After the news that Tron DAO Has Purchased $50 Million In Bitcoin And TRX To Add To Its USDD Reserves, the peg of USDD lost 3% with the lowest price is: 0.9716.
USDD – TRON Network’s stablecoin
- The way it works is similar to Terra’s UST Stablecoin, which is an Algorithmic Stablecoin backed by TRX and BTC.
- TRON uses Oracle with the following mechanism: Super Representatives (SRs) grant Oracle the USDD price on the TRON Network. They will submit a coupon about the current exchange rate of USDD in USD.
- The TRX ecosystem doesn’t have stablecoin-supporting pieces like Terra.
- Community trust in TRX is not appreciated.
To ensure the stability of the stablecoin, TRX has created Reserves back by BTC and TRX with a value of over $600b: 14,040.6 Bitcoin, 140 million Tether (USDT), and 1,906 billion Tron at the moment (TRX). The value of USDD reserves is present $605.133b down: 12% compared to yesterday. According to Justin Sun, USDD will always be over-collateralized by less volatile assets like USDT, USDC, Bitcoin, and other digital assets.
Tron DAO’s objective to overcollateralize the USDD stablecoin by a minimum of 130 % includes the purchase of $50 million in Bitcoin and Tron (TRX). As shown in the screenshot below courtesy of the USDD website, the algorithmic stablecoin of USDD is overcollateralized by a factor of 197 percent at the time of writing.
Is TRON’s USDD Similar to Terra’s UST?
USDD and UST are both algorithmic stablecoins that are not backed by collateral. Considering the recent collapse of the UST, investors are becoming skeptical of stablecoins, especially those in the algorithmic category.
USDD was burned because its algorithm and framework looked like UST – mint USDD by burning TRX and minting TRX by burning USDD.
USDD is also backed by the Tron DAO, which plans to manage a reserve of $10 billion in various cryptocurrencies to support its peg. This is similar to LFG’s intention to hold $10 billion in bitcoin and AVAX to help the UST price fix.
Justin belive that: UST grew too quickly in a short period and was overly leveraged, citing UST’s large market capitalization and relatively small reserves before its collapse. He also points to the high yields of the Anchor Protocol and the lack of proper consideration of market variables, such as technical areas where the UST has failed.
According to Justin Sun, plans to focus on healthy growth by keeping its market cap lower than TRX, the Tron DAO reserve, and the entire crypto market cap. He stated that the reserve would mainly consist of Bitcoin, TRX, and other top stablecoins such as USDT, USDC, BUSD, DAI, and TUSD. Stablecoins can be deployed if USDD falls below its anchor, so it gradually takes time to liquidate other assets.
Unlike the Anchor Protocol, which has a constant interest rate of 20% without any withdrawal limits, Justin Sun said USDD is intended to introduce structures that affect interest rates and withdrawal limits.
3 reasons USDD lost peg
Considering the current crypto market sentiment, USDD crash was triggered by the ongoing volatile crypto market mayhem. According to CoinGecko, USDD has now lost its peg to $1, to $0.977 on June 13. and it continues to lose its peg to this day. The crypto market cap fell from $1,188B to as low as $835B. $BTC also lost 16% of its value in just one day.
This is similar to LUNA when BTC fell from $35K to $30K. The attackers took advantage of the market panic and sold UST, causing the stablecoin’s price to lose peg. Investors are fleeing the market, their confidence is lost when Stablecoins cannot hold value. Made all efforts to save UST futile. And the same is happening with USDD.
Domino effect lose peg of stETH
The complicated depeg of stETH opened the series of liquidation and panic sell the whole market. The Defi market is still a delicious piece of cake, but gradually revealing many serious problems, the holes in the operating system and maybe mark the decline of Defi. And like a snowball effect, everything on the verge of collapse will cause users to continue to panic sell/get liquidated. At that time, it would be difficult for TRON DAO Reserve to maintain enough collateral for USDD.
USDD mint/burn mechanism
The third reason why USDD loses peg is its mint/burn USDD mechanism. The mechanism of TRON is quite similar to Luna: mint and burn TRX back and forth with USDD and farm with USDD at a rate of 30%. When USDD < $1, we can burn USDD and mint TRX to sell on the market for the difference above that $1. With mechanism, USDD price can return to peg.
The big problem is:
Assume time t1: 1 TRX = 0.05$
Burn 1 million USDD we get 20 million TRX mint. This causes the supply of TRX to increase, causing the price of TRX to decrease. Let’s say devaluation decreases by 10% and USDD price has not yet reached peg. Users who continue to burn 1 million USDD will mint up to 22 million TRX.
With the panic selling BTC, TRX also strongly reduces whether the USDD operating model can succeed and not be like UST, it takes time to answer, but with the current peg loss, many investors started to worry and whether will they continue to sell off USDD like UST? However, withdrawal limits, it will help USDD not be sold off like UST, reducing a part of the risk for investors.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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