Foreword

In 2021, a new type of stablecoin called algorithmic stablecoin made its appearance in the crypto space. It uses a new mechanism to maintain its peg to a certain currency. Popular algorithmic stablecoins include USD Digital (USDD), TerraUSD (UST), Frax (FRAX), NeutrinoUSD (USDN), and MIM, among others.

Despite its recent launch, USDD has already gained significant attention from cryptocurrency users due to TRON’s extensive experience in the crypto market.

What is USDD?

As we all know, USDD is an algorithmic stablecoin launched on the TRON blockchain as a TRC token. USDD provides an open-source software called Peg Stability Module (PSM), allowing users to exchange with other stablecoins (such as USDT and USDC) at a 1:1 ratio. The introduction of PSM aims to further improve the stability of USDD.

When the price of USDD experienced ups and downs, TRON DAO Reserve tweeted that the market volatility rate (within ± 3%) for stablecoins is acceptable, which sparked controversy, as the fluctuation of USDD’s price led to uncertainty about its stability.

Despite being ranked 7th in market cap among stablecoins, USDD is suffering a price depegging, which fluctuates between $0.97-$0.98.

Summary

USDD aims to provide financial freedom to all users through mathematical algorithms, similar to other algorithmic stablecoins such as TerraUSD (UST) and Frax Finance (FRAX).

As many people see it, USDD may not be that important to the entire crypto market, among a wide variety of algorithmic stablecoins launched in the past two years. USDD is not the first, nor will it be the last one to link its value to US dollars through algorithms.

The launch of USDD marks TRON’s official entry into the field of decentralized algorithmic stablecoins. TRON DAO aims to cooperate with other blockchains and industry leaders to establish a fully decentralized USD exchange mechanism.

The Origin of USDD

USDD was officially launched on May 5, 2022, as an algorithmic stablecoin on TRON, BNB chain, and Ethereum. It is pegged 1:1 to the U.S. dollar, meaning 1 USDD is equal to 1 US dollar.

At that time, the emergence of USDD was actually more of an opportunity brought by the collapse of UST.

Despite being recently introduced, USDD is similar to UST, the stablecoin on the Terra chain that once dominated the market, in many aspects.

TRON, a blockchain-based decentralized digital platform, developed USDD to replicate the success of Terra UST, which was once the third-largest stablecoin by market capitalization, trailing USDT and USDC at its peak.

USDD is new in the crypto market, but TRON, the institution behind it, was founded by Justin Sun as early as 2017. The name of TRON and TRX that TRON issued have long been familiar to many people in the crypto market. TRON aims to accelerate the decentralization of the internet through blockchain and related technologies. USDD is TRON’s attempt to establish itself in the algorithmic stablecoin market. Justin Sun explained the motivation for this attempt in an open letter before USDD went live.

USDD ushers in the era 3.0 of algorithmic stablecoins, which is characterized by complete decentralization and the end of reliance on centralized institutions to ensure price stability.

Then what actually is the era 3.0 of algorithmic stablecoins he described?

First, era 1.0 is the first iteration of an algorithmic stablecoin application, where USDT, one of the first stablecoins, was built on top of the Bitcoin network using the Omni Layer, a revolutionary technology at the time.

However, as it is deployed on the Bitcoin network, this technology has a very low token throughput, which means that it took a long time to transfer USDT. In addition, the handling fees were prohibitive by today’s standards, and the US dollar reserves pegged to USDT were managed by centralized institutions.

In the open letter, era 2.0 is described as the “TRON-based USDT 2.0 era”.

This is because an independent decentralized layer on the TRON network processes USDT transactions, bringing higher throughput, less transfer time, and lower handling fees. However, its reserves and general custodianship remained centralized.

As for era 3.0, it features the emergence of decentralized algorithmic stablecoins, where on-chain algorithms are used to control volatility. Users will gain access to a fully decentralized algorithmic stablecoin. USDD is such a stablecoin created in this context.

By the end of 2022, TRON enjoyed a huge global user base, with around 100 million registered accounts on the platform, which is conducive to the promotion of USDD.

At the launch of USDD, TRON promised to fully back USDD with a calibrated combination of stable and volatile assets. Justin Sun confirmed that USDD will be over-collateralized with a mix of high-quality, low-volatility assets. He further assured that collateral will include BTC, USDT, and USDC, among others.

TRON promises to maintain a minimum collateral ratio of 130% at all times. According to the TRON website, USDD now enjoys a total market capitalization and circulating market capitalization of $725,332,036.

(Source: tronscan.org)

How does USDD maintain stability?

USDD is a decentralized algorithmic stablecoin. Unlike popular stablecoins like USDT and USDC, USDD has no centralized institution to control and guarantee its price reserve.

USDD’s 1:1 value peg to the U.S. dollar is guaranteed by algorithms and the use of so-called Super Representatives.

In the early stage, TRON DAO Reserve will act as a custodian, backing USDD in circulation with a $10 billion collateralized asset reserve. This approach aligns with TRON’s goal of creating a truly decentralized financial system, free from centralization and control by a single entity.

Super Representatives

Super Representatives are essentially a smaller, decentralized network of block validators. At the same time, it is also a human-controlled voting mechanism composed of multiple accounts with different addresses.

Super Representatives play a crucial role in maintaining the stability of USDD by providing the current exchange rate of the US dollar. They vote to determine what they think the current exchange rate of the US dollar is. Essentially, they retain a significant stake in TRX, so they have a vested interest that drives them to quote pricing accurately.

Super Representatives will be affected by price fluctuations of USDD and US dollars in the short term but will be incentivized to get earnings in the long run.

Minting mechanism of TRX and USDD

TRX, the native cryptocurrency of TRON, is used as the base currency for USDD pricing. TRX is essentially USDD’s guarantee against price fluctuations.

In addition, USDD also enables users to convert US dollars into TRX, forming a stable trading pair. When the price of USDD falls below $1, users can send $1 to the system to get $1 worth of TRX.

This way, the price of USDD stabilizes at $1 since its issuance.

How USDD works

Without delving into the technical details, USDD maintains its parity with the US dollar mainly in two ways, accompanied by Super Representatives and the conversion of TRX mentioned above.

When the price surges beyond the peg

In a scenario when the demand for USDD is higher than the supply, its price will inevitably exceed $1 according to market dynamics.

In this case, the USDD protocol will temporarily allow users to swap $1 worth of TRX for $1. This swap burns $1 worth of TRX and mints $1. As more and more users perform these swaps, the supply of USDD is increased and the swap ratio will gradually stabilize at 1:1.

It is important to note that users are incentivized to participate positively in the process, as the TRX-to-USDD swap provides users with arbitrage opportunities for them to make profits.

When the price falls below the peg

Similarly, if the USDD price falls below $1, users can buy USDD at that price in an external market, and then swap 1 USDD for $1 worth of TRX in the protocol. Each swap will cause 1 USDD to be burned in the system, and its circulating supply will gradually decrease.

The reduction in supply prompts more users to exchange USDD for TRX, gradually driving the price back up to the target level of 1:1.

The incentives in this process are the same as that when the price of USDD rises. Users can sell $1 worth of TRX in an external market to earn profits from each swap.

The development of USDD

Although the framework of USDD is excellent in theory, it suffered price depegging several times since its launch.

With a total supply of $725 million, the stability of USDD relies on the stability of TRX and the development of the TRON platform. In the event that the price of the algorithmic stablecoin Terra USD (UST) fell in June 2022, the inherent risks of this dual-token model are exposed.

The value of USDD is affected by that of TRX. According to the TRON website, the collateral ratio of USDD exceeds 200%, with a value of about $1.5 billion. The collateral consists of over two-thirds of TRX and some BTC and USDC.

However, impacted by the FTX collapse, USDD lost its peg, once trading below $0.9. Although it gradually recovered, the price cannot stabilize at $1 for a long time.

Currently, the price of USDD falls within $0.9-$1, unable to keep a stable peg. It is so even in 2023.

Despite the fact that USDD has been over-collateralized for more than half a year, its price can only be protected from falling heavily, which is far away from its original intention. If the peg cannot be maintained for a longer term, the intrinsic nature of its algorithmic stablecoin will be doubted.

Further, USDD added new mechanisms based on its original structure. Benefiting from the large user base of TRON itself, this short-lived algorithmic stablecoin has been frequently referenced in crypto news.

In the early stage, USDD has been widely reported by media outlets and received extensive attention from users in social media. However, when evaluating its current development, it is far away from achieving the prospect of the algorithmic stablecoin era 3.0 described by Justin Sun.

Conclusion

USDD does not deliver stunning achievements, especially when compared with its counterparts that occurred earlier. This could be due to its relatively short existence. Despite this, the market outlook for USDD is positive, with its price unlikely to experience sharp drops. To reach its full potential as an algorithmic stablecoin, USDD needs the support of both TRON and the market.

Currently, USDD presents substantial potential and arbitrage opportunities that warrant prolonged consideration and investment. However, when compared to other stablecoins, it lacks impressive appeal in terms of its core features.

11/01/2023 Charles

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