Having launched as an algorithmic stablecoin in early May, Tron-based USDD is now supposedly over-collateralizing the stablecoin in the wake of the collapse of Terra’s UST.
The troubled history of algorithmic stablecoins has seen a number of them lose their dollar peg and collapse. Terra/UST was the most notable with its collapse last month responsible for $60 million in value being vaporized. Despite that, Tron founder Justin Sun believes that USDD can succeed where others have failed.
The quest for a truly stable algorithmic stablecoin
USDD has a market capitalization of $667 million at the time of publication. This is dwarfed by centralized fiat-backed stablecoins such as Tether ($72 billion) and USDC ($54 billion) although as Terra had shown, there is considerable potential for an algorithmic stablecoin to grow should one be developed that is truly robust.
In an open letter to announce the launch of USDD, Sun said that the stablecoin would be backed by a $10 billion reserve which would set a ‘risk-free’ interest rate of 30%. The stablecoin went live on May 5 but doesn’t contain the reserve amount that Sun initially claimed it would. At the time of publication, the reserve stands at $834 million.
USDD is managed by the Tron DAO Reserve and offers an interest rate of up to 30% - exceeding the 20% that Terra had offered. The Tron DAO is administering a reserve to backstop the stablecoin - consisting of Bitcoin, TRX and stablecoins such as USDT (Tether) and USDC.
USDD over-collateralization claim under scrutiny
According to the Tron DAO reserve website, the USDD stablecoin has a collateralization rate of 226% right now. Currently, the reserve includes 14,000 BTC, 240,000,000 USDT and 946,000,000 TRX. However, in a recently published thread on Twitter, community member @resdegen has challenged Tron’s claims of collateralization in excess of 200%.
@resdegen puts the real collateralization rate at 118% on the basis that it’s not reasonable for Tron to include burnt TRX tokens as collateral. The claim is also made that TRX - an asset involved in the minting and burning mechanism of the algorithmic stablecoin - will not maintain value if the USDD stablecoin comes under pressure and is de-pegged, as happened with LUNA / UST.
On this basis, if the TRX-based reserves are removed from the calculation, that would put USDD at 95% collateralized. Exodus News contacted the Tron DAO Reserve for its response to these claims. We will update this article upon receipt of a response.Just weeks before Terra’s collapse, another algorithmic stablecoin - Near Protocol’s USN - launched, following a similar seigniorage model. As Terra was in the process of imploding, Decentral Bank - the DAO responsible for administration of USN - underscored how it would maintain its dollar peg. It promises to double-collateralize the stablecoin initially with NEAR tokens and USDT.
While it can be criticized on the very same basis for depending upon the NEAR token as collateral (given that it is directly implicated in the minting/burning process), it should also have a 100% USDT reserve to fall back on if the stablecoin came under pressure. The commitment to always maintain these collateralization levels was not explicitly made, however.
No algorithmic stablecoin has succeeded over the longer term and at scale so far due to design vulnerabilities that can lead to them being destabilized. The nearest successful project would be MakerDAO’s DAI stablecoin which does manage to be decentralized even if it does rely on collateralization. However, the prize for whomever can improve design so that an algorithmic stablecoin can’t be de-pegged is enormous.
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