Hey Edge readers,

This week, we’re pivoting to a more cautionary topic. A recent depeg event involving the USDF stablecoin has raised serious red flags across DeFi, especially around risk management, due diligence, and collateral integrity. Let's break down what happened, what it tells us about the current market, and why it’s essential to stay vigilant.

Stay sharp. 🫡

-The Exponential team

Overview of USDF’s depeg

On July 8, the stablecoin USDF, issued by Falcon Stable, lost its peg to the U.S. dollar, triggering panic in the communities where it was deployed. At its worst point, USDF had a depeg of nearly 80 basis points. The depeg drew attention not just for the speed of the collapse, but for the underlying issues it revealed.

The event highlights key concerns in the stablecoin ecosystem: opaque collateral backing, unvetted partnerships, and unsustainable yield promises. Below, we’ll explore what caused the depeg, how stakeholders reacted, and the broader lessons for DeFi participants.

It started with a thread

The panic began with a post on X from user @0xlawlol, who alleged that Falcon Stable was sitting on tens of millions in bad debt, backed by illiquid assets, and using high APYs to bait liquidity with no sustainable revenue. The post also criticized the project’s use of low-cap collateral tokens like DOLO, as well as the centralization of its reserve management.

While some users dismissed the post as typical crypto FUD, the claims quickly gained traction. On-chain observers started digging into USDF’s mechanics, and what they found aligned with many of the concerns raised. That scrutiny set the stage for the depeg.

What Falcon was really doing with USDF

Falcon’s model for USDF centers around aggressive yield generation and flexible minting mechanisms. Users could mint USDF using a broad range of collateral, including volatile or thinly traded tokens. Those USDF tokens could then be staked into sUSDF, a vault token designed to generate yield from off-chain strategies such as centralized exchange trading, delta-neutral positions, and arbitrage.

On paper, the system looks advanced. In practice, it raises multiple red flags:

• Opaque reserves: 96% of reserves are held off-chain with custodians, with no detailed breakdown of assets or risk exposure. Users have no way to verify solvency or asset quality.

• Low-quality collateral: Tokens like DOLO, with a $14 million market cap, were allowed to back up to $50 million in USDF. This imbalance made the system fragile to volatility and manipulation.

• Complex and unverifiable strategies: Falcon claims to run delta-neutral trades, liquidity provisioning, and options-style structures. But there is little to no transparency into the execution, performance, or risk parameters of these strategies.

• Redemption delays: A seven-day redemption lag for USDF (available only to whitelisted users) limits market correction mechanisms and exposes holders to extended depeg periods.

• Centralized control: The Falcon team retains full authority over reserves, strategy allocation, and minting mechanisms. There are no checks or independent oversight in place.

Rather than building a resilient, transparent stablecoin, Falcon designed a system that depended heavily on trust in its team and the sustained success of off-chain strategies. As with other yield-bearing stablecoins that have run into trouble this year, the lack of visibility created a fragile foundation.

How the team responded

Following the depeg, Falcon Finance's managing partner, and DWF Labs executive, Andrei Grachev issued a detailed response on X addressing the allegations. He stated that USDF is backed by approximately $544 million in assets, with 89% composed of stablecoins and Bitcoin, and only 11% in altcoins. Grachev reiterated that the stablecoin remains overcollateralized at 116%, and emphasized that all revenue-generating activities are market-neutral, with no directional exposure.

To maintain the peg, Grachev explained that traders naturally engage in arbitrage: minting and selling USDF when it's above $1, and buying and redeeming it when it drops below. He attributed the depeg to market sentiment rather than structural issues and noted that the company collaborates with multiple trading firms to reinforce peg stability.

Despite these reassurances, skepticism remains. The Falcon team has yet to publish a full breakdown of reserve holdings, and the referenced asset attestation has not been independently verified. Additionally, tools such as the insurance fund and hedging strategies are still not publicly auditable. As a result, many DeFi users and protocol contributors continue to express concern over Falcon's opacity and centralized control.

A reminder for the cautious investor

The USDF case offers a powerful reminder: in DeFi, stability is only as strong as the weakest link in the chain. Marketing around overcollateralization or yield is not enough. The real questions remain: Can the collateral be verified? Is it liquid under pressure? And who’s holding the keys?

Here’s what to watch out for:

• Opaque reserves: If you can’t see what backs your stablecoin, assume the worst.

• Questionable collateral: Allowing low-cap assets like DOLO to mint large amounts is a dangerous game.

• Limited redemption pathways: Delays and low liquidity limit recovery mechanisms when pegs slip.

• Centralized discretion: If one team controls everything, your risk profile is tied to their judgment, and incentives.

Always remember to DYOR. Stay safe

In the news 🗞️

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