Deep-dive: USDD Stablecoin
In-depth analysis of the recently launched USDD stablecoin by TRON
When we think about algorithmic stablecoins, TerraUSD (UST) comes to mind. Yes, we know what happened to them (pst, it collapsed). Read here to find out more.
Just 5 days before UST's collapse (May 5th 2022), Justin Sun, the Founder of TRON, announced the launch of algorithmic stablecoin USDD through the TRON DAO Reserve. Since then, USDD became the top 8 stablecoin token by market capitalization ($787,699,459), with a daily volume of $76 million. However, this controversial project drew criticism for its likeness to UST, which, before its collapse, was the largest decentralized stablecoin by market capitalization.
So how does USDD work? Are both USDD and UST really similar? What will USDD's future look like?
As of now, USDD is depegged at $0.95, struggling to repeg. However, Justin Sun can easily repeg it with the snap of his fingers. But.. why is it still depegged? Follow me as I take a deep-dive into it.
Introducing TRON ($TRX)
Before that, let's introduce TRON.
TRON is a blockchain that has been around for years, and is one of the largest decentralized platforms, with its own cryptocurrency ($TRX). Tron aims to host a global entertainment system for the cost-effective sharing of digital content. Initially marketed primarily in Asia, it is evident that TRON is now global, with over 50 million accounts on their platform as of August 2021.
The TRON network has been compared to that of Ethereum's, and there are signs that both of them are competitors for the business of cryptocurrency traders. Currently, the circulating supply of TRC-20 USDT has exceeded that of ERC-20 USDT.
Personally, I am more inclined to use TRON's network to move funds (like USDT) as compared to Ethereum's network, as TRON's network provides much cheaper transaction fees and faster speeds.
Introducing Justin Sun
Justin Sun is a business executive and entrepreneur who's mainly known for developing TRON in 2017 as a blockchain DAO ecosystem. Sun is also the CEO of the file-sharing program BitTorrent. Justin Sun has been seen as the "villain" during the 2017 ICO period, as he has also been involved in a fair share of controversies over the years, the latest of which is central to USDD stablecoin. His controversies include plagiarism, Tesla giveaways, Liverpool FC partnership and more.
USDD is a TRON stablecoin and digital asset that launched on BNB Chain, Ethereum and TRON. The coin is set to be part of the TRON blockchain and is meant to function like the price of U.S dollar or a currency such as gold.
What is it for?
USDD is algorithmically pegged to the U.S dollar to achieve the overarching goal of financial freedom for everyone. It is a fast, low-fee crypto asset, and they hope to develop a modern decentralized financial system in the blockchain. USDD was actually inspired by UST as Justin Sun saw the meteoric rise of LUNA and tried to piggy-back by making a similar stablecoin. However, USDD runs on TRON.
The TRON DAO strives to safeguard the overall blockchain industry and crypto market, prevent panic trading caused by extreme events, and mitigate severe and long-term economic downturns.
They do this by stabilizing the exchange rates of centralized and decentralized stablecoins on TRON and other blockchains by setting benchmark interest rates and regulating the market through liquidity provision.
The issuance of USDD and administration of reserves are overseen by the TRON DAO Reserve transparently (supposedly). The DAO will manage the permissions of USDD, ensuring price stability and decentralization by over-collateralizing USDD with its reserves.
As of now, the supply of USDD is currently controlled in a centralized manner. They do not want it to grow uncontrollably to a point where it could bring down the entire TRON ecosystem. Hence, only whitelisted institutions can participate right now, and not open to the free market.
Furthermore, they have a built-in incentive mechanism and a responsive monetary policy that allows USDD to self-stabilize against any price fluctuations, which is extremely similar to UST, but not quite operational yet (will talk more about this below)
Important Thing to Note
One important thing to note is that there is NO WAY to burn USDD to get TRON back, not even for the whitelisted entities.
Few questions that need to be answered:
How strong are their reserves?
How is the peg of USDD maintained?
Tron DAO Reserve
The TRON DAO Reserve has introduced high-liquidity digital assets such as BTC, USDT and TRX for over-collateralization in the protocol, and claims that the total value of collateralized assets is significantly higher than that of USDD in circulation with the collateral ratio set at 130%.
As of now, a visit to their website shows a collateralization ratio of 320.35%, in the name of transaprency. Similarly, all collateral assets are stored in public on-chain accounts and listed on the website.
Tron says it aims to build the reserves up to $2 billion by their end of their Phase 1 rollout, with plans to increase that to $10 billion in the long run. This reserve could theoretically help maintain the dollar peg in a potential market turmoil.
All of the collateral will be held in transparent, on-chain accounts that will be displayed for everyone on their website.
This is in comparison to the Luna Foundation Guard (LFG), which only had $3billion of capital in their reserves.
Maintaining USDD's Peg
Given that USDD runs on the TRON network, TRX is the native token and the most natural defence against USDD price fluctuations. According to USDD's whitepaper, its peg will be sustained by creating and destroying USDD supply by a mint-and-burn mechanism and an arbitrage swap.
If 1 USDD < $1 USD, users can buy 1 USDD in the external market and swap 1 USDD for a guaranteed $1 worth of TRX. As a result, 1 USDD will be burned, and $1 worth of TRX will be minted.
Similarly, if the price of 1 USDD is above $1 USD, users can swap $1 worth of TRX token for 1 USDD in the protocol. This way, 1 USDD will be minted and $1 worth of TRX will be burned, expanding the supply of USDD until its price returns to its peg.
However, one thing to note here is that this mechanism is still NOT LIVE as of now, as the “burnt” TRX is just sent to a MultiSigTRXBurn Contract, which can be accessed if 5 out of 7 of the signatures are accessed.
As outlined in USDD's whitepaper, it is expected to adhere to a four-staged roadmap. These stages are:
USDD 1.0: Space
USDD 2.0: ISS
USDD 3.0: Moon
USDD 4.0: Mars
As of now, we only know of details about the initial 2 stages (Space and ISS), and they are all centered around the strategies and management techniques that will ensure USDD's stability and peg.
USDD 1.0: Space
The initial stage which we are in now involves issuance of USDD to early whitelisted institutions, with the TRON DAO Reserve planning to raise $10 billion in early-stage reserves from prominent blockchain industry partners.
Upon its establishment, the TRON DAO Reserve will set its benchmark interest rate to 30% per annum and facilitate other decentralized and centralized organizations that accept USDD to implement consistent interest rate policies. Introducing JustLend, a decentralized lending platform that was once offering close to 25% APY for depositing USDD. These high-interest rates serve as a tool to incite demand and attract more users onto the ecosystem.
Subsequent phases will serve as testing grounds before the final Phase 4 arrives. Once Phase 4 arrives, the USDD’s decentralized network goes live and TRON DAO Reserve can take a step back by giving more control to the decentralized system, thereby ensuring self-sustainability.
Personal Thoughts and Conclusion
Sounds familiar right?
The arbitrage swap of USDD and TRX mirrors Terra's way of maintaining UST stablecoin’s peg with the blockchain’s native token, LUNA.
TRON DAO Reserve resembles the Luna Foundation Guard (LFG)'s reserve, which serves the same purpose of protecting and maintaining the peg.
The high 30% annual yield as a tool to generate demand for USDD resembles Anchor Protocol, which offers a 20% annual yield on deposits in UST.
Kevin Zhou, co-founder of the hedge fund Galois Capital, called this a “LUNA clone”.
HOWEVER, despite all these similarities, I believe that it will not result in a collapse as catastrophic as UST’s. Hear me out.
The high 30% annual yield that USDD is offering is undoubtedly unsustainable, as seen in Anchor’s 20% case. However, one may fail to notice the limit that Justin has set for this redemption. They are limiting the initial rewards (30% yield) to just $2 billion USDD that can be minted for this 30% APR.
During Phase 1, anyone who stakes USDD on DEXes, lending protocols or CEXes can receive the 30% yield as a reward for providing liquidity. When Phase 2 initiates, the liquidity has to be locked on DEXes for OVER A YEAR in order to continue receiving this high yield.
The $2 billion limit is just the initial cap, the longer term cap will be set in the future after analysing the demand for USDD. (Higher volume of USDD traded, higher cap on USDD supply)
The reason for this approach is ultimately to strike a balance between creating demand (with the 30% APR) and minimizing risks (setting a $2b max cap).
Is it really overcollateralized?
We know how the burn-and-mint mechanism ended up with the LUNA/UST crash, but how about the over-collateralization? On their website, the overcollateralization ratio stands at more than 300%, we are very safe right?
Turns out, the information that USDD is collateralized at over 300% is technically false, as they also counted the TRX that was ‘burnt’ to mint USDD as part of the collateral, which is not a fair approach in my opinion. One particular research analyst has taken the time to analyse and calculate the true collateralization ratio, and the real collateralization ratio will shock you. Read on here to find out more.
Furthermore, given the macroeconomic conditions and also the recent LUNA/UST debacle, investors’ confidence have wavered significantly, causing USDD's peg to take a blow as the panic sell continues to worsen. As of 13th June, USDD lost its $1 peg and has been downspiraling ever since. At the time of writing this article, USDD's price stands at $0.9588.
However, someone did the math to calculate how much does Justin need to bring the peg back to $1. A mere $36 million. This makes sense as there is really not a lot of liquidity for USDD trading pairs.
So why is Justin not repegging USDD?
Rumours were saying that Justin did this to punish TRON shorters, who believed that a similar LUNA/UST crash will happen and that TRX will decline in price just like LUNA.
Another theory was that Justin could just be waiting for market participants to “realize their mistakes” and bid up USDD so it pegs back to $1 without Justin having to lift a finger.
What do you think? Will USDD fall to the same demise as UST? Or will Justin be successful in repegging USDD back to $1? Will you be investing in USDD in the future?
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