After the collapse of LUNA-UST, the community began to be on high alert for algorithmic stablecoins with similar interest-paying mechanisms. And TRON-USDD is the subject of extremely high risk of depeg. However, I did not expect this story to come so soon.
USDD model work mechanism
USDD is an Algorithmic stablecoin and works similarly to Terra’s UST Stablecoin.
Specifically, USDD will be pegged to the US dollar, with 1 USDD corresponding to 1 USD. In the immediate future, the value of USDD will be backed by TRON’s TRX token. To get USDD, users need to key their TRX to receive a corresponding amount of USDD. In case you want to get TRX back, you just need to do the opposite.
As of the morning of May 13, according to data from https://tdr.org/#/ – an on-chain website about USDD reserves and collateral, USDD has a total supply of 2 billion USD but only 723 million USD in circulation, the equivalent to $8.97B TRX burned.
So what makes USDD lose peg?
3 reasons why USD 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.
But we also know “As the water rises, the boat rises”. The sharp drop in the market made people panic. They sold their assets and fled the market. And this is a good time to attack assets that are pegged to other assets according to the market mechanism.
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.
stETH was losing peg and then causing the chain of reaction (ETH – TRX takes a big correction)
Three Arrow Capital (3AC) and Amber Group have huge exposures to Celsius and Celsius have dumped a lot of stETH on AAVE and Compound to borrow money.
Currently, the price of stETH has lost peg against ETH, putting Celsius’ debt position at high risk of being liquidated.
Once Celsius is liquidated. ETH will be heavily dumped, and BTC and other coins will not escape the same fate. The chain effect makes the market bleed. BTC and TRX plummet >> Guaranteed asset value for USDD will continue to decline
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 $1. Thanks to this mechanism, USDD price can return to peg.
The big problem is:
Assume time t1: 1 TRX = 0.05$
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.
If USDD can’t on peg. The cycle will repeat continuously and the TRX price will probably be the same as LUNA.
Another way that can help USDD return to peg is to use the reserve on the current TRON DAO reserve.
At the time of writing, the Reserve of TRON DAO is around $1.5B, ($300m BTC, $140m jUSDT, $1B USDC and $100m TRX) ⇒ 209% collateralize ratio.
However, both ways cause a crash effect on an already illiquid market, because BTC dump will bring the whole market down, and TRX dump reserve compared to usdd supply is decreasing.
Above are some of my analyses on the reasons why USDD lost the peg. In general, Justin Sun and Tron DAO reserve have made moves to save USDD, bringing this stable coin to its peg price. However, so far these efforts have been fruitless.
In my opinion, USDD has a much lower supply than UST, so saving will be a bit easier. USDD price will soon return to peg.
If you have any questions, comments, suggestions, or ideas about the project, please email [email protected].
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.