Tron’s USDD stablecoin has been making frequent appearances in crypto headlines lately. For a token that’s barely a month old, media coverage and social media limelight on that scale should have come off as a big feat. Not for the Tron stablecoin, though, which finds itself in a rather delicate situation after the fall of fellow algorithmic stablecoin terraUSD (UST) last month.
Under scrutiny, Tron is now desperate to prove that USDD is immune from the vulnerabilities that eventually spelled the doom for terraUSD. Of course, only time will tell how successful these efforts prove to be in the long run.
Meanwhile, if you want to learn about the USDD stablecoin, this detailed guide is a good place to start.
In this guide:
What are algorithmic stablecoins?
As you may already know, stablecoins are digital assets that attempt to peg their market value to another asset, such as a fiat currency. In the case of dollar-pegged stablecoins such as USDT or USDC, their prices are always supposed to be $1.
Each stablecoin has its own mechanisms to maintain the peg. For example, the likes of USDT and USDC are “over-collateralized” by USD reserves. In other words, the total circulating supply of USDT or USDC is backed by an equal or higher volume of USD reserve maintained by their respective issuers.
Similarly, a stablecoin issuer may also choose to back their stablecoin with other reserve assets. The reserve asset could be a commodity such as gold or even another cryptocurrency like bitcoin or ethereum. For example, MakerDAO’s decentralized stablecoin DAI is over-collateralized and is backed by ether (ETH) reserves.
An upgrade over conventional stablecoins?
Since 2021, a new type of stablecoins emerged in the crypto market. Called algorithmic stablecoins, this new type of asset uses a whole new approach to maintaining its peg. Some examples of algorithmic stablecoins are USD Digital (USDD), terraUSD (UST), frax (FRAX), neutrinoUSD (USDN), and magic internet money (MIM).
They’re called algorithmic because these assets use an algorithm underneath to issue more coins when the price increases and purchase them off the market when the price drops. The idea here is to prevent depegging by regulating the supply-demand ratio.
In their purest form, these assets are uncollateralized, which is why they are also referred to as “uncollateralized stablecoins” sometimes. USDD, however, claims that it is over-collateralized (details below).
You could argue that an algorithmic stablecoin is a true representation of decentralized assets because it doesn’t depend on any centralized entity to sustain itself. The algorithm itself takes care of all proceedings, including regulating the supply, demand, and target price.
If you want to learn more about algorithmic stablecoins, BeInCrypto already has a comprehensive guide explaining how they work, their advantages and limitations, and other key details.
What is USDD stablecoin?
USD Digital (USDD) officially made its debut on May 5, 2022, as a stablecoin on Tron, BNB Chain, and Ethereum blockchains. It is pegged to the U.S. dollar in a 1:1 ratio, meaning that USDD maintains its value at a fixed exchange rate to the U.S. dollar, whereby 1 USDD is always supposed to be equivalent to $1.
Being barely a month old, USDD doesn’t have much of a history. However, as an algorithmic stablecoin, it shares many similarities with UST, the Terra stablecoin that used to rule the roost until its downfall. We’ll be delving into the details, including how USDD works and its underlying tokenomics, in a while, but first, let’s have a look at the team behind the token.
The team behind USDD
Tron, a blockchain-based decentralized digital platform, developed USDD to replicate the success of Terra UST, which at one point was the third-largest stablecoin by market cap (lagging only behind USDT and USDC).
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While USDD is the proverbial new kid on the block, Tron is not. Founded by Justin Sun in 2017, Tron and its homegrown cryptocurrency, Tronix (TRX), are already familiar names in the crypto market. The platform aspires to expedite the decentralization of the internet via blockchain technology and its offshoots.
As of Q2 2022, Tron has a vast global user base with more than 90 million accounts.
USDD is over-collateralized
At launch, Tron promised to fully back USDD with a calibrated combination of stable and volatile assets. Justin Sun himself confirmed that USDD would be over-collateralized with a mix of high-quality, low-volatility assets. He further assured that that collateral would consist of the likes of BTC, USDT, and USDC.
Tron recently promised a guaranteed minimum collateral ratio of 130% will be maintained at any given time. As of this writing, the collateralization ratio stands at just over 200%, with approximately $1.4 billion in reserves backing roughly 700 million USDD in circulation, according to the Tron Dao Reserve website.
How does the Tron stablecoin work?
Without delving into the technical nitty-gritty, this is roughly how the USDD stablecoin promises to maintain its parity with the U.S. dollar:
When the price surges beyond the peg
Imagine a scenario when the demand for the Tron stablecoin is higher than the supply. The market dynamics will then cause the price to go above $1.
To bring the price back to $1, the USDD protocol temporarily allows users to swap $1 worth of TRX for 1 USDD. This swap burns $1 worth of TRX and mints 1 USDD. As more and more users execute these swaps, the resulting increase in USDD supply gradually stabilizes the price at $1 per token.
Note that there’s an incentive for users to actively participate in the process. That’s because these TRX-to-USDD swaps present an arbitrage opportunity for users that they can leverage to make profits.
For example, if the USDD price goes up to $1.1, then the new Tron stablecoin you have minted by swapping $1 worth of TRX will also be valued at $1.1 in an external market. You could then sell that USDD to make a net profit of ($1.1 – $1.0 =) $0.1. This may not seem much, but the profits can add up to sizable numbers if done in large quantities.
When the price drops below the peg
Similarly, if the USDD price drops below $1 (say, to $0.9), you can buy 1 USDD for only $0.9 in an external market. You could then swap 1 USDD for $1 worth of TRX in the protocol. Each swap results in 1 USDD to burn in the system, which then gradually reduces its circulating supply.
The supply eventually drops, with more and more users swapping USDD for TRX. It then causes the price to come back to the target level, i.e., $1.
As for your incentives for participating in the process, you could now sell your $1 worth of TRX in an external market to make a profit of ($1- $0.9 =) $0.1 per swap.
The role of Tron Super Representatives
Note that typically, price dropping below the peg is a more common occurrence for most stablecoins. This is where the Tron Super Representatives have a big role to play.
For those out of the loop, Super Representatives (SRs) are TRX holders who are responsible for producing blocks and packing transactions. SRs are selected through a community vote where all TRX holders get a chance to cast their votes. The top-27 most-voted candidates are elected as SRs, and they play an important role by absorbing the volatility of the USDD price. This is how:
Each time the USDD stablecoin price drops below $1, the subsequent minting of TRX temporarily dilutes the mining power of the SRs. So, in a way, the SRs end up bearing the cost of USDD price volatility on behalf of the community.
The cost they incur is temporary, though. That’s because in the medium to long run, the SRs are compensated with a portion of the token swap fee accumulated by the USDD protocol.
USDD tokenomics
USDD tokenomics is relatively simple. Because the token is built on the Tron blockchain, you can easily trade or swap your TRX coins for USDD.
The value of the token changes over time depending on factors like the demand-supply ratio and the U.S. dollar value. However, as we have explained in the previous section, there is a built-in mechanism in the USDD protocol that stabilizes the token’s price every time it depegs from the dollar.
As of this writing, the USDD stablecoin has a circulating supply of just over $703 million, with roughly $160 million worth of the token being traded in the last 24 hours.
USDD vs. UST
As algorithmic stablecoins, USDD and UST share many similarities. In fact, even the roadmaps of both tokens are nearly identical. However, Justin Sun insists that there is only so much the similarities can go. He recently wrote in a blog post that Tron was taking every possible measure to make USDD immune from the vulnerabilities that led to the UST crash.
One of the main faults of the Luna-terraUSD ecosystem was that the vast majority of UST’s collateral consisted of LUNA. Bitcoin made only 15% of the collateral. Now, LUNA being a highly volatile asset, it was apparent that the very foundation of UST’s stability stood on shaky grounds.
In contrast, Tron has made it a point to collateralize USDD with multiple high-quality assets with comparatively low volatility.
How to buy the USDD stablecoin?
You can buy or trade USDD on several major centralized and decentralized exchanges:
On some of these exchanges — Poloniex, for example, you can also buy USDD with fiat. The process is relatively simple for anyone who has used a crypto exchange before. In the case of Poloniex, just follow these steps (the process will be more or less similar in other exchanges)
- Navigate to your exchange wallet and choose “Buy with Fiat.”
- Choose EUR from the list of available fiats.
- Next, choose USDD and the amount that you want to buy.
- Click on proceed after reading the disclaimers. Note that you may have to show a valid ID to execute the order.
USDD staking
A casual online search will show you that exchanges periodically come up with different USDD staking opportunities with attractive rewards. As usual, the rewards tend to be on the higher side when an exchange newly lists the token.
For example, recently KuCoin announced a “USDD High Profit Staking” program with an APR of 60%. Poloniex, too came up with its own staking program with 30% APY.
Is USDD a good investment choice?
We hope that by now, you have developed a fair bit of insight into USDD and how it operates. The next obvious question now would be whether it is the right investment choice for you.
Overall, it seems that Tron is indeed taking a slew of measures to ensure that USDD’s value remains intact even during adverse situations. The decision to collateralize the token with relatively more stable assets such as BTC and USDT (in addition to TRX) is a good step in that direction.
So, all things considered, USDD could be worth looking into.
However, at the risk of stating the obvious, all crypto investments come with an element of risk, and USDD is no exception. Therefore, before investing, always make sure to do your own research and consult a financial expert, if need be.
The basics of USDD stablecoin are fairly easy to understand, but like with all things crypto, the deeper you go, the more there is to process. Learn everything you need to know at the BeInCrypto Telegram group.
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