Will USDD experience the same collapse as Terra’s stablecoin?

Since its launch, the Tron stablecoin has already lost its peg against the dollar several times. On Saturday, it even fell as low as $0.93, raising fears of a Terra-like collapse.

Could the USDD algorithmic stablecoin suffer the same fate as the Terra blockchain stablecoin terra usd (UST)? USDD was launched in early May by Tron, which is the fourth largest blockchain in decentralized finance to date, with just over $4 billion locked in smart contracts according to data from DeFi Llama.

However, since its launch, this stablecoin has already lost its anchor several times against the dollar according to data from Coinmarketcap.

As a reminder, a so-called “algorithmic” stablecoin works with reserves placed in assets other than the underlying to which it is pegged, for example digital assets. These algorithms should make it possible to maintain parity with the dollar… At least in theory.

The promise is to permanently maintain parity, for example 1 algorithmic stablecoin = 1 dollar. This peg to a currency is also called a “peg”. When there is a gap between the value of the underlying and that of the stablecoin, it is called a “de-peg” or “loss of parity”.

During the crypto-crash of May, the USDD had tried to maintain this parity as best they could (falling to a low of 0.98 dollars on May 12). However, it seems to be less resilient in the face of the new crypto-crash. Indeed, the latter reached its all-time low on Sunday, falling to $0.93.

Concretely, how does the USDD work? When USDD is above a dollar, Tron creates USDD to increase supply and drive down the price, and when USDD is below a dollar, Tron burns USDD ( thus reducing the supply) to bring it down to one dollar.

“Except that we saw with the collapse of the terra usd that this mechanism does not work and can go to 0. As a result, the Tron ecosystem explained that in addition to this mechanism, it was going to collateralize this stablecoin : they bought cryptocurrencies which they put in their protocol reserve in order to have more than 2 billion dollars in reserve, so if ever the USDD drops below a dollar, this reserve could give the equivalent lost”, explains Valentin Demé, journalist at Cryptoast.

According to the official USDD page, the value of USDD issued to date by Tron is $723 million, with the stablecoin having a reserve ratio of 325% with $2.3 billion in collateral.

On Friday, the Tron ecosystem made a thread on Twitter to defend its model. “No. USDD is a decentralized stablecoin that relies on an on-chain mechanism and collateralized assets, unlike centralized stablecoins like USDC,” Tron explains.

Towards a collapse like Terra?

Despite these words, the Tron ecosystem regularly injects funds to raise the peg: last Tuesday, it added 700 million USDC (another dollar-denominated stablecoin that serves as collateral) in its reserve to avoid another loss of peg . 300 million USDC was also injected on Friday.

Moreover, if we look at its reserve more closely, some signals are worrying. On the one hand, their reserve, which is certainly made up of classic stablecoins such as USDC and USDT, also contains volatile cryptocurrencies, including bitcoin (whose value has fallen by more than 70% since its all-time high) and TRX (the cryptocurrency of the Tron ecosystem). So if cryptocurrencies continue to fall, the reserve will fall accordingly.

“Which implies that they will no longer have enough collateral to guarantee the stability of this stablecoin. The Tron fund risks finding itself therefore under-collateralized, which would lead to people fleeing the stablecoin, and therefore a collapse like Terra “, specifies Valentin Demé.

Moreover, “if ever the USDD is below a dollar, they burn USDD to create TRX: this is the stabilization mechanism. But if this situation continues, we could be in the same scenario than the luna cryptocurrency. Among the 2 billion in reserve, 10 million are TRX, so if ever there is an attack like the UST, Tron will create billions of TRX which risks going to 0 as well”, underlines this last.

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