There has been some understandable concern in the HypurrFi community in recent days because USDXL, the collateralized-debt position (CDP) stablecoin, has been trading below its one-dollar target. We wanted to take a moment to explain how this drift from peg has been driven by Hyperliquid’s rapid growth, how CDP stables function and have performed historically, and what HypurrFi is doing to address the peg. 

First, market pricing below or above $1 USD does not have any bearing on HypurrFi or USDXL’s health as a debt instrument. There is no exploit or attack, and all systems are functional and quite healthy. In fact, the movement below $1 indicates strong HypurrFi and Hyperliquid EVM health. This might seem counterintuitive to traders accustomed to fiat-backed stablecoins like USDC or USDT, but let us provide some context to explain why.

What is USDXL?

USDXL’s final form is a hybrid stablecoin. This means that it functions as a CDP (explained below), but also has yield-bearing treasury assets backing the value. Presently, USDXL is only a CDP, and the treasury-based asset backing is coming very soon as detailed in the USDXL documentation. 

A hybrid model is an innovative stablecoin approach. It will provide multiple peg mechanisms, debt servicing utility, and the backing creates a yield-generating flow that can be used for protocol needs such as growth, incentives, or liquidity provisioning. This is a self-sustaining flywheel mechanism where USDXL will use yield generated from treasury style asset backing to buy more backing collateral up to the ratio that makes sense for economic modeling. The CDP in this case is the start of the flywheel for revenue to move gently into this model.

For a deeper read about HypurrFi’s goals and the role of USDXL, read The HypurrFi Vision.

The present issue with the USDXL peg stems from a misunderstanding about how CDP peg mechanisms work. Here is some context.

What Does it Mean for USDXL to be a CDP?

USDXL is debt-backed and overcollateralized, not algorithmic. This means USDXL is not subject to the self-reinforcing depeg dynamics, aka “doom loops”, that destroy algorithmic or partially-backed stables. Most notoriously, Luna’s TerraUSD’s mint-redeem system created a perverse arbitrage incentive that turned a slight depeg into a full meltdown. That can’t happen to USDXL, because it is overcollateralized and backed by debt.

If USDXL goes further down in peg, it does not impact protocol or lending health at all, and never did. The only impact is that users would redeem their collateral at a much better rate given purchasing of cheap USDXL.

USDXL is backed by Collateralized Debt. 

USDXL is a Collateralized Debt Position (CDP) stablecoin, redeemable to always repay debts for $1 per USDXL on HypurrFi. Unlike USDC, for instance, you can’t swap USDXL for a fiat dollar. You also can’t use it to purchase someone else’s collateral – only repay your own debt.

We think this is where some confusion occurred on Hyperliquid. Traders seeing USDXL on the Core market bought, then went to discover how they could redeem it on HypurrFi, only to find that USDXL only repays debt on HypurrFi. The debt repayment arbitrage is a valuable trade, but only if you’ve already taken out debt as USDXL on HypurrFi. This is clearly outlined in the HypurrFi documentation.

Regardless of open market price, USDXL is always worth a full $1 USD of market debt on HypurrFi. This creates an arbitrage opportunity for existing debt holders to repay at a discount when USDXL is below its peg, which in turn drives USDXL back towards its peg. A few times in recent weeks, when USDXL dipped sharply, borrowers bought those dips and repaid their loans at a big discount.

This model relies on market forces to correct the peg. Admittedly, it is not for everyone, and the price of USDXL reflects changing liquidity conditions on Hyperliquid. With the addition of USDT0 and USDe within two days of each other, a mass movement to other stablecoin yield opportunities arose. The market spoke.

USDXL debt has value.

This is where the bullish news comes in. If borrowers are paying a fee to have USDXL exposure, why aren’t they repaying en masse when USDXL is below $1 at a profit? The answer is simple: The debt is more valuable than the fee. Borrowers are taking USDXL out into the Hyperliquid ecosystem and making far greater returns than the 2.02% that was being charged. In response, and to help encourage the peg, HypurrFi has raised the borrow rates to 10.52% to test the market and find a fair value.

We saw approximately $1M USDXL repaid when this change took effect, but there are still more than 4.5M USDXL out in circulation paying the new rate. Holders likely estimate they are making more from yield and points having USDXL out in the ecosystem. Indeed, we’ve seen an influx in deposits to isolated market deposits where users can earn back a % of that fee from lending to others while earning points.

Organic Market Discovery

There is a temptation to pay liquidity providers or market makers to help maintain the peg. But to date we have not hired any market makers to maintain the USDXL peg. This is again in contrast to a token like TerraUSD, which relied heavily on well-funded market makers to maintain the illusion of a self-correcting mechanism. Our mechanism is responding only to open market dynamics, which can take longer to converge with a target. There is no systemic risk to HypurrFi or user positions from any USDXL depeg, so the only thing a paid liquidity provider would be doing is maintaining an illusion and taking any future value distributed to the community away in advance.

CDP stablecoins take time to mature. USDXL is modeled after GHO, a CDP issued against collateral on Aave. The chart below will look uncannily familiar: GHO traded under its peg for nearly a year after launch, at a time when debt on Aave was in particularly high demand, and as market dynamics solidified around the token.

We are taking steps to support USDXL following the Aave GHO playbook. More details are below, but tldr: create more utility for USDXL, build systems that encourage repayment and minting in a dynamic fashion. 

Finally, to be clear, we understand that these swings are anxiety-inducing, even if they’re transient. That’s why we are working with an established partner to add backing to USDXL. This is also yield bearing backing, so in addition to increasing trust, it will provide sustainable yield for USDXL backing, leading to more incentive design space. We will have more details on this new feature soon!

Immediate Actions to Support USDXL

• Lower the mint cap: Less USDXL on the open market will make it harder for people to sell and drive down the price

• Increase points incentives to 5x for lending USDT0 and USDe on HypurrFi: Many people want to lend and borrow stablecoins on HypurrFi, so we are providing incentives for lenders so stablecoin borrowers can get better rates without relying on USDXL alone

• Remove the points bonus for borrowing USDXL: There are many points-earning opportunities for LPing and depositing USDXL on HyperEVM, we don’t need to juice borrows at this time

• Launch stkUSDXL & add 10x points for depositing to stkUSDXL

Introducing stkUSDXL

HypurrFi’s directional design is based on years of building a DeFi economy that is self-sustainable by returning revenue to real users via incentives. stkUSDXL brings this idea to life.

Staking USDXL in the stkUSDXL vault will earn the depositor 50% of USDXL revenue. More details about the precise mechanics of the pool will be available before launch, but here are some early likely parameters. 

• stkUSDXL will be a capped deposit vault

• Yield comes from USDXL borrow fees on the pooled and isolated lending markets 

• Additional yield will come from Hyperliquid Core Spot trading pair fees

• Deposited USDXL is locked for 21 days before withdrawal is available 

Parameters are subject to change.

Using revenue to pay incentives has long been a goal. The USDXL peg conversation has accelerated the timeline, but in no way derails the mission. As yield-bearing backing begins to generate revenue on its own, the stkUSDXL model will shift. It’s possible that the yield-bearing backing revenue becomes responsible for significant tranches of the yield. Again, more details to come.

We will continue to solicit community input and feedback, and will share more details around protocol developments as they become available.

We’re Excited About Pegging

We have always made clear that we’re committed to doing things the right way, not the easy way. The easy way would be for us to hire a market maker or otherwise cook our charts to make it look like everything is fine. Instead, we’re trusting the process of market maturation and ecosystem growth, and we’re bringing products to market that users are asking for. 

And we hear you - this is uncomfortable! But we do understand our system, we understand DeFi, and we can see that even if the road ahead is occasionally rocky, it’s the best way forward.

Deposit and Borrow from HypurrFi lending markets on Hyperliquid here.

Become an expert and review technical and risk documentation here.

Join the community for discussion, memes, and troubleshooting here.

And follow us on X.