Since its launch, the stablecoin Tron has lost its peg to the dollar several times. It even dropped to $0.93 on Saturday, raising fears of a terra-like crash.
Could USDD algorithmic stablecoin suffer the same fate as Terra USDD (UST) stablecoin? USDD was launched in early May by Tron, which is currently the fourth largest decentralized finance blockchain with just over $4 billion locked up. smart contracts according to DeFi Llama.
However, since its launch, this stablecoin has already lost its peg to the dollar several times, according to data from Coinmarketcap.
Recall that the so-called “algorithmic” stablecoin works with reserves placed in assets other than the underlying asset to which it is linked, for example, in digital assets. These algorithms should allow maintaining parity with the dollar… At least in theory.
They promise to constantly 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 asset and the value of the stablecoin, this is called “depegging” or “loss of parity”.
During the May cryptocurrency crash, USDD struggled to maintain this parity (falling to a low of $0.98 on May 12). However, it seems less resilient in the face of another cryptocurrency crash. Indeed, the latter hit its all-time low on Sunday, dropping to $0.93.
Specifically, how does USDD work? When USDD is above the dollar, Tron creates USDD to increase supply and lower the price, and when USDD is below the dollar, Tron burns USDD (thus reducing supply) to bring it down to one dollar.
“Except that we saw with the collapse of 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 is going to provide this stablecoin: they bought cryptocurrencies. which they have placed in their protocol reserve to have more than $2 billion in reserve, so if ever the US dollar falls below the dollar, this reserve could lead to the loss of the equivalent, ”explains Valentin Deme, a Cryptoast journalist.
According to the official USDD page, the USDD value of Tron issued to date is $723 million, with the stablecoin having a 325% reserve ratio with a $2.3 billion collateral.
On Friday, the Tron ecosystem created a Twitter thread to defend its model. “Not. USDD is a decentralized stablecoin that relies on an on-chain mechanism and collateralized assets, unlike centralized stablecoins like USDC,” explains Tron.
To crash like Terra?
Despite these words, the Tron ecosystem regularly injects funds to increase the peg: last Tuesday it added $700 million (another dollar-denominated stablecoin that serves as collateral) to its reserve to avoid another loss of the peg. On Friday, US$300 million was also invested.
Moreover, if we look at his reserve more closely, some signals are alarming. On the one hand, their reserve, which certainly consists of classic stablecoins such as USDC and USDT, also contains volatile cryptocurrencies, including bitcoin (whose value has fallen by more than 70% from its all-time high) and TRX (the price of a cryptocurrency Tron ecosystems). So if cryptocurrencies continue to fall, the reserve will fall accordingly.
“This means that they will no longer have enough collateral to guarantee the stability of this stablecoin. The Tron Foundation runs the risk of being underfunded, leading to people fleeing the stablecoin and therefore a Terra-like crash,” Valentin Deme clarifies. .
Moreover, “if ever the US dollar is below the dollar, they burn US dollars to create TRX: this is a stabilization mechanism. But if this situation continues, we may find ourselves in the same scenario as the moon cryptocurrency. Among the 2 billion in reserve, 10 million is TRX, so if an attack like UST ever happens, Tron will create billions of TRX that are also at risk of being nullified,” the latter emphasizes.