Tron’s USDD Stablecoin Slips Further From Dollar Peg — Despite Overcollaterized Reserve

Tron’s algorithmic stablecoin, Decentralized USD (USDD) remained below its intended price peg with the U.S. dollar on Tuesday even after the team behind the project rushed to shore up the currency with over $2 billion in reserve assets. 

USDD Peg Slips Below $1

Justin Sun’s Terra-like stablecoin is struggling to stay afloat amid a market-wide rout merely forty days after its debut.

The algorithmic stablecoin veered away from its dollar peg on Monday, sliding to as low as 92 cents. At press time, USDD is yet to regain its dollar peg, with its price fluttering around $0.97, per data from CoinGecko.

Sun indicated that the de-peg was a result of many short-sellers targeting the Tron Blockchain’s native TRX token on the Binance crypto exchange. He promised that TronDAO Reserve, an organization responsible for maintaining the collateral of USDD, would deploy $2 billion to fight the short-sellers. “I don’t think they can last for even 24 hours. [A] short squeeze is coming,” Sun quipped.

A short squeeze happens when traders who are betting on the price of an asset to sink are forced to close their positions by buying back the underlying token.

TRX is trading at two-month lows of $0.058 today, down over 9.2% on the day.

The whole point of maintaining a standby reserve of bitcoin, Tron, and stablecoins like Circle’s USDC and Tether’s USDT by TronDAO was precisely for this moment. Two billion and over 24 hours later, however, USDD has not been able to restore its dollar link.

Will USDD Come Crashing Down Like Terra’s UST?

Launched on May 5, USDD’s design is eerily similar to that of Terra’s stablecoin UST backed by sister token LUNA. UST lost its dollar peg and eventually plunged back to earth in May, dealing investors a $60 billion blow and sending shockwaves throughout the financial markets.

Just like UST, USDD relies on market incentives to maintain its dollar parity. This means arbitrageurs are able to burn (and remove from the supply) USDD for $1 worth of Tron whenever its price falls below $1. Conversely, if USDD goes above $1, users can swap $1 TRX for one USDD and help bring the stablecoin back to parity with the dollar.

According to the TronDAO official website, USDD is now over-collateralized with a collateral ratio of 317%. The DAO presently holds 10.8 billion TRX, 14,000 BTC, 140 million USDT, and 1 billion USDC. Nevertheless, the de-peg has sparked fears that USDD, which boasts a market capitalization of around $723 million, may see a spectacular UST-Esque implosion.

Time will tell whether USDD succeeds where its predecessor TerraUSD failed.