tron usdd token drifts off peg

Tron’s algorithmic stablecoin USDD has been under pressure for two days now as short sellers are rushing to bet against the project’s ability to keep the token pegged to one US dollar amid the current turmoil in the crypto market.

In a tweet published yesterday by the founder of the Tron (TRX) project, Justin Sun, he noted that the annual percentage rate (APR) for shorting USDD on Binance stood at 500% meaning that short interest spiked to the point that borrowers are willing to pay anything as they expect that the stablecoin will suffer a similar faith than Terra’s demised UST token.

According to data from CoinMarketCap, USDD drifted to a session low of $0.9771 per coin earlier today but has slightly recovered since then to $0.9804. In any case, USDD remains off its peg and, while that situation continues, the risk of bank run remains high.

Your capital is at risk.

Tron Responds by Strengthening USDD’s Collateral

To respond to this threat, the Tron DAO Reserve, an organism that should supposedly monitor that USDD remains pegged to the North American currency, reportedly increased its USDC reserves to $650 million on the Tron network. According to its official website, the project’s total reserves stood at $2.29 billion after this injection.

Tron’s USDD stablecoin was launched in May this year. The stablecoin maintains its peg via a combination of mint and burn mechanisms involving the network’s native token TRX and crypto reserves held by the Tron DAO Reserve.

usdd price chart

USDD/USD price chart (7D) – Source: CoinMarketCap

According to Tron’s official website, the total supply of USDD at the moment stands at $723.32 million. This means that the project’s collateral ratio is sitting at 317%. USDD’s collateral is currently comprised of $1 billion USDC, 14,040 BTC tokens ($315.75 millIon at today’s market price), and 10.87 billion TRX tokens (approximately $650 million at today’s market price).

For USDD’s collateral to drift below 100%, USDC would have to deviate from its peg significantly while the price of BTC and TRX would have to decline sharply as well. More details about the project’s collateral can be found on the website including the wallet addresses on which the tokens are held.

“USDD is different. For one thing, the stability of USDD is backed by its peg to TRX, which absorbs short-term volatility; for another, the highly liquid billion-dollar reserve assets from the TRON DAO Reserve will swiftly stabilize the price of USDD against extreme industry-wide volatility”, stated the press release through which the launch of the stablecoin was announced.

Tron USDD: An Oddly Similar Project to Terra’s Now-Collapsed UST Stablecoin

The hybrid mechanism used to maintain Tron’s USDD pegged to the US dollar is eerily similar to the one used by Terra for its now-demised UST stablecoin.

However, the Luna Foundation Guard (LFG) – the institution in charge of maintaining UST’s peg by building a large crypto reserve – never fully collateralized UST’s outstanding supply. In this regard, data from CoinMarketCap shows that the market capitalization of UST reached $18 billion at some point while LFG’s reserves peaked at around $3 billion before the meltdown.

Therefore, even though the projects use a similar scheme to make sure their respective stablecoins remain pegged to the North American currency, Tron’s reserves are much stronger.

For USDD to collapse, one of two things must happen. The first scenario would require that the value of the collateral declines sharply, which would involve significant losses in BTC, TRX, and the demise of USDC – a reserve-backed stablecoin.

Meanwhile, there is a second scenario in which the total circulating supply of USDD increases beyond its collateral. This is a possibility that is not entirely off the table as deep-pocketed players could use a crypto lending protocol to move money to USDD to increase its supply and ultimately surpass the value of its collateral.

Once the collateral ratio drifts below 100%, the market may panic and that could prompt a bank run – similar to what happened to Terra’s UST back in the day.

This will not necessarily happen and nothing is pointing in that direction but, in today’s highly volatile crypto markets, one can expect the unexpected as cracks are starting to surface in even the most robust projects in the ecosystem.

Your capital is at risk.

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