USDD, the algorithmic stablecoin on Tron, has received an additional 300 million USDC to use as reserves.
@trondaoreserve has received another 300 million USDC as reserve. Current USDD collateralization rate is above 300%. https://t.co/8OrPih3Wwo
— TRON DAO Reserve (@trondaoreserve) June 17, 2022
In recent days, USDD has lost parity with the US dollar due to fears that it could implode like UST did in May.
Algorithmic stablecoins always run the risk of not having enough hedges to maintain their value, due to the possible sharp loss in value of the reserves. This is exactly what happened to UST, as most of the reserves were in LUNA, and the value of LUNA imploded.
This is why TRON DAO Reserve decided to buy tokens of another stablecoin, USDC, to use as a stable reserve for USDD.
USDC is issued by a regulated US company, and is 100% collateralized with weekly audits certifying its soundness. So using it as a reserve for USDD means making sure the value of the algorithmic stablecoin can be sustained even if the crypto markets collapse.
It is enough to say that the average value of USDC in recent months has always been more or less $1, despite all the crashes.
What’s more, USDD has a low market capitalization of just over $700 million, so partially collateralizing it with 300 million USDC could really help to recover the peg.
It has now lost parity with the dollar since 13 June, although after hitting a low below $0.96 on 15 June it has never fallen back to those levels.
Stablecoin tokens worth well over USDD’s market capitalization are now stored on the TRON DAO Reserve blockchain, so it shouldn’t be difficult to get it back to parity with the dollar.
The difference between off-chain and on-chain collateralized stablecoins
Off-chain collateralized stablecoins maintain parity simply by allowing the holder to return them in exchange for an equal amount of dollars. This is not the case for algorithmic stablecoins, so it is more difficult to recover the peg when it jumps.
However, it is worth mentioning that the most widely used stablecoin on Tron is not USDD, but USDT, so even in the case of a loss of the USDD peg, the problem only affects a very small portion of the Tron ecosystem.
Currently on the Tron network, in addition to $720 million in USDD, there is also more than $38 billion in USDT and almost $3 billion in USDC. So in theory USDD should have a very limited role, although USDT and USDC do not really have anything to do with the Tron project.
The real problem is the still very high APY for those staking USDD. These rates make many people turn their noses up at them, so much so that suspicions are raised that this could be some sort of pyramid scheme that only manages to pay stratospheric interest until the moment it collapses. However, it is worth emphasizing that these are not fixed and stable percentages, and that they are likely to decrease greatly over time, making the scheme less risky.