Neutral Flags Reserve-Asset Liquidity Problems, Plans Early NUSD Redemptions

Neutral, a decentralized finance protocol, said liquidity problems have emerged in investment positions used to manage its reserve assets. It currently has about $27 million in liquid assets available for immediate use. The amount that can be recovered from the remaining assets, and the timing of any recovery, remain unclear.

Neutral said on its official X account on Aug. 28 that problems had arisen in some positions within its investment strategy, affecting the liquidity of part of its reserves. After obtaining legal advice, it halted the related smart contracts. Neutral has suspended key functions of its synthetic dollar token NUSD, including minting and redemptions, since Aug. 13.

The protocol said the incident was not caused by a smart-contract exploit, hacking or code vulnerabilities. It did not disclose which investment assets ran into trouble, the counterparties involved, or whether any losses have been incurred. Neutral said it continues to hold the illiquid positions and any associated profit and loss, but cannot determine how much can be recovered or when.

Neutral generates yield by deploying user-deposited stablecoins and other assets into market-neutral strategies, over-the-counter trading and arbitrage. Users can mint NUSD, a dollar-pegged token, against deposited assets. sNUSD is a product that pays yield to users who deposit NUSD.

The disclosure marks a sharp shift from reserve data Neutral published before the incident. On Aug. 5, the protocol said it had $60.35 million in reserve assets backing about $58.4 million of NUSD. That implied a reserve ratio of 103.18%. The reserves then included $35.6 million in stablecoins, $9.9 million in over-the-counter positions and liquidity-provision assets.

Neutral now says it has $27 million in liquid assets available for immediate use. That is about half of NUSD's roughly $53.3 million market capitalization, according to DefiLlama. It remains unclear whether the total value of assets, including positions that cannot yet be liquidated, will be enough to cover liabilities. Neutral said unwinding the remaining positions and recovering the assets will take considerable time.

Neutral plans to establish an early-redemption process for holders of NUSD and sNUSD. It aims to begin redemptions in early September after deploying a new redemption smart contract and completing an external security audit, along with legal and financial reviews. The redemption ratio, payment method and schedule could change because the amount of recoverable assets has not been finalized. Detailed terms will be disclosed before redemptions begin.