DeFi protocol Neutral says part of the reserve assets backing its products has become tied up in illiquid investment positions, leaving about $27 million available for immediate use while the recovery value and timing for the rest remain unknown.

The protocol said key functions tied to its synthetic dollar token NUSD, including minting and redemptions, have been suspended since Aug. 13. Neutral added that the issue was not caused by a hack, smart-contract exploit or code vulnerability, and said it halted related contracts after receiving legal advice.

Liquidity issue hits reserve strategy

In a statement posted on X on Aug. 28, Neutral said problems emerged in some positions within the investment strategy it uses to manage reserve assets. Those problems affected the liquidity of part of the reserves rather than stemming from a technical breach of the protocol.

Neutral did not identify the assets involved, the counterparties tied to those positions, or whether any losses have already been realized. It said it still holds the illiquid positions and any associated profit and loss, but cannot yet determine how much will ultimately be recovered or when that may happen.

What Neutral says it can access now

Neutral said it currently has around $27 million in liquid assets that can be used immediately. Based on DefiLlama data cited in the report, that figure is roughly half of NUSD's market capitalization of about $53.3 million.

Because a significant share of reserves cannot yet be liquidated, it remains uncertain whether the protocol's total assets will be sufficient to meet liabilities in full. Neutral said unwinding the remaining positions and recovering those assets is expected to take considerable time.

How NUSD and sNUSD are affected

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

With minting and redemption functions suspended, the disruption directly affects the core mechanics of both products. Neutral said the contract stoppage followed legal advice, but it has not yet provided a breakdown of the troubled positions behind the reserve shortfall.

Planned early redemptions in September

The protocol said it plans to introduce an early-redemption process for holders of both NUSD and sNUSD. Its current target is to begin that process in early September, but only after a new redemption smart contract is deployed and an external security audit is completed, alongside legal and financial reviews.

Neutral said the redemption ratio, payment method and schedule are not final because the amount of recoverable assets has not been established. It plans to disclose detailed terms before the redemption program starts.

What comes next

For now, the confirmed next steps are the deployment of the new redemption contract and the completion of outside reviews. Until those are finished, Neutral has indicated that the scope of recoverable assets and the timetable for making users whole cannot yet be fixed.

That leaves the central unanswered questions unchanged: how much of the illiquid reserve positions can be recovered, how long the unwind will take, and whether total assets will be enough to cover outstanding obligations tied to NUSD and sNUSD.

Source: en.bloomingbit.io