This Monday, Tron DAO added 700 million USDC to the USDD reserve, its algorithmic stablecoin, to avoid following the example of Terra’s defunct UST. While the effort is commendable, there are still some things to note that call for distrust. How to distinguish FUD from legitimate criticism? We take stock in this article.
Tron DAO increases the USDD reserve
USDD, the algorithmic stablecoin of the Tron blockchain (TRX), recently added a collateralization reserve to secure its dollar peg. While the algorithm already allows for this role, these funds are to be used to further secure the edifice, providing at least 130% over-collateralization.
Today, the project announces the arrival of 700 million USDD, which now brings this reserve to nearly 1.3 billion dollars.
This injection of liquidity is all the more significant as it represents roughly the equivalent of the USDD’s capitalization. Thanks to this, the latter would reach a collateralization of 278.56% at the time of writing. However, this is not quite true, although it is the value mentioned.
Indeed, with a capitalization of $723 million, the rate shown in the illustration takes into account the TRX that were burned to issue the USDD. As these tokens simply do not exist anymore, a relevant calculation of the collateralization should only take into account the reserve amount. Thus, the actual value of this collateralization would be 178.56%.
The flaws of this reserve
This reserve now relies on four assets to collateralize USDD:
Although in terms of proportions, this reserve is substantial, several flaws should be noted, the first of which concerns the TRX.
Indeed, if the USDD were to lose its value, it would be necessary to burn some of it to issue TRX in parallel. The latter would then see its value decrease, because of the inflation caused by the process. Mechanically, the value of the reserve would also fall.
Too much TRX in this reserve could then weaken it. While the purpose of this article is not to create FUD, it is still important to remember that this is exactly the same phenomenon that caused the collapse of the LUNA token when the UST lost its anchor. Thus, it is necessary to have all the keys in hand to form one’s own opinion.
Another interesting fact concerns the USDT. While the Tron DAO has since made arrangements, one Twitter user noted that until this morning USDTs were actually jUSDTs. This means that the assets were not directly in the reserve’s smart contract, but deposited on the JustLend protocol to generate yield.
TronScan blockchain explorer transactions show that the Tron DAO has now backed off. But even so, the ability to use such freedoms is questionable. And for good reason, while this can be justified by a logic of capital optimization, it does result in a point of failure in case of a hack of the JustLend platform.
The impact of falling prices
On a more global level, the generalized fall in prices leads to a decrease in the value of the reserve. This is all the more true given that when it announced the said reserve last week, the USDD’s collateralization stood at 225%. Or rather 125%, if we only refer to the real value of the assets present in collateral. Whereas this morning, before the arrival of the USDC, those same assets brought the USDD’s collateralization to about 86%.
As the stablecoin’s capitalization is bound to increase, this cushion will necessarily need to be replenished to fulfill its role. This recent capital increase is therefore a very appropriate decision, and one that Tron DAO will have to repeat as the capitalization of the stablecoin evolves.
The whitepaper of the project announces the objective of raising 10 billion dollars to complete this mission. Provided that the USDD teams manage to maintain this over-collateralization, the consequences of a possible failure of the arbitrage mechanism should be limited, which is what the reserve is for.
On the other hand, it will be important to consider the elements highlighted in this article. After the UST episode, if it is not clear that an almost identical copy is doomed to failure, it is still necessary to monitor it carefully.
