Lending + Pledge, Decoding the Innovative Model of Stablecoin Protocol Level | CryptoSeed

Author: Fairy, ChainCatcher

Editor: TB, ChainCatcher

On March 26, the market capitalization of lvlUSD surpassed $100 million, achieving a growth rate of 129% in less than a month. As a stablecoin issued by the stablecoin protocol Level, lvlUSD is emerging as a notable player.

In the stablecoin sector, there is an increasing market demand for stablecoins that are both secure and offer considerable returns. Recently, Level has been exploring a new path by leveraging lending protocols to create a highly transparent and composable stablecoin, lvlUSD, while providing risk-adjusted returns.

Background and Current Development of the Level Team

Level co-founder Kedian Sun graduated from the Wharton School and previously served as an operations manager at Brex and worked at Lazard. Another co-founder, David Lee, has ten years of experience as a computer engineer, having worked as a software engineer at Flexport and Uber, and holds a bachelor's degree in computer science from Columbia University.

Currently, Level has completed two rounds of financing, totaling $6 million. In August 2024, its development company, Peregrine Exploration, announced the completion of $3.6 million in funding, led by Polychain Capital and Dragonfly Capital. In March 2025, it completed another $2.6 million funding round, led by Dragonfly Capital.

Design of lvlUSD

lvlUSD is fully backed by USDC and USDT and can only be minted permissionlessly using these two stablecoins. USDC and USDT constitute the reserves of lvlUSD, which are used to generate returns in lending protocols. Additionally, a portion of the lending protocol receipt tokens representing Level's lending positions will be deposited into a re-staking protocol to earn extra rewards.

Earnings Mechanism

Level returns lending earnings to users through the ERC-4626 staking mechanism. After staking lvlUSD, users will receive slvlUSD, whose value will appreciate as the protocol distributes earnings to the staking contract. lvlUSD and slvlUSD can be freely transferred, traded, exchanged, and used in integrated DeFi protocols.

1. Generation of Lending Earnings

To generate earnings, Level supplies USDC and USDT to blue-chip lending protocols such as Aave. Currently, all reserves are deployed in Aave, but these reserves will soon be diversified across other lending protocols (such as Morpho). The receipt tokens from these protocols (such as Aave's aUSDC or aUSDT) will be wrapped into yield-generating assets.

2. Distribution of Earnings to slvlUSD

Level will distribute the lending earnings obtained by the protocol to slvlUSD (i.e., staked lvlUSD). Therefore, users must stake lvlUSD into the staking contract or vault to receive slvlUSD, representing their share in the vault. As earnings increase, the value of slvlUSD will gradually appreciate.

3. slvlUSD Earnings Exceed Base Lending Earnings

Since all lvlUSD reserves are used to generate lending earnings, but only slvlUSD can earn returns, the earnings of slvlUSD are higher than the base lending earnings. When the staked lvlUSD is lower, the earnings of slvlUSD are higher, and vice versa.

4. Unstaking and Withdrawal

When users unstake, slvlUSD will be burned. Users will receive the corresponding amount of lvlUSD based on the ratio of the total lvlUSD held in the contract to the outstanding slvlUSD supply. After unstaking, users need to wait 7 days to withdraw lvlUSD.

Risks Faced by the Level Protocol

According to information on the project's official website, the use of the Level protocol may involve the following risks:

• Collateral Risk: There may be a risk of bankruptcy of the collateral.
• Lending Protocol Risk: The underlying lending protocol may accumulate bad debts.
• Staking Risk: The operator of the staked assets may face penalties, leading to bankruptcy.
• Smart Contract Risk: The smart contracts managing or deploying lvlUSD collateral may have vulnerabilities, leading to the bankruptcy of lvlUSD.
• Operational Security Risk: Certain functions of the protocol (such as emergency collateral rescue) are controlled by permissioned roles, which may be compromised.

To address these risks, Level has implemented several mitigation measures. For example, Level only accepts USDC and USDT as collateral and has set strict standards for the selection of lending protocols; it enhances operational security by employing multi-signature mechanisms and cold wallets to ensure the safety of administrative permissions.

The Level protocol offers new possibilities for the stablecoin sector through its innovative earnings mechanism. However, whether it can break through with its unique earnings model and risk management strategy remains to be validated by the market.

(This article only introduces early-stage projects and does not constitute investment advice.)