Cryptocurrencies have come under immense pressure after the collapse of a so-called stablecoin called terraUSD.
Umit Turhan Koskun | Nurphoto via Getty Images
A controversial stablecoin launched just before the collapse of a similar token called terraUSD is struggling to maintain its peg to the US dollar.
USDD, a so-called “algorithmic” stablecoin believed to still be worth $1, plunged to 93 cents on Sunday. The coin’s creator has amassed a stash of bitcoins and other digital tokens worth nearly $2 billion to provide a buffer in case investors flee in droves.
The situation raised fears that USDD could suffer the same fate as terraUSD, or UST, the so-called destroyed stablecoin that was part of an experiment called Terra. The collapse of the UST triggered a broader sell-off in cryptocurrencies, which has been exacerbated in recent weeks by a growing liquidity crisis in the market.
Reserve Tron DAO, which oversees and manages the stablecoin, said some degree of USDD price volatility is to be expected given its “decentralized” nature.
“Some % volatility is unavoidable,” the organization tweeted last week. “Currently, the market volatility rate is at +- 3%, an acceptable range. We will monitor the market very closely and act accordingly.”
The USDD was trading at around 97 cents on Wednesday.
Despite concerns over a repeat of the Terra saga, experts say that’s probably not the case, as USDD is much smaller and has had little adoption among crypto investors.
What is USDD?
The USDD launched in early May, days before the UST fell below $1. Over the past week, it has consistently traded below its expected dollar peg amid increased selling.
Instead of sitting on piles of cash and other cash-like assets, USDD runs a complex algorithm – combined with a related token called tron – to maintain a one-to-one link with the greenback.
If this sounds familiar, it’s because Terra’s UST worked much the same way, creating and destroying UST units and a sister piece called luna to circumvent the need to have reserves to support the stablecoin.
Another similarity between USDD and UST is that it has accumulated a large cache of other digital tokens to help boost its price in case investors pull out in droves. Terra bought billions of dollars worth of crypto in an effort to keep its stablecoin afloat, a move that ultimately proved futile.
USDD’s use of crypto as reserves exposes it to “similar risks to UST,” said Monsur Hussain, senior director of financial institutions at Fitch Ratings.
“Cryptos are generally correlated to prices during times of turmoil,” he added.
USDD also offers investors unusually high interest rates – up to 39% – on their USDD deposits. Anchor, a crypto lending platform, has also touted returns of up to 20% on UST holdings, a rate that many investors now deem unsustainable.
The coin was created by Justin Sun, the outspoken crypto entrepreneur behind Tron, a blockchain trying to compete with Ethereum. Like Do Kwon, the founder of Terra, Sun has often used Twitter to promote his projects and defy critics.
The Chinese-born businessman has been embroiled in numerous controversies and publicity stunts in the past. In 2019, he paid $4.6 million to have lunch with Berkshire Hathaway CEO Warren Buffett, only to abruptly cancel. The lunch finally took place in 2020.
Not another Terra
On closer inspection, however, it is clear that there are notable differences between USDD and UST.
For one thing, USDD is nowhere near the scale of Terra, whose UST and luna tokens reached a combined value of $60 billion at their peak. It would therefore be unlikely to have the same effect if it collapsed, analysts say.
“USDD lacks the clout to cause the same wake of destruction as UST,” said Dustin Teander, research analyst at crypto data firm Messari.
He added that the use of USDD is not as widespread as UST was before its demise.
According to the public blockchain records, around 10,000 accounts hold the token on the Tron network, while just over 100 accounts hold it on Ethereum.
If USDD crashed, “it wouldn’t cause the same degree of contagion, or fear, as when UST/LUNA crashed,” Hussain said.
And unlike UST, which was only partially crypto-backed, USDD aims to be over-collateralized, meaning its assets always exceed the number of tokens in circulation.
The Tron DAO reserve says its reserve holds over $1.9 billion in bitcoins and other tokens, including USDC and tether stablecoins. The USDD has a supply of around $700 million. This reduces the risk of Terra-like collapse, according to Teander.
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