Cryptocurrency enthusiasts have started talking about the centralisation of the USDD stablecoin in the Tron network. What is the reason for what is happening?
This week, 12,000 BTC worth $729 million were withdrawn from the address used to store funds as the basis of the decentralised USDD stablecoin. The event attracted the attention of the crypto community, whose representatives wondered about possible problems with the stability of the asset’s value. In addition, the decision to withdraw was made without the participation of the Tron DAO Reserve community, because the last vote by its representatives was held only on the use of burnable tokens in May 2023. As a result, Justin Sun published a public address on the matter and explained the essence of what was happening.
The popularity of the Tron ecosystem is on the rise right now. The reason for this is the launch of the SunPump platform on 12 August, which allows you to quickly create and launch a meme token. This platform is an analogue of pump-fun based on the Solana network.
As Santiment analysts note, since then, Tron TRX has become one of the most HYIP coins among traders. Still, more than 7 thousand tokens have already been launched on SunPump, for transactions with which TRX coins are required. Due to this, the TRX rate jumped by 23 per cent in a fortnight.
Tron TRX value growth after the launch of the SunPump platform
In addition, there has been a noticeable increase in activity within the blockchain, with the frequency of TRX mentions on social platforms reaching its highest since 2021.
How does USDD work?
USDD, or US Decentralised Dollar, is a stablecoin on the TRON blockchain that is pegged to the value of the US dollar at a 1:1 ratio. The token is backed through an arbitrage mechanism and collateralised with other cryptocurrencies. If the price of USDD deviates from $1, users can make arbitrage trades to bring the stablecoin back to its target price.
That is, in essence, network participants buy the coin if its value decreases, which leads to an increase in the price of the asset and stabilises the situation.
USDD Stablecoin Market Capitalisation Growth
To maintain the stability of USDD, an over-collateralisation mechanism is used. This means that for every USDD in circulation, there is more than $1 in other crypto assets – for example, TRX, BTC or USDT. This feature provides additional protection in case of sharp price fluctuations in cryptocurrencies.
USDD is considered a decentralised stablecoin because its issuance and collateral is controlled by a decentralised autonomous organisation (DAO) and other network participants, rather than a centralised authority.
This is an important detail in the context of the news, as Justin Sun cannot make a unanimous decision on a steiblcoin without a majority vote from the community. However, there is a way around this restriction in the way USDD works, which became clear the day before.
Why did Justin Sun withdraw bitcoins from the USDD security?
According to Cointelegraph, Justin Sun published an official explanation of his decision on Twitter. He stated that withdrawing the coins from the USDD backing address is in line with basic decentralised finance guidelines – here’s his rejoinder.
As for the USDD decentralised stablecoin, its mechanism is similar to MakerDAO’s DAI and is nothing mysterious. When your pledge exceeds the amount set by the system – typically 120-150 per cent depending on the vault – any pledge holder is free to withdraw any amount without anyone’s approval.
Collateralisation of USDD stablecoin on the Tron network
There is also a minimum collateral bar – usually set at 110 per cent. That is, if there is less than $1.1 of assets to collateralise each steiblcoin in the ecosystem, you need to replenish the vault in the face of the address with collateral assets. Otherwise, the asset will face problems and risk collapse.
According to San, USDD is safe from the impact of any crisis. Here is his rejoinder.
Currently, USDD’s long-term collateral rate is above 300 per cent, which means it is not a very efficient use of capital. TRON DAO plans to spend time improving USDD in the future to make it a more competitive decentralised decentralised stablecoin in the market. Keep in mind that Tron is also a stablecoin kingdom.
While everything sounds right in theory here, it does nothing to dispel doubts about the centralisation of everything related to Tron. USDD, launching in 2022, is supposed to be managed by the DAO, yet virtually no decisions regarding the steiblcoin have been put to a community vote.
Even the announcement of the USDD pledge withdrawal was made from Justin Sun’s personal account and not the Tron DAO, which also raises certain questions.
Tron founder Justin Sun
Last year, Bluechip, a platform that specialises in evaluating and auditing stablecoins, gave USDD its lowest stability rating. In particular, its heavy reliance on TRX and lack of transparency were noted. Here is an archived quote cited by The Block.
USDD has no clear governance system. USDD holders have no legal or decentralised protection and are at the mercy of the Tron DAO.
Today, there are 744 million USDD tokens in circulation, making it the seventh largest stablecoin. The crypto asset holds $1.7 billion worth of TRX and USDT tokens in reserves. This gives the coin a collateralisation ratio of more than 230 per cent, meaning it is backed by more than twice as many assets as the outstanding stablecoins.
Tron founder Justin Sun
However, Bluechip estimates that USDD’s actual collateralisation is only 53 per cent – partly because the cryptocurrency exchange Huobi, which is owned by Sun, also claims control of the USDD Bitcoin-reserve address.
The platform’s report notes that almost all of the USDD reserves were held in a multi-signature wallet rather than a smart contract. This means that assets can still be moved by certain people, so Justin Sun’s excuses don’t make the situation any better.
The collateralisation of USDD does raise questions, as such a drastic change in the structure of the token clearly needs to be validated by the community. It now appears too dependent on the situation with TRX, which has become the backbone of the stablecoin's collateralisation. And while such a thing may be enough on the bullrun, after a bearish trend occurs, it may lead to significant volatility of the asset and its decoupling from the dollar exchange rate, which has happened many times with popular stablecoins before.
Related posts
