Intro
We modeled ParyonUSD after the Liquity V2 protocol, but made various adaptations to make it practical to build on Bitcoin Cash. The direct redemption mechanism of Liquity V2 has very strong peg guarantees, and a well-functioning interest rate market allows borrowers to protect themselves from their loans being redeemed, since redemptions take the lowest-rate loans first. On ParyonUSD, the interest rate market has not been working well for borrowers: waves of redemptions and large interest rate swings make the system unpredictable. The root cause traces back to some of the ways ParyonUSD’s redemption and rate-setting rules differ from Liquity V2.
The peg itself has held, as the first State of PUSD showed. But redemption became a routine off-ramp that arrives in waves, and interest rates swing from almost 0% to 15% and back around them, faster than borrowers can protect themselves or the feedback loops in ParyonUSD’s Stability Mechanism can respond.
This post is an economic deep dive into those differences and what they cause. Immutable contracts can’t fix them afterwards, and we see this as the main blocker for ParyonUSD’s growth today, which is why we’re building a ParyonUSD V2.
Redemption became an off-ramp
Since redemptions went live on May 8th, 1.57 million PUSD has been redeemed for 5,598 BCH, about 3.75x today’s supply of 419,000 PUSD. 364 loans were closed by redemption, against 649 repaid by their owners and 34 liquidated.
Before launch we called redemption a fallback and expected DEXes to be the main off-ramp. Instead, redemption volume shows no meaningful relationship with PUSD trading below $1. The waves line up with big BCH moves: May 28th (−12%), August 21st (+28%) and September 18th (+12%).
From the redeemer’s side, the reason is simple. Redemption buys BCH at the oracle price plus a flat 0.5%, with no slippage and no size limit. Cauldron, the main DEX for PUSD, holds around 118,000 PUSD, so a large trade there moves the price. In effect V1 turns borrowers into a market maker with unlimited depth, a role most of them never chose.
It arrives in waves
Most days are quiet: in the median active period, about 0.5% of supply is redeemed. The problem is the tail:
| Wave | PUSD redeemed | Share of supply | Loans hit |
|---|---|---|---|
| May 8 – 13 | 134,000 | 31% | 34 of 73 |
| May 17 – 19 | 170,000 | 48% | 36 of 91 |
| May 27 – 31 | 327,000 | 87% | 49 of 104 |
| June 9 – 11 | 86,000 | 29% | 29 of 86 |
| August 21 – 24 | 145,000 | 48% | 97 of 159 |
| September 18 – 19 | 99,000 | 29% | 39 of 140 |
Finalized redemptions, measured against the supply just before each wave. The live data is on the redemptions page.
Six times in five months, between 29% and 87% of the borrowed supply was redeemed within a few days, most recently on September 18–19. V1’s fee is the same 0.5% for the first and the last PUSD of a wave, so nothing in it stops one holder with enough PUSD from redeeming the whole book.
Not all of it was unwanted. About half of the wave volume hit loans parked below 1%, many of them there on purpose, and the May 27–31 wave almost entirely so. The rest reached ordinary borrowers: 71% of August’s redeemed PUSD came from loans paying 1% or more, and all of September’s.
Rates that jump from 0% to 15% and back
When a wave clears the bottom of the book, the remaining borrowers and the interest managers raise their rates to get out of the way. Once it has passed, rates drift back down. September showed how fast that now happens:
- September 16th: median borrowing rate 2.0%
- September 18th: a wave starts, and the median climbs to 11%
- September 19th: median 15%, and even the lowest rate in the book is 12%
- September 22nd: median 0.5%
The swing is a lagged response. The bulk of a wave lands inside one period, while rate changes only take effect at the next. By the time rates are high the wave is over, and low rates look safe again.
That breaks the loops the stability mechanism relies on. Higher rates are meant to cut borrowing and attract stakers, but a new stake waits up to 10 days for the next epoch before it earns, so a three-day spike is gone first. Between September 16th and 22nd, while rates hit 15%, staked PUSD actually fell by 19%.
A rate that moves like this also stops working as a price. No rate is safe to set and leave alone: one comfortably above the book on a quiet day is at the front of the queue when a wave starts.
Interest rate manipulation
V1 lets borrowers change their rate every period for free, and that breaks what the rate is for. The rate is meant to be what you pay all the time to stay out of the queue. With free changes, a borrower can pay close to nothing most of the time and only pay for protection when a wave is coming:
- The queue loses its meaning. Your position reflects who changed their rate last, not who values avoiding redemption most.
- It feeds the swings. Loans move in and out of the queue together, so rates collapse in quiet times and jump when a wave arrives. In early June the lowest rate in the book flipped between about 0% and 5–10% five times in a single day.
What this means for borrowing
For someone who wants to hold a loan for a year, V1 is hard to hold passively. The August wave hit 97 of 159 open loans, including borrowers who picked a reasonable rate and didn’t check it daily. An interest manager helps, but its changes only take effect from the next period.
It shows in the numbers. Borrowed PUSD is 419,000 today, against 436,000 in launch week, and the recent jump from 318,000 came with BCH’s rally. In State of PUSD #1 we called a flat supply resilience; it’s also a sign that borrowing hasn’t compounded. Most of last week’s $1M TVL milestone was BCH’s price too: measured in BCH, collateral grew about 9% since September 14th.
The small scale makes this worse. One holder can be a large share of a 400,000 PUSD supply, and the main DEX holds about as much as a single wave. With few other off-ramps, redemption is the easy exit for any sizeable amount.
Where V1 diverged from Liquity V2
Adapting Liquity V2 to Bitcoin Cash changed a lot, from staking in periods and epochs to redemptions that settle in two steps. The differences that matter here are simplifications around redemption and rate-setting. Our Liquity V2 comparison named the trade-off: V1 “relies entirely on the redemption queue (lowest-rate loans get redeemed first) to discipline rate-setting, with no fee-based deterrent against rapid rate changes.”
- No dynamic redemption fee. A flat 0.5%, sized for oracle drift rather than volume.
- No premature adjustment fee. Rates can change every period at no cost.
- No tie-breaking rule. In Liquity V2, among loans at the same rate the one repriced most recently is redeemed first. In V1, moving down to match a rate costs nothing in queue position.
We treated these as complexity we could leave out. Five months of data say they matter far more than we assumed. Without them, redemption becomes an off-ramp that borrowers pay for, and the rate becomes a switch instead of a price.
ParyonUSD V2
The V1 contracts are immutable, so none of this can be patched in. ParyonUSD V2 moves back toward Liquity V2 where V1 diverged, and is written for the native loops and functions Bitcoin Cash gained in its May 2026 upgrade. The main changes:
- A dynamic redemption fee that rises with recent redemption volume, so a wave gets more expensive as it grows and spreads out over time.
- A fee for changing your rate again within about a week, so toggling in and out of the queue costs something.
- Staking that can respond in time. A new stake earns from the next period instead of waiting up to 10 days, so staking can react to a rate rise while it lasts. Interest is also paid in PUSD and compounds automatically.
V2 is a new deployment with its own PUSD. The V1 contracts don’t change: V1 PUSD stays backed and redeemable, and V1 loans and stakes keep working as they do today. There’s no date yet, so stay tuned for more on V2.
Join the Conversation
If you borrow on ParyonUSD, have been redeemed in one of these waves, or have opinions on how V2 should price redemptions, we want to hear from you.
- Follow ParyonUSD on X: x.com/ParyonUSD
- Join the ParyonUSD group on Telegram: t.me/ParyonUSD
In our Telegram group you can engage directly with the team - ask questions, share your thoughts, and be part of the ongoing conversation as we build ParyonUSD together!