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Redemption & Risk

Understand how redemptions work, how csUSDL maintains liquidity, and why it’s built to resist depegging under stress.

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Introduction

csUSDL is designed to offer reliable liquidity and price stability without compromising on yield.

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Redemption Mechanics

Redemptions are permissionless and instant — as long as there is sufficient liquidity in the csUSDL vault.

  • Users call redeem() on the ERC-4626 vault.

  • If the vault holds enough idle wUSDL, it is returned instantly.

  • If not, the transaction reverts.

Redemptions follow a first-come, first-served model. Liquidity is returned in wUSDL, which can be unwrapped to USDL and swapped to USDC.

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Liquidity Conditions

When the vault is fully utilized (i.e. all wUSDL is lent out on Morpho), redemption requests will revert due to insufficient available liquidity.

In such cases, users have the following options:

  • Swap csUSDL on Curve or CowSwap for immediate liquidity

  • Monitor utilization and redeem once liquidity is available again

csUSDL relies on Morpho’s market-level withdrawal mechanics. As demand to exit grows, Morpho increases borrow rates, which incentivizes loan repayment and new capital inflows.

If additional liquidity is still not restored, collateral posted by borrowers (e.g. wstETH or cbETH) can be liquidated to repay the vault and enable further redemptions.

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Oracle Design & Price Behavior

The csUSDL price is calculated entirely onchain via two ERC-4626 convertToAssets() functions:

  1. csUSDL → wUSDL: from the Coinshift vault contract

  2. wUSDL → USDL: via Steakhouse’s ERC4626 feed oracle, reviewed by Morpho and audited by Spearbit

  3. USDL → $1.00: hardcoded to $1.00 in Curve, Chainlink, and internal oracles, based on Paxos’s fully collateralized peg

Example: 1.00 csUSDL = 1.01 wUSDL = 1.02 USDL = $1.02

Because both csUSDL and wUSDL are accrual tokens, and USDL is pegged to $1.00, the price of csUSDL only increases over time.

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Depeg Risk

csUSDL is structurally resistant to depegging due to:

  • Fully collateralized design: USDL is backed 1:1 by T-Bills and cash, held in regulated custody by Paxos (FSRA-regulated in Abu Dhabi).

  • Hardcoded price feeds: USDL is treated as $1.00 in the system — enforced via oracle logic, and externally redeemable through Paxos (with KYB).

  • Redemption off-ramps:

    • Curve pool for USDL/USDC (~$20M depth) allows ~$2M clips at low slippage (~3bps)

    • Paxos Dashboard offers 1:1 USDL-to-USDC redemption with an 8bps fee (KYB required)

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Bank Run Scenario

If many users redeem csUSDL at once:

  1. The vault’s idle wUSDL is drained.

  2. Redemption calls start reverting.

  3. Borrow rates on Morpho spike, incentivizing repayment or new deposits.

  4. If liquidity remains insufficient, Morpho may liquidate borrower collateral to repay wUSDL to the vault.

This dynamic ensures the system self-corrects over time — while protecting remaining lenders and maintaining solvency.

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Summary

Mechanism
Behavior

Redemption

Instant if liquidity exists, reverts if not

Liquidity Model

First-come, first-served; market-level rebalancing

Oracle Path

csUSDL → wUSDL → USDL → $1.00, all onchain

Depeg Protection

Paxos 1:1 backing, Curve liquidity, hardcoded USDL price

Risk Mitigation

Rate hikes, collateral liquidation, multiple exit paths

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Next Up

  • Yield Mechanics

  • Minting Guide

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