Will TRON and USDD collapse like LUNA/UST? That’s what everyone is wondering. Before I did my research, I was leaning towards yes that it will collapse and that’s why I was hesitant to write this article because I thought that it would die before I had a chance to release this. But now after I read their white paper and a bunch of other documentation, I actually think that they won’t collapse – at least not anytime soon.
To understand why there’s three things we got to look at. We’re going to examine why USDD is still at 95 cents right now, struggling to recover its peg even though Justin Sun could easily bring it back to one dollar with a snap of his fingers. But first we got to understand USDD and see how it compares to LUNA’s UST.
USDD is an algorithmic stable coin with a soft peg to one dollar. It was actually inspired by LUNA’s UST because Justin Sun saw the meteoric rise of LUNA and he tried to piggyback off of it by making a similar stable coin. Of course, there are some differences like USDD runs on TRON for example, but I think the biggest misconception has to do with their on-chain swap.
Remember how UST had that infamous system where you could swap one dollar worth of LUNA for one UST and vice versa. Well, TRX and USDD will also have such a system but it’s not quite operational yet. Right now, only whitelisted members of the TRON DAO reserve or TDR can participate in the issuance and redemption of USDD. So the supply of USDD is currently being controlled in a centralized manner. They don’t want to have it grow uncontrollably to a point where it could bring down the whole TRON ecosystem if there’s a bank run. That’s why only whitelisted institutions can participate right now, and it’s not open to the free market yet.
One important thing to note here is that there’s no way to burn USDD currently. Like you know how you can burn one UST to mint one dollar worth of LUNA. That’s an important part of the arbitrage process to bring the price back to one dollar. As of right now there’s no way to burn USDD to get TRON back, not even for those whitelisted entities. Keep this in mind because this is going to play a big role in understanding why USDD is still d-pegged right now.
So without this on-chain swap live right now. USDD is actually more like Dai aka it’s just your regular collateral back stable coin. It’s actually over collateralized though, which makes it very different from LUNA’s UST. The LUNA foundation guard only had around three billion dollars with the capital in their reserves, but UST’s supply was 19 billion at its peak and that was a whole problem. The three billion could not defend the peg of a 19-billion-dollar monster. But the TRON DAO reserve wants to keep an over collateralized reserve with stable coins like USDC and USDT, plus Bitcoin, TRON, etc.
They’ve already put some assets into the reserve, but they plan on building that up to a two-billion-dollar value by the end of their phase one rollout, with plans to increase that to 10 billion dollars for the long haul. All of their collateral will be held in transparent on-chain accounts which will be displayed for everyone to check out on their website. Their current minimum collateral ratio is set to 130% but they’re going to have likely way more than that.
There’s actually a lot of controversy behind how they calculate the collateral ratio on their website because they display some massive 324% collateral ratio, but people point out that they also count the TRX that was burned in order to mint USDD, as part of the collateral. Which is not a fair approach in my mind. But if we remove that, their collateral ratio is still over like 200%, per my calculations. which is still good.
Now something that worried me when I first heard about the stable coin was the sky-high 30% yield that they’re promising. Remember UST was able to grow so much because anchor protocol was offering that unsustainable 20% yield on it. So with USDD coming in at an even higher yield that makes me wonder is Justin Sun crazy. Well turns out that he is not crazy because they are limiting the initial rewards to just 2 billion USDD, that could be minted for this 30% APR. So during phase 1 of their stable coin rollout, anyone who stakes USDD on DEXs, lending protocols and even centralized exchanges, can get this 30% yield as a reward for providing liquidity. And when phase 2 rolls around you’re going to have to lock your liquidity on DEXs for over a year in order to get this higher yield.
if you decide to lock it for a shorter period of time then you will get a lower, more sustainable rate so that 2 billion USDD limit is just the initial cap. But the longer-term cap will be set in the future by looking at demand for USDD. Like if there’s a lot of trading volume going on, then that cap can be higher but if there’s less volume that means a lower cap will be set. The whole reason for this approach is to minimize risk by limiting the growth of USDD supply so you’re not like “Woooo! 30% APR forever! Let’s go!”.
Speaking of phases there’s four total phases for the staple coin rollout. Phase one already happened. Basically, they pre-issued some USDD and it’s all carefully controlled by the TRON DAO reserve. Then phase two and phase three are more testing stuff before phase four finally arrives. That is when the USDD decentralized network goes live and the TDR takes a step back and they hand over control to the decentralized system.
Theoretically this is when the system will be more self-sustaining and they’re going to also have their on-chain swap running at that time. But right now we don’t have any of that so you see why it doesn’t make sense to expect a death spiral or bank run to happen right now.
That whole mechanism that costs LUNA’s death spiral isn’t even out for TRON and USDD. So right now, this is just a boring old over collateralized stable coin. But wait if that’s the case why did USDD lose its peg a week ago and it’s still not back at one dollar?
That’s a great question. The first thing you got to know is that there’s currently no way to burn USDD. So institutions can mint USDD but they can’t go back the opposite direction. Remember being able to burn a stable coin is a key part of that arbitrage mechanism that brings the price back to one dollar. If the price is below one dollar you want people to buy and burn USDD, which reduces the overall supply and helps alleviate selling pressure.
But besides all that, I think most people are confused right now because almost everyone I talk to assumes that TRON and USDD are just like LUNA and UST. Because of that there’s a general lack of confidence in USDD, which could explain why it’s sitting at 95 cents right now instead of one dollar. People should really be thinking of this as an ultra-conservative over collateralized stable coin, not some risky algo staple.
But at last, you know that whole saying about market staying irrational. I think that’s what is happening here. The funny thing is someone did the math of how much money it would take for Justin Sun to bring USDD back to one dollar, and they ended up with a number of around like 36 million dollars. That number is tiny, it’s like 2% of its overall reserve. But it makes sense because there’s really not a lot of liquidity for USDD trading pairs right now.
After all they just launched it recently and people are still shaken from the whole LUNA/UST debacle. So Justin Sun can definitely re-peg it with the click of a button. But then the question becomes why isn’t he doing that right now? Well, some people say that it’s because Justin wants to punish the TRON shorters. Because there’s no good way to short USDD right now. So a lot of people are shorting TRON instead, expecting it to go the way of LUNA. But that’s not really going to happen because the TRON for USDD swap isn’t live. So even if USDD completely dies there’s zero risk for TRON currently.
That’s why some people speculate that Justin just wants to pump TRON to liquidate all the shorters and enact his ultimate revenge. He did tweet out that a short squeeze was coming after all.
But another theory is that Justin is just waiting for market participants to realize their error and then bid up USDD. So it goes back to one dollar without him having to lift a finger. That way he can save his capital and improve the reputation of the stable coin which would be a win-win for him. Personally, I think this second theory is more likely.
So that is the present state of USDD, but what about the future though? Like once it’s on-chain swap comes online, will it also fall to a similar fate as LUNA/UST? Well, we’re honestly going to need a lot more details before we can say for sure. But just for fun we can try to speculate based on the info we have available.
The main concern is that a death spiral is going to happen here just like it did for LUNA/UST. But honestly, I think that as long as they let USDD grow in a slow but steady manner they’ll be okay. They are doing a lot of things differently after all. Like they have their massive over collateralized reserve, from the get-go. And they’re only offering 30% APR for up to 2 billion USDD.
Ultimately, I just don’t think Justin Sun would ever let his precious TRON fail just because of the stable coin. That’s why he’s making this pretty conservative from top to bottom. So, the verdict is that USDD probably won’t collapse any time soon.