Tron DAO increases USDD reserve
USDD, the algorithmic stablecoin of the Tron (TRX) blockchain, recently got a collateralization reserve to secure its peg to the dollar. While the algorithm already makes it possible to play this role, these funds must be used to further secure the building, by providing over-collateralization of at least 130%.
Today, the project announces the arrival of 700 million USDCwhich now brings this reserve to nearly $1.3 billion.
USDD Reserve Status
This liquidity injection is all the more significant as it represents almost USDD capitalization equivalent. Thanks to this, the latter would reach collateralization of 278.56% at the time of writing these lines. But this is not entirely true, although this is the value mentioned.
Indeed, with a capitalization of 723 million dollars, the rate displayed in the illustration takes into account TRXs that have been burned to issue USDDs. Since these tokens simply no longer exist, a relevant calculation of collateralization should only take into account the amount of the reserve. Thus, the actual value of this collateralization would be 178.56%.
👉 To go further – Find our guide on stablecoins
The faults of this reserve
This reserve is now based on four assets to ensure the collateralization of the USDD:
- The TRX.
Although in terms of proportions, it is substantial, it should however be noted several flawsand the first concerns the TRX.
Indeed, if the USDD were to lose its value, it would then be necessary to burn it for send TRXs in parallel. The latter would then see its value decrease, because of the inflation caused by the process. Mechanically, the value of the reserve would also drop.
Too high a proportion of TRX in this reserve could then weaken it. If the purpose of this article is not to create FUD, it is still important to remember that it is exactly the same phenomenon which caused the LUNA token to collapse during the loss of UST peg. Thus, it is necessary to have all the keys in hand to form one’s own opinion.
Another interesting fact concerns the USDT. While the Tron DAO has since made arrangements, a Twitter user noted that up until this morning USDT was actually jUSDT. This means that the assets were not directly in the smart contract of the reservebut dropped on the JustLend protocol to generate yield:
2/ That means that the 140M USDT are deposited into JustLend, a lending / borrowing protocol on the $TRX network
They are earning some yield on that, which is understandable
However, we need to consider now that those $140M are subject to smart contract and exploit risk pic.twitter.com/M9zY7bTG43
— Res ®️ (@resdegen) June 12, 2022
Transactions from blockchain explorer TronScan show that the Tron DAO has now backtracked. But even so, the possibility of using such freedoms is debatable. And for good reason, if this can be justified by a logic of capital optimization, it nevertheless results a point of failure in case of hack of the JustLend platform.
The impact of falling prices
On a more global level, the general fall in prices brings with it a decrease in the value of the reserve. This is all the more true since when it announced the said reserve last week, the USDD’s collateralization stood at 225%. Or rather 125%, if we only refer to the real value of the assets present as collateral. Whereas this morning, before the arrival of the USDC, these same assets brought the collateralization of the USDD to around 86%.
As the capitalization of the stablecoin is bound to increase, this safety cushion must necessarily be powered to fulfill its role. This recent capital injection is therefore an appropriate decisionwhich Tron DAO will have to reiterate, as this capitalization evolves.
The project’s whitepaper also announces the objective of raise $10 billion to carry out this mission. Provided that the USDD teams manage to maintain this over-collateralisation, the consequences of a possible failure of the arbitration mechanism should be limited, which is what the reserve is for.
On the other hand, it will be important to consider the elements highlighted in this article. After the episode of the UST, if it is not recorded that an almost exact copy is also doomed to failure, it is still necessary to watch her carefully.
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Source: USDD Reserve, USDT Reserve Contract, USDD Whitepaper
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