USDD — the first over-collateralised stablecoin
The collapse of Terra UST showed the disadvantages of algorithmic "decentralized" stablecoins, whose rate is secured by the algorithm, not collateral, like USDT, USDC, BUSD, TUSD and other "centralized" stablecoins. At the same time, collateralised stablecoins can have problems with reserve shortages. The Tron project team has made a challenge to all modern stablecoins and released their decentralized.
What is USDD, and what is its speciality
The USDD stablecoin was released on 5 May 2022 by Tron DAO, the team behind the Tron blockchain and TRX cryptocurrency. By some unfortunate coincidence, or maybe not, USDD existed just days before the collapse of another decentralized stablecoin, UST.
USDD is decentralized: a third party cannot block or freeze users' tokens. This makes USDD significantly different from USDT or USD Coin, which provide the ability to freeze tokens via a smart contract. With the Blacklist feature, Tether or Circle can mark addresses that cannot withdraw tokens from the wallet on different networks.
In addition to decentralization, the main feature of the USDD stablecoin was excessive collateralisation: tokens are backed by more than 190%. For comparison, the DAI stablecoin is 120% collateralised, while the USDT and USDC tokens are only 100% collateralised.
Another peculiarity is that, like DAI, the USDD stablecoin is fully backed by digital assets. According to the official website, USDD reserves consist of:
- 10.93 billion TRX;
- 14,040 BTC;
- 1,340,800 TUSD.
In October 2022, USDD received the status of authorized digital currency and medium of exchange in Dominica.
How is the USDD stablecoin exchange rate maintained?
A unique Peg Stability Module or PSM is responsible for pegging to the US dollar — it is a trading (swap) instrument that allows USDD to be exchanged for other stablecoins at a 1-to-1 rate without slippage.
The Mint & Burn mechanism provides the token issuance: to get 1 USDD, the user needs to "burn" $1 worth of TRX tokens in their wallet. The infamous UST stablecoin used the exact mechanism.
The user receives USDD tokens, and TRX is sent to the reserve. If the user wants their TRX tokens back, they must burn USDD.
A separate contribution to the stability of the USDD exchange rate is made by the so-called "Super Representatives" — 27 large TRX holders who mitigate the impact of volatility on the stablecoin through a certain mechanism. The Tron DAO community chooses the super representatives by voting, and this process is reversible.
Statistics and data
At the time of writing, 726 million USDD tokens have been issued. Stablecoin exchange rates typically range from $0.99 to $1.01, according to CoinMarketCap. The exchange rate has deviated twice since its launch. The most significant deviation was recorded on 20 June 2022 — then the USDD price fell to $0.93. The exchange rate recovered for over a month but eventually returned to parity with the dollar.
The second time, the price of USDD fell to $0.97 amid the collapse of FTX. Justin Sun, the founder of the Tron project, suggested that the deviation was caused by the sale of the stablecoin by the now-bankrupt Alameda Research fund to address liquidity issues.
May-June 2022 was a difficult period for stablecoins: due to the collapse of Terra, many investors feared a repeat of the situation with other tokens tied to the US dollar exchange rate. Therefore, even a slight deviation in the price could cause a panic wave of sales. Later, a similar thing happened with another algorithmic stablecoin — USDN on the WAVES blockchain.
USDD predicted the same fate as UST or USDN, but this stablecoin continues to maintain its parity with the currency despite the negative predictions.
Problems
However, the users' fears are not in vain. Firstly, apart from verbal statements and information on the website, there are no guarantees of security and compensation in case of a collapse of the exchange rate. Secondly, more than 99% of the stablecoin reserve consists of highly volatile assets, the rate of which can fall significantly. For example, if the value of TRX and BTC suddenly collapses by 50%, the collateral ratio will become less than 100% — that is, the reserve will be insufficient, not excessive. Finally, at any time, the reserve can shrink by any amount.
It is worth noting that since its launch, the issuance of stablecoin has increased more than 7 times — from 100 million to 726 million. However, such a rapid issuance is also due to the high interest for the deposit — a similar thing happened with UST, which was one of the reasons for the collapse of stablecoin. The crypto community is divided into two camps: some users are confident in the long-term success of USDD, while others remain sceptical about it.