A contentious stablecoin issued shortly before the demise of a similar cryptocurrency named terraUSD is battling to keep its peg to the US dollar.
USDD, a “algorithmic” stablecoin that is supposed to always be worth $1, fell to as low as 93 cents on Sunday. The coin’s creator has amassed a stockpile of bitcoin and other digital tokens worth around $2 billion to act as a safety net in the event that investors flee in droves.
The issue has raised concerns that USDD will follow in the footsteps of terraUSD, or UST, the defunct so-called stablecoin that was part of the Terra experiment. The UST crash spurred a broader sell-off in cryptocurrencies, which has been worsened in recent weeks by the market’s mounting liquidity issue.
The Tron DAO Reserve, which controls and manages the stablecoin, stated that given its “decentralised” structure, some fluctuation in the USDD price is to be expected.
“Certain % of volatility is unavoidable,” the organization tweeted last week. “Currently, the market volatility rate is within +- 3%, an acceptable range. We will watch the market very closely and act accordingly.”
On Wednesday, the USDD was selling at roughly 97 cents.
Despite fears of a replay of the Terra debacle, experts think this is improbable because USDD is significantly smaller in size and has attracted less interest from crypto investors.
USDD was introduced in early May, only days before the UST fell below $1. It has routinely traded below its targeted dollar peg over the last week due to increased selling.
Instead of sitting on piles of cash and cash-like assets, USDD employs a complex algorithm, in conjunction with a related token known as tron, to maintain a one-to-one peg to the US dollar.
If that seems familiar, it’s because Terra’s UST worked in a similar fashion, generating and destroying units of UST and a sister coin called luna to avoid the requirement for reserves to back the stablecoin.
Another similarity between USDD and UST is that it has amassed a substantial stockpile of other digital tokens to assist increase its price if investors withdraw in droves. Terra spent billions of dollars on cryptocurrency in an attempt to keep its stablecoin afloat, but the plan ultimately failed.
According to Monsur Hussain, senior director of financial institutions at Fitch Ratings, the USDD’s usage of crypto as reserves exposes it to “identical risks as UST.”
“Cryptos are generally price-correlated during times of upheaval,” he added.
The USDD also provides investors with extraordinarily high interest rates — up to 39 per cent — on USDD deposits. Anchor, a crypto lending platform, similarly advertised rates of up to 2 per cent on UST holdings, a rate that many investors now believe is unsustainable.
Justin Sun, the outspoken crypto entrepreneur behind Tron, a blockchain that is attempting to compete with Ethereum, launched the coin. Sun, like Terra creator Do Kwon, has frequently used Twitter to promote his enterprises – also to combat critics.
In the past, the Chinese-born billionaire has been embroiled in a number of controversies and PR stunts. He paid $4.6 million for lunch with Berkshire Hathaway CEO Warren Buffett in 2019, only to cancel abruptly. The lunch was eventually held in 2020.
However, upon closer study, it is evident that there are some significant distinctions between USDD and UST.
For one thing, USDD is nowhere like the scale of Terra, whose UST and luna coins once had a combined value of $60 billion. According to analysts, it would be unlikely to have the same effect if it collapsed.
“USDD doesn’t have the weight to cause the same wake of destruction UST did,” said Dustin Teander, a research analyst at crypto data firm Messari.
He also stated that the use of USDD is nowhere like as common as UST was prior to its death.
According to public blockchain records, approximately 10,000 accounts possess the token on the Tron network, while slightly more than 100 accounts hold it on the Ethereum network.
If the USD fell, “there would not be the same level of contagion or anxiety as when the UST/LUNA fell,” Hussain said.
Moreover, unlike UST, which was only partially collateralized by cryptocurrency, USDD aspires to be overcollateralized, which means that its assets will always exceed the quantity of tokens in circulation.
The Tron DAO Reserve claims to have over $1.9 billion in bitcoin and other tokens, including stablecoins USDC and tether. The USDD has a supply of approximately $700 million. According to Teander, this minimises the likelihood of a Terra-style collapse.
(Adapted from CNBC.com)
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