforce MiCA, the market isn’t waiting. Investors and exchanges are already repositioning, and USDT’s grip on the market appears to be slipping.

For context, exchanges like Coinbase and OKX have already delisted USDT for European users, citing non-compliance with MiCA. 

Circle’s USDC stands out as a prime beneficiary of the regulatory shift. Having secured MiCA approval in mid-2024, USDC has positioned itself as the stablecoin of choice for exchanges looking to align with EU rules. 

Binance’s partnership with Circle, aimed at accelerating USDC adoption globally, is a direct response to growing demand for transparency and compliance. This move has already begun to pay off; USDC’s market cap has grown by $2 billion since securing the license.

Meanwhile, Ripple’s RLUSD, launched on December 17, 2024, is also gaining traction as a regulatory-compliant alternative. 

Designed to operate seamlessly on the XRP Ledger (XRP) and Ethereum (ETH), RLUSD processed 33,953 transactions on the XRP Ledger and 1,690 on Ethereum during its testing phase alone. 

Ripple’s big Moment as RLUSD gains momentum in a changing era

The year 2025 could be a turning point for Ripple, as a convergence of legal victories, strategic partnerships, and a crypto-friendly administration in the U.S. creates ideal conditions for expanding its foothold in the stablecoin market. 

With Donald Trump’s presidency expected to usher in crypto-friendly policies, Ripple may finally resolve its long-standing legal battle with the Securities and Exchange Commission, lifting a major obstacle to its growth.

Already, Ripple has scored key wins in the SEC case, including reducing a potential $2 billion penalty to just $125 million. This resolution provides the company with the breathing room needed to refocus on innovation and the rollout of RLUSD. 

Monica Long, Ripple’s president, has hinted at ambitious plans for RLUSD, including imminent listings on major exchanges to broaden its reach and utility. 

“We are continuing to expand distribution and availability of Ripple dollars on other exchanges. So, I think you can expect to see more availability, more announcements coming soon,” Long shared in a recent Bloomberg interview.