The Trap of Pseudo-Decentralization: Analyzing the Three Structural Defects of CDP Stablecoins on HyperEVM

Original Title: What’s wrong with CDP stablecoins on HyperEVM?

Original author: @stablealt

Original compilation: zhouzhou, BlockBeats

Editor’s Note: CDP "stablecoins" like feUSD and USDXL on HyperEVM are unable to maintain a peg of 1 dollar due to a lack of strong arbitrage mechanisms, weak demand in Hyperliquid, and low borrowing costs, causing their prices to fall below 1 dollar. Hyperliquid natively offers leveraged trading, and users do not need CDP stablecoins. As airdrops and point rewards dwindle, CDP tokens will lose value and ultimately may not be sustainable.

The following is the original content (for ease of reading and understanding, the original content has been organized):

Disclaimer: This article is not intended to spread FUD or attack the CDP protocol of HyperEVM.

In short: CDP stablecoins, such as feUSD and USDXL, are not actually stable or capital efficient. They lack strong arbitrage mechanisms, have limited use cases, and are mainly used for leveraged trading, while Hyperliquid already provides a better user experience and liquidity natively. Therefore, the trading price of these tokens is below their $1 peg, and without incentives like airdrops, they are likely to gradually disappear.

Collateralized Debt Position (CDP) stablecoins promise to provide a decentralized alternative to dollar-backed stablecoins (such as USD and USDT) or centralized synthetic dollars (such as USDe), but the reality often does not meet expectations. feUSD, USDXL, and KEI are some of the latest attempts to emulate Liquity, but they all face serious issues such as anchoring stability, scalability, or flaws in incentive design.

This article will analyze the issues at hand, the things that paid KOLs have not told you, and why these problems are not just growing pains - they are structural issues.

CDP Design Overview

First, let's understand the basic concept: CDP "stablecoins" are not true stablecoins or "dollar" tokens. This is why DAI is called "DAI" rather than USDD or another name. It's a mistake to name CDP stablecoins with a "USD" prefix, as it may mislead DeFi newcomers. They have no arbitrage mechanism and no direct collateral. Each CDP token is minted out of thin air and may be worth far less than 1 dollar.

To mint a CDP token, users must lock collateral worth more than 100% in order to borrow tokens. This reduces capital efficiency and limits growth. To mint 1 token, you need to lock in collateral worth more than 1 dollar. Depending on the loan-to-value ratio, this ratio may be higher.

If a mechanism with strong measures is not implemented, CDP tokens cannot maintain a 1:1 peg to the US dollar at all, especially when their primary use case is leveraged trading, like Felix's redemption (when arbitrageurs can steal someone's collateral, provided that the borrowing interest rate is too low) or Dai's PSM module.

In DeFi, a CDP is merely another form of borrowing. Borrowers mint CDP stablecoins and use them to exchange for other assets or yield strategies that they believe can outperform the protocol's borrowing interest rates.

What happened?

Everyone swaps their CDP stablecoin for other assets, usually more stable centralized assets like USDC or USDT, or for more volatile assets (such as HYPE) for leveraged trading. It doesn't make sense to hold these tokens, especially if you need to pay a borrowing rate: feUSD borrows at an annualized yield (APY) of 7% on Felix, and USDXL borrows at an APY of 10.5% on HypurrFi.

Taking USDXL as an example: it has no local use case, and users have no reason to hold it. This is why it can fluctuate at prices like $0.80 and $1.20 – the price is not anchored by any real arbitrage mechanism. Its price merely reflects the demand for borrowing HYPE. When the trading price of USDXL is above $1, borrowers can borrow more USD; when it is below $1, borrowers can borrow less – it's that simple.

feUSD is somewhat better. Felix provides users with a stable pool, allowing them to earn 75% of the revenue from borrowing fees and liquidation bonuses, with the current annualized yield being around 8%. This helps to reduce price volatility, but like USDXL, there is still no strong arbitrage mechanism to keep feUSD firmly at 1 dollar. Its price will still fluctuate based on borrowing demand.

The core issue is that users who purchase feUSD and place it in the stable pool are essentially lending their USDC or HYPE (via Felix) to those minting feUSD. These CDP tokens have no intrinsic value. They only have value when paired in a liquidity pool with valuable tokens like HYPE or USDC.

This introduces third-party risks. Without airdrops or other incentives, DeFi users have little reason to borrow tokens that lack liquidity and are not pegged, such as feUSD or USDXL, or to purchase them as exit liquidity for borrowers. Since you can directly borrow stablecoins like USDT or USDe, why would you do this? In any case, the stablecoins you borrow will eventually be converted into other tokens, so you don't need to worry about the decentralization of the borrowed assets.

Classic lending is much simpler through the flywheel mechanism of the money market, such as Hyperlend, and produces the same economic effects for the end user.

Another reason why CDP has not succeeded in HyperEVM is that leveraged trading is already a native feature of the Hyperliquid ecosystem. On other chains, CDP provides decentralized leveraged trading. However, on Hyperliquid, users only need to use the platform itself, leveraging perpetual contracts (perps) and an excellent user experience, without relying on CDP stablecoins.

With Hyperliquid, there's no need to engage in leveraged trading through third-party protocols. I see that the only use case for CDP is for leveraged farming and the cyclical operation of HLP.

In summary, here are the reasons for the poor performance of CDP "stablecoins" on HyperEVM:

Lack of a strong arbitrage mechanism

·The demand for CDP products in Hyperliquid is relatively weak.

·Low borrowing costs and no reason to hold CDP tokens

Therefore, CDP "stablecoins" like feUSD and USDXL are trading below the soft peg price of 1 dollar: feUSD is 0.985 dollars (-1.5%), and USDXL is 0.93 dollars (-7%).

Conclusion: I do not believe that CDP stablecoins have any potential in the Hyperliquid ecosystem. Users do not need them—Hyperliquid already offers a better user experience and deeper liquidity, with native support for leveraged trading. Once the airdrop and points reward programs are exhausted, CDP tokens will lose their remaining utility.

Hypurrliquid, do not exit liquidity.