The USDD stablecoin has fallen below its dollar peg
Despite concerns over a repeat of the Terra saga, experts say this is unlikely to be the case. Find out more about what's happening with the USDD stablecoin here.
by Aline Barbosa
While investors grow worried, experts say it’s nothing like the UST collapse. Read on to see why.
There’s yet another stablecoin – launched shortly before the TerraUSD collapse – that is currently struggling to keep its peg to the dollar. The USDD stablecoin, an algorithmic token that is meant to always have the same value as the U.S. dollar, dropped to $0.93 last Sunday. The USDD stablecoin creator has accumulated approximately $2 billion worth of bitcoin and other cryptocurrency in order to cushion the blow should investors leave en masse.
The situation has led to concerns that the USDD stablecoin may have the same fate as the TerraUSD token. The complete breakdown of Terraform Labs’ stablecoin triggered a massive sell-off in the crypto world. Undoubtedly aggravated in recent weeks due to a growing liquidity issue in the market.
Tron DAO Reserve – the company that oversees and manages the USDD stablecoin – said that the token’s current state of volatility was to be expected because of its decentralized nature. The organization tweeted that there is no way to avoid a certain percentage of volatility. They also said the current market volatility is within an acceptable limit of 3% over and/or under. However, they will continue to watch the market closely and act accordingly if needed.
By Wednesday, the USDD stablecoin was trading at $0.97. Although some investors might be worried about a TerraLuna repeat, financial experts say this is not the case. That is because not only USDD is smaller, but also because it has seen some uptake from cryptocurrency investors.
What is the USDD stablecoin?
The USDD stablecoin rolled out in early May. Coincidently, only days before the TerraUST began dropping below the $1 mark. This past week, USDD has been trading consistently below the intended dollar peg due to the crypto market’s sell-outs. The token is not backed by cash like many other assets of its sector. Instead, the USDD is part of a complex algorithm. It’s merged with a sister token called Tron in order to maintain its one-to-one peg to the U.S. dollar.
Does all that sound familiar? It’s probably because the Terraform Labs’ token operated almost exactly like that. It created and destroyed UST units and its sister coin, Luna, in order to have enough reserves to back the token. One other affinity the USDD stablecoin shares with TerraUST is that it has amassed a considerable stock of several other cryptocurrencies to boost its price if investors decide to withdraw en masse.
The use of crypto as a reserve exposes the USDD stablecoin to similar risks as TerraUST’s, according to the senior director of financial institutions at Fitch Ratings, Monsur Hussain. He says that digital coins are usually price-correlated in times of disruption. USDD also provides investors with significantly high interest rates on their deposits.
The person behind the creation of the USDD stablecoin is Justin Sun, who’s also responsible for the Tron blockchain. According to Sun, Tron’s main objective is to compete with the Ethereum blockchain. The entrepreneur, much like the founder of Terra, often uses Twitter to back his projects and provoke his critics.
Not a TerraUST repeat
Taking a closer look, there are clear and notable differences between the USDD stablecoin and TerraUST. First, USDD is not on the same level as Terra was. At their height, the company’s UST reached a combined value of over $60 billion. Therefore, a USDD collapse would not have the same effect.
According to analysts, the USDD does not have the mass to cause the same destruction as UST did. Another reason for that is because the USDD stablecoin also isn’t as widespread as UST was before the crash. As reported by public blockchain data, only 10,000 Tron Network accounts hold the token. On Ethereum, that number drops to 100.
Therefore, if the USDD stablecoin were to crash, it would not result in the same amount of fear and contagion as when the TerraUST did. But crypto analysts say the chances of it happening right now are slim. The USDD’s goal is to overcollateralize, which means its reserves always exceed the amount of tokens.
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