# Post-Mortem: msETH/msUSD Underbacking

By [MetronomeDAO](https://paragraph.com/@metronomedao) · 2026-07-30

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**Summary**

Unbacked float has been identified across Metronome’s synthetic swap module. The threat has been mitigated, however, it caused an underbacking of Synth assets. At the time of writing, the debt positions backing Metronome's synthetic assets fall short of what's in circulation by:

~6,367 msETH

~4.57m msUSD

This is concentrated on just the swap module. Other Metronome functionality, including Metronome Morpho markets, MetBasis, and Metronome Synth itself are unimpacted and remain functional.

This incident impacts external liquidity providers across the various liquidity pools featuring msUSD and msETH.

The treasury has already built significant defensive positions to close this gap, including over  $34m notional of looped positions and ~$6.5 million in full-range synth LP structured as "last-to-leave": treasury-owned liquidity that will not exit until backing is restored. These positions are sized so that if msETH or msUSD depegs by approximately 30%, the treasury has sufficient capital to buy back and burn enough synthetic assets to eliminate the underbacking completely. That is the point at which current treasury positions are sufficient to fully settle the gap, not a guarantee that price cannot move further.

No LP is required to act. LPs can sell into the market at any time, or stay in LP and let the underbacking be closed without needing to do anything; some may find it more valuable to do the latter, or to arbitrage the spread directly as treasury positions close.

Over the past several months, the rate of accumulation of unbacked assets accelerated well beyond historical norms. Our analysis of Metronome’s complete swap history identifies the cause as the latency of the Chainlink price at swap execution, a variable which Metronome’s fee design did not properly account for, and one that particularly deteriorated on Base. See further details below.

**Background: How Unbacked Float Accumulates**

The mispricing described in this post-mortem affects a portion of swap volume, not all of it. ETH-USD price arbitrage and peg arbitrage, which helps keep msETH and msUSD trading close to their reference price, are healthy use cases and are not the source of the underbacking.Metronome's synth protocol allows users to swap between msETH and msUSD. When MEV bots execute these swaps, the price they are filled at is not always identical to prevailing DEX pricing. Any deviation that favors the MEV bot is considered "unbacked float."

Metronome sized its swap fees on Base at 0.45%, three times the price feed’s published deviation threshold, and 0.55% on Ethereum mainnet, slightly higher than that feed’s 0.5% deviation threshold, on the assumption that any excess underbacking generated by pricing deviation would be absorbed by the fee capture. 

Feed staleness, the length of time spent outside of the deviation threshold, additionally contributes to the underbacking, with underbacking introduced by arbitrageurs multiplying alongside staleness (by both average % deviation and gross volume).

**Oracle Performance**

Metronome prices swaps against the Chainlink ETH/USD Data Feed. We have parsed the protocol's complete transaction history, 241,292 swaps across Ethereum, Optimism and Base, 100% priced coverage, $3.60B gross volume, and priced every swap against its exact on-chain feed round. The findings below are measurements of Metronome’s experience. We have shared the full set with Chainlink and are in active discussion with them.

Each chain's feed publishes a deviation parameter, the price move at which an update should be triggered (0.15% on Base and Optimism; 0.50% on Ethereum). At each swap we measured whether the on-chain price was inside or outside that band relative to the concurrent market mid, and when outside, for how long it had been continuously outside.

**Base (0.15% band), complete history:**

**Feed state at execution**

**Share of swap volume**

**Adverse flow, % of volume**

In-band

3.5% ($51M)

0.050%

Beyond band, 0-30s

6.4%

0.51%

Beyond band, 30-60s

3.4%

0.46%

Beyond band, 1-2 min

39.4%

0.81%

Beyond band, 2-5 min

35.7%

0.77%

Beyond band, 5 min +

11.5%

0.81%

Four feed configurations spanning a 3.3× range of deviation band produce outcomes uncorrelated with band width and ordered by staleness. Chainlink's own Ethereum (0.50%) and Base (0.15%) feeds produce materially the same adverse-flow rate per dollar of volume.

Feed / chain

Deviation band

Median staleness

Realised adverse flow

Chainlink / Base

0.15%

54s

0.740%

Chainlink / Ethereum

0.50%

~54s

0.726%

Pyth / Base

0.50%

22s

0.434%

Pyth / Base, 2025 peak

0.50%

7s

0.342%

**Cadence on Base has deteriorated through 2026.  
**Measured as band-time share divided by realized volatility, so that volatile months are not mistaken for poorly-served ones, March-July 2026 is the worst five-month window in the protocol's history on both L2s under every baseline tested: approximately 30% below Metronome launch-era service and **70-100%** below the March-September 2025 baseline. 

![](https://storage.googleapis.com/papyrus_images/6ccabe2881b221716fbd50c04f2d5e63fd51cbc23319742ae462d353ea0da0a3.png)

p90 breach response on Base ran **4:36–5:37** in those months against a 2025 norm of 1:10–1:44.

![](https://storage.googleapis.com/papyrus_images/505cfff3efee2ecb2f7f36a5436107d4a3b3c17c69dcfa513f4e832398d054a6.png)

The ETH/USD feed has been outside its 0.15% band **18.50%** of all minutes since Metronome went live on Base. ETH/USD on Base additionally underperforms Optimism every single month, despite representing similar L2 blockspace, maintaining identical deviation and heartbeat parameters, and referencing the same aggregate price feed.

[Additional findings, independent academic references, and research methodology can be found in our full report.](https://paragraph.com/@metronomedao/ethusd-oracle-service-and-adverse-flow-on-msusd-mseth-liquidity-pools-measured-findings)

**Timeline: How This Was Identified**

Metronome is a legacy product, launched in 2023, before pull oracles existed. When the technical team discussed proper implementation with experts and auditors, it was concluded that surplus swap fees and other protocol guardrails, such as supply limits, would ground the risk of oracle frontrunning.

Through H1 2025, unbacked float was not meaningfully impacting protocol operations. The team regularly spot-checked unbacked float, and total underbacking remained minimal and explained by unrelated factors, including skew, recirculation of synth fees, and absorption by protocol-owned liquidity.

In Q1 2026, the team noticed underbacking had increased, and set out to identify and eliminate possible causes in order of highest probability.

The first step was introducing MetBasis, a new defensive measure that has since removed over $3m in synthetic assets from circulation.

In April and May, the Kelp DAO exploit forced Metronome [(1)](https://layerzero.network/blog/kelpdao-incident-statement)[(2)](https://www.coindesk.com/tech/2026/05/09/layerzero-says-it-made-a-mistake-in-usd292-million-kelp-exploit) to turn off synth operations due to LayerZero concerns. After operations were resumed, certain Aerodrome pools were also migrated to new versions, which additionally inhibited swapping.

In June, with all systems operating normally again, the team observed underbacking continuing to increase. By this point, the only outstanding variable was the assumptions around the oracle itself.

**Response**

On confirming the cause, the team’s immediate priority was to mitigate impact to users. The team has already activated protocol-owned capital to build defensive positions against a potential depeg. This has included growing protocol owned liquidity, borrowing synth assets against productive collateral, and borrowing against synth LP positions.

If msETH or msUSD trade materially below their reference price, the treasury will close these positions and use the resulting profits to buy back and burn synthetic assets until the underbacking is fully eliminated. LP positions initiated by the treasury are treated as "last-to-leave" LP: a portion of protocol-owned LP will not exit until backing is restored, which gives external liquidity providers additional confidence to remain in the pool.

**Additional Defensive Measures**

*   Swap fees have been increased across all synth pairs to eliminate further unbacked flow. Metronome continues to monitor activity and may adjust these as needed.
    
*   The synth protocol has been upgraded with isolated-by-direction fee support, which lets the protocol charge higher fees on swaps in one direction to defend against imbalanced swap flow. There is limited imbalance today; this measure is preventive.
    
*   Metronome has been in active communication with Chainlink.
    

**Treasury Deployment, By the Numbers**

*   Internal treasury operations have borrowed and looped $34 million worth of synthetic assets.
    
*   $1.5m of treasury assets are currently deployed in owned LP positions.
    
*   An additional $5m of borrow-and-LP and AMO mint-and-LP positions have also been created.
    
*   Over $1m is deposited into StakeDAO's Morpho market pair of msUSD-frxUSD collateral / frxUSD borrow.
    
*   As of 7/30/2026.
    

  
For more synth backing details, please visit the [Dune Dash](https://dune.com/dom_xyz1549/metronome-synth-backing).

**Remediation Plan**

Internal treasury operations have grounded the maximum possible depeg, the point at which a sufficient number of synthetic assets can be repurchased and burned to restore 100% backing. Under current circumstances, that maximum depeg is roughly 30%.

Maximum depeg is not a guaranteed outcome for LPs. There is no mandatory realization of the underbacking, and liquidity providers can choose what they feel is best for them: 

1.  Withdraw their positions and sell synthetic assets into remaining liquidity.
    
2.  Remain in LP, continue earning APY, and wait for a stronger peg. 
    

The maximum depeg figure reflects the rate at which the treasury can exit its existing positions alone, without drawing on principal treasury capital.

Several levers will continue to improve this maximum further:

*   Metronome continues to earn revenue. Over $51m in outstanding debt obligations continue to generate interest, the treasury is now heavily optimized to generate yield through yield-bearing collateral and yield-bearing LPs, and new AMO mint-and-LP AUM (~$4.5m in assets) is earning yield with no ongoing or upkeep costs.
    
*   Remediation conversations with partners are ongoing, and may result in additional capital being injected toward the buyback and burn of synth tokens.
    
*   MetBasis will serve as the primary "sink" for collected synth interest revenue. Metronome anticipates that MetBasis, as the primary venue for msETH-msUSD swapping during this period of heightened peg volatility, will substantially increase swap volume.
    

**Other Parties Impacted**

**MET holders:** None of Metronome's remediation efforts infringe on the interests of MET token holders. Treasury assets, including MET, are not planned to be sold at this time. MET buybacks and distributions to esMET are still planned to proceed as before. Incentivization rates on LP pools have already been adjusted, and the team will continue to optimize these rates in a way that maximizes the business's margin.

**Metronome's broader product stack:** Borrow/lend policy will adapt to the changing market environment. Metronome may increase interest rates across its internal marketplace and issuance to its various Morpho markets. The protocol will continue to extend to new markets as peg strength allows.

**Outlook**

Before internal remediation efforts, synthetic LPs were roughly 30% unbacked globally, and Metronome had been paying to incentivize unbacked, unproductive synthetic assets in circulation.

Regardless of outcome, the protocol is positioned with a clear path toward full backing, while introducing new revenue streams and optimizing existing ones along the way.

Full swap functionality will not return until the architecture upgrade is complete. Until then, elevated fees keep swap volume minimal, and isolated-by-direction fees remain active only for skew protection. Once the upgrade is complete, the protocol plans to concentrate swap activity, including ETH-USD price arbitrage, around MetBasis.

Beyond restoring equal backing between synthetic assets in circulation and debt positions held, the measures introduced today will continue to strengthen synth backing further, and remain applicable to strengthening backing into the future. Once the buyback and burn is complete, Metronome will have numerous methods available to restrict circulation sooner, which should allow the protocol to more efficiently incentivize LP and more easily grow borrow/lend going forward.

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*Originally published on [MetronomeDAO](https://paragraph.com/@metronomedao/post-mortem-msethmsusd-underbacking)*