Tron’s stablecoin loses $1 peg in crypto crunch; can it be saved?

Posted: 15 June 2022 5:07 pm
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USDD has slipped a few cents below its peg, and Tron’s founder has deployed 2.5 billion TRX tokens to save it. Is another stablecoin crash in the future?

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Tron’s algorithmic stablecoin Decentralized USD (USDD) lost its peg on Monday as the crypto market struggled, and it still hasn’t recovered. That’s despite efforts by Justin Sun, Tron’s founder, who deployed 2.5 billion Tron (TRX) tokens – roughly $150 million – to fight short sellers against his stablecoin.

In a tweet, Sun suggested $2 billion in reserves might be used to defend USDD.

Last month, Terra’s USD (UST), another algorithmic stablecoin, lost its peg and eventually both the stablecoin and its sister coin, now Terra Luna Classic (LUNC), collapsed.

Will USDD be the next algorithmic stablecoin to crash? That’s a possibility, though it seems unlikely at this point. Here’s why.

Why USDD may survive

USDD is a USD stablecoin, meaning the price is supposed to be locked at $1. This stablecoin is an algorithmic one, using computer code to leverage the native Tron (TRX) tokens and keep the peg.

Other types of stablecoins like Tether (USDT) and USD Coin (USDC) own hard assets in a 1:1 ratio to hold the peg.

USDD also has substantial collateral behind it, and Tron has described it as “overcollateralized.” That would mean it holds more in hard assets that can be used to protect the peg than there are USDD coins in circulation.

This is the main reason the team behind USDD believes it will avoid UST’s fate.

Currently, the Tron DAO holds Bitcoin (BTC), Tether (USDT) and a recently added $700 million stockpile of USDC to protect the peg.

USDD has a total market cap of $700 million at current prices, meaning that Tron’s USDC holdings alone should be enough to protect the peg. The total collateral asset value stands at $2.26 billion, according to Tron DAO.

So why hasn’t USDD returned to $1?

Justing Sun tweeted recently that the Tron team has withdrawn several tranches of TRX from Binance in an effort to combat short-sellers. It’s likely the funds have not yet landed. They would be used to buy USDD, pushing its price higher.

On the other hand, Blockchain analytics platform Nansen tweeted in the last 24 hours that one of the funds that profited from the UST collapse has started moving large amounts of USDD.

Currently, USDD trades at around $0.97. Tron expects the real collateral deployed to support the peg will bring it back to $1 at some point. But if short interest remains high, it could be quite a battle.

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Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Kliment Dukovski owns cryptocurrencies as of the publishing date.

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