A Turn of Tide: TRON's Stablecoin Shifts Gears to Avoid Terra UST-Like Crash
Launched first as an algorithmic stablecoin, Tron's new stablecoin USDD changed its operating model to avoid a possible crash, like Terra's UST.
TRON Founder, Justin Sun, announced plans to implement a “re-collateralization” model for the algorithmic stablecoin USDD. This model is designed to protect the asset from the collapse of the price, which occurred earlier with the stablecoin TerraUSD (UST). According to the press release, the decentralized autonomous organization, TRON DAO Reserve (TDR), will set the reserve for USDD at 130% of the total issued coins. Such backing in reserves is a first for any algorithmic stablecoins in the crypto-verse.
What is USDD?
USDD, launched May 5 2022, is extremely similar to Terra's UST, an algorithmic stablecoin managed by smart contracts without any collateral.
- Stablecoin - cryptocurrencies that are supposed to be pegged to fiat currencies such as the US dollar. If pegged to the USD the stablecoin is supposed to be at 1 UST at all times.
- Algorithmic Stablecoin - unlike stablecoins, algorithmic stablecoins are ‘under-collateralized. In other words, they don’t have independent assets in reserves to back the value of their stablecoin.
- Smart contract mechanism - a mechanism that supplies or sells tokens if the price goes down or above the pegged assets.
Last month, UST collapsed, wiping out about $60 billion of investor wealth in a week. Algorithmic Stablecoins have since been heavily criticized, including USDD.
The USDD dollar peg is governed by a smart contract mechanism between USDD and Tron. When the USDD price is below $1, users can send 1 USDD into the system and receive TRX worth $1. By selling the newly-minted TRX, users can make profits by keeping the coin at the dollar peg level, and vice versa.
However, the same algorithm proved ineffective in UST. This is one of the key reasons why Tron DAO decided to change the way its stablecoin works.
USDD Stablecoin on the Full Armor
After the collapse of Terra UST, the problems of algorithmic stablecoins have surfaced. Popular crypto veterans such as Vitalik Buterin, and many others do not consider algorithmic stablecoins to be a reliable model.
Although algorithmic stablecoins are supposed to stay at $1, they can quickly depreciate, as it happened with UST. In addition to Terra, other algorithmic stablecoins have faced similar problems like Basis Cash (BAC) and Neutrino (USDN).
The Terra explosion last month also raised doubts about Tron's stable USDD coins. As a result, it looks like the team behind Tron is taking swift action to address market concerns.
On May 14, Justin Sun announced that TRON has no plans to abandon the further development of its own USDD stablecoin, despite the collapse of the Terra ecosystem. He emphasized that during the development of USDD, the team was focused on the healthy growth of the asset and wanted to keep its market value relatively small compared to the native TRX token and its market capitalization.
- Future plans for USDD include a $2 billion reserve by the end of the first phase of the model and $10 billion overall to support the project in the long term.
- The reserve will be based on a basket of fiat-backed stablecoins (such as USDT and USDC) and coins such as BTC and TRX.
- The team has already committed more than $550 million in various assets to the reserve and will continue to do so as the supply of USDD grows.
If you are considering investing in TRON, we recommend that you always do your own research before making any investment decision.
TRON (TRX) at NAGAX
TRON remains one of the most active protocols in the cryptocurrency world. Over the past few months, TRON has made strong connections and projects in the cryptocurrency industry. As a result, the crypto continues to be one of the few with a market valuation of more than $7 billion.
The easiest way to buy TRX is through a reliable exchange such as NAGAX.
Follow the three steps below to learn how to buy TRX on NAGAX:
- Sign up for a NAGAX account
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- That’s it - you’re good to go!
When it comes to buying crypto, you have a lot of options. You can directly purchase $TRX with a credit/debit card or USDT. To learn more about buying crypto at NAGAX, please click here.
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