TRON’s Upgraded USDD: an Over-Collateralized Stablecoin

Just a month after its launch, Tron has implemented a significant update to its algorithmic stablecoin, Decentralized USD, or USDD, as of June 5th. The measure was carried out in order to safeguard Tron’s stablecoin from the fatal tragedy that befell Terra, while also making USDD the world’s first over-collateralized, decentralized stablecoin.

The over-collateralized model means that the USDD algorithmic stablecoin is backed by a combination of both stable and volatile assets. 

Prior to the update, the algorithmic stablecoin was pegged solely to the United States dollar was dependent on a smart contract algorithm that tracks the supply and demand of the coins, and adjusts accordingly. 

With regards to its working model, Tron’s stablecoin was widely labeled as being an exact copy of Terra’s UST. After the upgrade, the USDD has now become partially collateralized by the assets held in the Tron DAO Reserve (TDR).  

As stated, the latter has increased its holdings in liquid assets and currently possesses 240 million USDT stablecoins, 10.5K bitcoins, and 1.9 billion TRX in its reserves. Over 8.29 billion TRX has already been placed in the burning contract. 

The USDD stablecoin, the current market capitalization of which stands at $667 million, is said to have a collateral ratio higher than 130%, thus exceeding the 120% mandatory ratio levels for a DAO. The stablecoin’s collateralization ratio currently sits at higher than 226% at the time of writing. 

Tron Founder Justin Sun has claimed that USDD offers the highest collateral ratio in the world. In his interview with Bloomberg, he also remarked that the USDD’s over-collateralization had long been in Tron’s plans, “but Terra/Luna definitely accelerated and prioritized this for our team.”

Algorithmic stablecoins have come under intense scrutiny since TerraUSD (UST) lost its 1:1 peg to the United States dollar early in May, as it crashed and lost almost 99% of its value, leading to considerable turmoil in the border cryptocurrency market.

Terra’s stablecoin was not backed by any fiat currency or commodity, and relied solely on an algorithm linked to the supply of Terra’s governance coin LUNA to maintain a value of $1. Since the initial panic, during which investors massively withdrew their holdings, both TerraUSD and LUNA collapsed, resulting in nosedives to near-zero levels. 

The failure of TerraUSD prompted from warnings across the cryptocurrency sphere that algorithmic stablecoins may not be sustainable and have little meaningful future. Governments worldwide also took note, and are now urging their respective lawmakers to create a legal basis for stablecoin regulation. Indeed, earlier this year the Economic Secretary of the United Kingdom announced that stablecoins would be brought under official payments regulation.